<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 SEPTEMBER 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 September 30 December 31
1996 1995
-------------- --------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available-for-sale, at estimated fair value
(amortized cost: 1996 - $3,395,754; 1995 - $3,648,983) $ 3,440,851 $ 3,807,870
Equity securities available-for-sale, at estimated fair value
(cost: 1996 - $30,512; 1995 - $19,683) 34,815 21,433
Mortgage loans 76,675 121,248
Real estate held-for-sale 32,290 5,874
Policy loans on insurance contracts 1,075,754 1,039,267
-------------- --------------
Total Investments 4,660,385 4,995,692
CASH AND CASH EQUIVALENTS 132,087 48,924
ACCRUED INVESTMENT INCOME 94,758 91,942
DEFERRED POLICY ACQUISITION COSTS 375,714 372,418
FEDERAL INCOME TAXES - DEFERRED 0 2,222
REINSURANCE RECEIVABLES 3,406 1,552
OTHER ASSETS 45,258 54,900
SEPARATE ACCOUNTS ASSETS 7,290,773 6,834,353
-------------- --------------
TOTAL ASSETS $ 12,602,381 $ 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 September 30 December 31
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,521,154 $ 4,851,718
Claims and claims settlement expenses 38,517 29,812
-------------- --------------
Total policy liabilities and accruals 4,559,671 4,881,530
OTHER POLICYHOLDER FUNDS 14,710 13,607
LIABILITY FOR GUARANTY FUND ASSESSMENTS 20,601 21,144
OTHER LIABILITIES 54,782 53,566
FEDERAL INCOME TAXES - CURRENT 8,294 7,033
FEDERAL INCOME TAXES - DEFERRED 7,936 0
AFFILIATED PAYABLES - NET 4,560 2,429
SEPARATE ACCOUNTS LIABILITIES 7,287,018 6,825,857
--------------- --------------
Total Liabilities 11,957,572 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 138,735 76,482
Net unrealized gain on investment securities available for sale 2,619 16,900
--------------- --------------
Total Stockholder's Equity 644,809 596,837
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,602,381 $ 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>
Nine Months Ended
September 30
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 255,276 $ 285,266
Net realized investment gains 7,886 2,543
Policy charge revenue 117,418 103,973
------------ ------------
Total Revenues 380,580 391,782
------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 178,498 198,254
Market value adjustment expense 5,107 2,973
Policy benefits (net of reinsurance recoveries: 1996 - $6,189;
1995 - $5,454) 16,089 14,953
Reinsurance premium ceded 11,582 10,363
Amortization of deferred policy acquisition costs 43,116 41,501
Insurance expenses and taxes 34,679 32,508
------------ ------------
Total Benefits and Expenses 289,071 300,552
------------ ------------
Earnings Before Federal Income Tax Provision 91,509 91,230
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 11,408 32,378
Deferred 17,848 (572)
------------ ------------
Total Federal Income Tax Provision 29,256 31,806
------------ ------------
NET EARNINGS $ 62,253 $ 59,424
============ ============
</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
September 30
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 83,673 $ 93,137
Net realized investment gains 166 1,209
Policy charge revenue 39,392 34,669
----------- -----------
Total Revenues 123,231 129,015
----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 57,794 64,009
Market value adjustment expense 603 1,757
Policy benefits (net of reinsurance recoveries: 1996 - $1,755;
1995 - $1,458) 5,192 4,130
Reinsurance premium ceded 3,903 3,434
Amortization of deferred policy acquisition costs 10,478 7,830
Insurance expenses and taxes 11,222 12,253
----------- -----------
Total Benefits and Expenses 89,192 93,413
----------- -----------
Earnings Before Federal Income Tax Provision 34,039 35,602
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 9,356 11,533
Deferred 2,312 811
----------- -----------
Total Federal Income Tax Provision 11,668 12,344
----------- -----------
NET EARNINGS $ 22,371 $ 23,258
=========== ===========
</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 62,253 0 62,253
Net unrealized investment loss 0 0 0 (14,281) (14,281)
-------- ---------- --------- ----------- -------------
BALANCE, SEPTEMBER 30, 1996 $ 2,000 $ 501,455 $138,735 $ 2,619 $ 644,809
======== ========== ========= =========== =============
</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>
Nine Months Ended
September 30
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 62,253 $ 59,424
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 43,116 41,501
Capitalization of policy acquisition costs (32,609) (38,984)
Depreciation, accretion and amortization of investments (3,854) (5,382)
Net realized investment gains (7,886) (2,543)
Interest credited to policyholders' account balances 178,498 198,254
Provision (benefit) for deferred Federal income tax 17,848 (572)
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income (2,816) (6,287)
Claims and claims settlement expenses 8,705 2,070
Federal income taxes - current 1,261 21,781
Other policyholder funds 1,103 (8,886)
Liability for guaranty fund assessments (543) (1,926)
Affiliated payables 2,131 11,076
Policy loans (36,487) (33,186)
Other, net 8,632 (21,666)
----------- -----------
Net cash and cash equivalents provided by operating activities 239,352 214,674
----------- -----------
INVESTING ACTIVITIES:
Fixed maturity securities sold 534,193 486,579
Fixed maturity securities matured 400,161 443,195
Fixed maturity securities purchased (671,362) (679,709)
Equity securities available for sale sold 8,729 2,622
Equity securities available for sale purchased (18,052) (5,363)
Mortgage loans - purchased 0 (3,608)
Mortgage loans principal payments received 16,100 30,123
Real estate held-for-sale - improvements acquired 0 (589)
Real estate held-for-sale sold 2,857 7,435
Investment in Separate Accounts (344) (316)
Recapture of investment in Separate Accounts 5,323 6,559
----------- -----------
Net cash and cash equivalents provided by investing activities 277,605 286,928
----------- -----------
</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>
Nine Months Ended
September 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 403,472 436,661
Withdrawals (includes transfers to/from Separate Accounts) (837,266) (961,996)
------------ ------------
Net cash and cash equivalents used by financing activities (433,794) (525,335)
------------ ------------
NET INCREASE(DECREASES) IN CASH AND CASH EQUIVALENTS 83,163 (23,733)
CASH AND CASH EQUIVALENTS:
Beginning of year 48,924 139,087
------------ ------------
End of period $ 132,087 $ 115,354
============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 10,147 $ 10,597
Intercompany interest $ 765 $ 995
</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. The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Results for the three months and nine months ended
September 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 September 30, 1996 and December 31, 1995,
was $395 million and $304 million, respectively. For the nine
months ended September 30, 1996 and 1995, statutory net income
was $66.7 million and $106.7 million, respectively.
<PAGE>
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 September 30,
1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
(In Thousands)
Assets:
Fixed maturity securities available for sale $ 45,097 $ 158,887
Equity securities available for sale 4,303 1,750
Deferred policy acquisition costs (3,238) (17,041)
Federal income taxes - deferred (1,411) (9,100)
Separate Account Assets 31 (164)
------------ ------------
44,782 134,332
------------ ------------
Liabilities:
Policyholders' account balances 42,163 117,432
------------ ------------
Stockholder's equity:
Net unrealized gain on investment securities available-for-sale $ 2,619 $ 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 nine month periods. Therefore, the discussion
emphasizes the comparison between the nine 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.
<PAGE>
New life insurance premiums and annuity deposits received in the
first nine months of 1996 and 1995 were $403 million and $437
million, respectively. During the first nine months of 1996,
interest rates were, on average, lower than for the same period
during 1995. The Company's modified guaranteed annuity product, a
fixed interest rate product, experienced a $82 million (77%)
decline in sales during the first nine months of 1996 as compared
to the same period during 1995. Partially offsetting this decline
in sales, variable annuity deposits received during the first
nine months of 1996 increased $47 million (19%) to $302 million
as compared to the same period in 1995. Management attributes the
shift in investor demand from fixed interest rate products to
variable products to the lower interest rate environment and the
generally rising equity markets during the preceding nine months.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 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 September 30, 1996, approximately $236 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 nine 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 nine month periods ended September 30, 1996 and 1995, the
Company reported net earnings of $62 million and $59 million,
respectively. For the three month periods ended September 30,
1996 and 1995, the Company reported net earnings of $22 million
and $23 million, respectively.
Net investment income and interest credited to policyholders'
account balances for the nine months ended September 30, 1996 as
compared to the same period in 1995 have declined by
approximately $30 million and $20 million, respectively,
resulting in a $10 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 $5 million
during the current nine 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. During the three
month period ending September 30, 1996 and 1995, sales activity
declined resulting in a decrease of approximately $1 million of
net realized investment gains, reflective of the increase in
interest rates during this period.
Policy charge revenue increased approximately $13 million during
the current nine 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 $2 million during
the current nine 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. During the three month period ending
September 30, 1996 and 1995, the market value adjustment expense
decreased approximately $1 million, due to an increase in
interest rates during this period. The market value adjustment
expense generally changes in an inverse relationship with the
movement of interest rates.
Insurance expenses and taxes increased $2 million during the
current nine 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. For the three month
periods ended September 30, 1996 and 1995, insurance expenses and
taxes decreased $1 million, primarily as a result of an increase
in the amount of expenses capitalized.
<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
<PAGE> 4
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: November 13, 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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 3,440,851
<EQUITIES> 34,815
<MORTGAGE> 76,675
<REAL-ESTATE> 32,290
<TOTAL-INVEST> 4,660,385
<CASH> 132,087
<RECOVER-REINSURE> 3,406
<DEFERRED-ACQUISITION> 375,714
<TOTAL-ASSETS> 12,602,381
<POLICY-LOSSES> 38,517
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,710
<POLICY-HOLDER-FUNDS> 4,521,154
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 642,809
<TOTAL-LIABILITY-AND-EQUITY> 12,602,381
0
<INVESTMENT-INCOME> 255,276
<INVESTMENT-GAINS> 7,886
<OTHER-INCOME> 117,418
<BENEFITS> 16,089
<UNDERWRITING-AMORTIZATION> 43,116
<UNDERWRITING-OTHER> 34,679
<INCOME-PRETAX> 91,509
<INCOME-TAX> 29,256
<INCOME-CONTINUING> 62,253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,253
<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>
