<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 JUNE 30, 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 June 30, December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1996 - $3,444,491; 1995 - $3,648,983) $ 3,480,782 $ 3,807,870
Equity securities available for sale, at estimated fair value
(cost: 1996 - $18,272; 1995 - $19,683) 22,153 21,433
Mortgage loans on real estate 91,587 121,248
Real estate held for sale 32,290 5,874
Policy loans on insurance contracts 1,063,132 1,039,267
---------------- ----------------
Total Investments 4,689,944 4,995,692
CASH AND CASH EQUIVALENTS 114,513 48,924
ACCRUED INVESTMENT INCOME 92,041 91,942
DEFERRED POLICY ACQUISITION COSTS 377,135 372,418
FEDERAL INCOME TAXES - DEFERRED 0 2,222
REINSURANCE RECEIVABLES 2,932 1,552
OTHER ASSETS 78,986 54,900
SEPARATE ACCOUNTS ASSETS 7,102,787 6,834,353
---------------- ----------------
TOTAL ASSETS $ 12,458,338 $ 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 June 30, December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,579,666 $ 4,851,718
Claims and claims settlement expenses 36,109 29,812
---------------- ----------------
Total policy liabilities and accruals 4,615,775 4,881,530
OTHER POLICYHOLDER FUNDS 15,518 13,607
LIABILITY FOR GUARANTY FUND ASSESSMENTS 20,662 21,144
OTHER LIABILITIES 67,474 53,566
FEDERAL INCOME TAXES - CURRENT 5,052 7,033
FEDERAL INCOME TAXES - DEFERRED 6,081 0
AFFILIATED PAYABLES - NET 5,341 2,429
SEPARATE ACCOUNTS LIABILITIES 7,099,151 6,825,857
---------------- ----------------
Total Liabilities 11,835,054 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 116,364 76,482
Net unrealized investment gain 3,465 16,900
---------------- ----------------
Total Stockholder's Equity 623,284 596,837
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,458,338 $ 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>
Six Months Ended
June 30,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 171,603 $ 192,129
Net realized investment gains 7,720 1,334
Policy charge revenue 78,026 69,304
---------------- ----------------
Total Revenues 257,349 262,767
---------------- ----------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 120,704 134,245
Market value adjustment expense 4,504 1,216
Policy benefits (net of reinsurance recoveries: 1996 - $4,434;
1995 - $3,996) 10,897 10,823
Reinsurance premium ceded 7,679 6,929
Amortization of deferred policy acquisition costs 32,638 33,671
Insurance expenses and taxes 23,457 20,255
---------------- ----------------
Total Benefits and Expenses 199,879 207,139
---------------- ----------------
Earnings Before Federal Income Tax Provision 57,470 55,628
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 2,052 20,845
Deferred 15,536 (1,383)
---------------- ----------------
Total Federal Income Tax Provision 17,588 19,462
---------------- ----------------
NET EARNINGS $ 39,882 $ 36,166
================ ================
</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
June 30,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 84,694 $ 94,549
Net realized investment gains 992 1,396
Policy charge revenue 39,068 35,214
---------------- ----------------
Total Revenues 124,754 131,159
---------------- ----------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 59,106 65,889
Market value adjustment expense 873 998
Policy benefits (net of reinsurance recoveries: 1996 - $2,321;
1995 - $2,162) 5,368 6,055
Reinsurance premium ceded 3,918 3,501
Amortization of deferred policy acquisition costs 15,694 16,373
Insurance expenses and taxes 11,449 10,006
---------------- ----------------
Total Benefits and Expenses 96,408 102,822
---------------- ----------------
Earnings Before Federal Income Tax Provision 28,346 28,337
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current (5,082) 12,522
Deferred 13,983 (2,608)
---------------- ----------------
Total Federal Income Tax Provision 8,901 9,914
---------------- ----------------
NET EARNINGS $ 19,445 $ 18,423
================ ================
</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 39,882 0 39,882
Net unrealized investment loss 0 0 0 (13,435) (13,435)
------------ ------------- ------------ -------------- --------------
BALANCE, JUNE 30, 1996 $ 2,000 $ 501,455 $ 116,364 $ 3,465 $ 623,284
============ ============= ============ ============== ==============
</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>
Six Months Ended
June 30,
------------------------------------
1996 1995
---------------- ----------------
<C> <C>
OPERATING ACTIVITIES:
Net earnings $ 39,882 $ 36,166
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 32,638 33,671
Capitalization of policy acquisition costs (20,843) (26,556)
Depreciation, accretion and amortization of investments (2,540) (3,796)
Net realized investment gains (7,720) (1,334)
Interest credited to policyholders' account balances 120,704 134,245
Provision (benefit) for deferred Federal income tax 15,536 (1,383)
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income (99) (2,508)
Claims and claims settlement expenses 6,297 1,167
Federal income taxes - current (1,981) 20,844
Other policyholder funds 1,911 (6,551)
Liability for guaranty fund assessments (482) (1,512)
Affiliated payables 2,912 9,118
Policy loans (23,865) (21,458)
Other, net (11,559) (33,998)
---------------- ----------------
Net cash and cash equivalents provided by operating activities 150,791 136,115
---------------- ----------------
INVESTING ACTIVITIES:
Fixed maturity securities sold 470,665 271,951
Fixed maturity securities matured 299,314 402,835
Fixed maturity securities purchased (557,293) (534,484)
Equity securities available for sale sold 8,648 1,411
Equity securities available for sale purchased (5,640) 0
Mortgage loans on real estate principal payments received 1,106 20,719
Real estate held for sale sold 2,567 6,803
Investment in Separate Accounts (285) (255)
Recapture of investment in Separate Accounts 5,323 6,559
---------------- ----------------
Net cash and cash equivalents provided by investing activities 224,405 175,539
---------------- ----------------
</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>
Six Months Ended
June 30,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 259,314 285,864
Withdrawals (includes transfers to/from Separate Accounts) (568,921) (650,343)
---------------- ----------------
Net cash and cash equivalents used by financing activities (309,607) (364,479)
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 65,589 (52,825)
CASH AND CASH EQUIVALENTS:
Beginning of year 48,924 139,087
---------------- ----------------
End of period $ 114,513 $ 86,262
================ ================
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 4,033 $ 0
Intercompany interest $ 547 $ 641
</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 and six months ended June
30, 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 June 30, 1996 and December 31, 1995, was
$370 million and $304 million, respectively. For the six months
ended June 30, 1996 and 1995, statutory net income was $44
million and $63 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 June 30, 1996
and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
----------------- ----------------
<S> <C> <C>
(In Thousands)
Assets:
Fixed maturity securities available for sale $ 36,291 $ 158,887
Equity securities available for sale 3,881 1,750
Deferred policy acquisition costs (529) (17,041)
Federal income taxes - deferred (1,868) (9,100)
----------------- ----------------
Separate Account Assets (28) (164)
37,747 134,332
----------------- ----------------
Liabilities:
Policyholders' account balances 34,282 117,432
----------------- ----------------
Stockholder's equity:
Net unrealized investment gain $ 3,465 $ 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.
Changes in revenues and expenses in most cases are similar for
the three month and six month periods. Therefore, the discussion
emphasizes the comparison between the six months of 1996 and
1995, with additional information on the three month periods
presented where appropriate.
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 deferred and 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 six months of 1996 and 1995 were $259 million and $286
million, respectively. Investor demand experienced a shift to
variable annuity products from fixed interest rate products
during the first six months of 1996 as compared to the first six
months of 1995. During the first six months of 1996, interest
rates were, on average, lower than for the same period during
1995. Management attributes the shift in investor demand from
fixed interest rate 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 $77
million (86%) decline in sales during the first six months of
1996 as compared to the same period during 1995. Partially
offsetting this decline in sales, variable annuity deposits
received during the first six months of 1996 increased $54
million (37%) to $199 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 June 30, 1996, the
Company's assets included $3.0 billion of cash, short-term
investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
As of June 30, 1996, approximately $239 million (6.9%) 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.
During the first six months of 1996, the Company foreclosed on
two commercial mortgage loans with an $29 million estimated fair
value of the acquired real estate. The carrying value of the
mortgage loans at date of foreclosure approximated the estimated
fair value of the acquired real estate.
Results of Operations
For the six month periods ended June 30, 1996 and 1995, the
Company reported net earnings of $40 million and $36 million,
respectively. For the three month periods ended June 30, 1996 and
1995, the Company reported net earnings of $19 million and $18
million, respectively.
Net investment income and interest credited to policyholders'
account balances for the six months ended June 30, 1996 as
compared to the same period in 1995 have declined by
approximately $21 million and $14 million, respectively,
resulting in a $7 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 increased approximately $6 million
during the current six month period as compared to the same
period during 1995. The change in realized investment gains is
primarily attributable to an increase in sales in the investment
portfolio supporting the modified guaranteed annuity, product, 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 $9 million during
the current six 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 six month period as compared to the same period
during 1995 primarily as a result of increased surrender activity
attributable to the lower 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.
Insurance expenses and taxes increased $3 million during the
current six 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, $2 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.
<PAGE>
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: August 8, 1996
I-3
<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<PAGE> 6
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
<PAGE> 7
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: August 8, 1996
I-3
<PAGE> 8
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 3,480,702
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 22,153
<MORTGAGE> 91,587
<REAL-ESTATE> 32,290
<TOTAL-INVEST> 4,689,944
<CASH> 114,513
<RECOVER-REINSURE> 2,932
<DEFERRED-ACQUISITION> 377,135
<TOTAL-ASSETS> 12,458,338
<POLICY-LOSSES> 36,109
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 15,518
<POLICY-HOLDER-FUNDS> 4,579,666
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 621,284
<TOTAL-LIABILITY-AND-EQUITY> 12,458,338
0
<INVESTMENT-INCOME> 171,603
<INVESTMENT-GAINS> 7,720
<OTHER-INCOME> 78,026
<BENEFITS> 10,897
<UNDERWRITING-AMORTIZATION> 32,638
<UNDERWRITING-OTHER> 23,457
<INCOME-PRETAX> 57,470
<INCOME-TAX> 17,588
<INCOME-CONTINUING> 39,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,882
<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>