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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, 1995
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 Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, filed March 26, 1996, 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 Post-Effective
Amendment No. 1 to the Registrant's registration statement, filed March 26,
1996, 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 20, 1995, the Registrant paid a $26,243,000
ordinary dividend and a $73,757,000 extraordinary dividend to MLIG. On
December 23, 1994, the Registrant paid a $37,221,000 ordinary dividend and a
$112,779,000 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 26, 1996.
b. Balance Sheets at December 31, 1995 and 1994.
c. Statements of Earnings for the Years Ended December 31,
1995, 1994 and 1993.
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d. Statements of Stockholder's Equity for the Years Ended
December 31, 1995, 1994 and 1993.
e. Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993.
f. Notes to Financial Statements for the Years Ended December 31,
1995, 1994 and 1993.
(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 Certif-
icate, 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. (Incor-
porated by reference to Exhibit 24(a) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 29, 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 29, 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 29, 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 29, 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 29, 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 29, 1995.)
24.7 Power of attorney of Gail R. Farkas. (Incorporated
by reference to Exhibit 24(g) to Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-58303, filed
March 26, 1996.)
99.1 Preliminary prospectus contained in Post-
Effective Amendment No. 1 to Registrant's
registration statement, filed March 26, 1996,
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, 1995.
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INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1995 and 1994 . . . . . . . . . . . . . . . . .
Statements of Earnings for the Years Ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Stockholder's Equity for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . .
<PAGE> 14
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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, 1995
and 1994, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
February 26, 1996
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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, 1995 AND 1994
(Dollars in Thousands)
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ASSETS 1995 1994
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INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1995 - $3,648,983; 1994 - $4,014,272) $ 3,807,870 $ 3,867,833
Equity securities available for sale, at estimated fair value
(cost: 1995 - $19,683; 1994 - $15,946) 21,433 16,777
Mortgage loans on real estate 121,248 149,249
Real estate held for sale
(accumulated depreciation: 1995 - $81; 1994 - $515) 5,874 12,955
Policy loans on insurance contracts 1,039,267 985,213
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Total Investments 4,995,692 5,032,027
CASH AND CASH EQUIVALENTS 48,924 139,087
ACCRUED INVESTMENT INCOME 91,942 95,133
DEFERRED POLICY ACQUISITION COSTS 372,418 466,334
FEDERAL INCOME TAXES - DEFERRED 2,222 38,919
REINSURANCE RECEIVABLES 1,552 1,832
RECEIVABLES FROM AFFILIATES - NET 0 3,113
OTHER ASSETS 54,900 28,656
SEPARATE ACCOUNTS ASSETS 6,834,353 5,798,973
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TOTAL ASSETS $12,402,003 $11,604,074
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</TABLE>
See notes to financial statements.
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LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
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LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,851,718 $ 5,148,971
Claims and claims settlement expenses 29,812 26,177
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Total policy liabilities and accruals 4,881,530 5,175,148
OTHER POLICYHOLDER FUNDS 13,607 21,221
LIABILITY FOR GUARANTY FUND ASSESSMENTS 21,144 24,774
OTHER LIABILITIES 53,566 36,775
FEDERAL INCOME TAXES - CURRENT 7,033 2,274
AFFILIATED PAYABLES - NET 2,429 0
SEPARATE ACCOUNTS LIABILITIES 6,825,857 5,784,311
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Total Liabilities 11,805,166 11,044,503
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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 501,455 535,450
Retained earnings 76,482 66,005
Net unrealized investment gain (loss) 16,900 (43,884)
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Total Stockholder's Equity 596,837 559,571
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $12,402,003 $11,604,074
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</TABLE>
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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, 1995, 1994 AND 1993
(Dollars in Thousands)
===================================================================
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 376,166 $ 433,536 $ 586,461
Net realized investment gains (losses) 4,525 (14,543) 63,052
Policy charge revenue 141,722 126,284 95,684
----------- ----------- -----------
Total Revenues 522,413 545,277 745,197
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 261,760 313,585 454,671
Market value adjustment expense 5,805 6,307 30,816
Policy benefits (net of reinsurance recoveries: 1995 - $6,482;
1994 - $6,338; 1993 - $6,004) 19,374 16,858 17,030
Reinsurance premium ceded 13,896 13,909 12,665
Amortization of deferred policy acquisition costs 58,669 69,662 109,456
Insurance expenses and taxes 44,124 35,073 47,784
----------- ----------- -----------
Total Benefits and Expenses 403,628 455,394 672,422
----------- ----------- -----------
Earnings Before Federal Income Tax Provision 118,785 89,883 72,775
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION:
Current 38,335 22,503 20,112
Deferred 3,968 1,375 4,803
----------- ----------- -----------
Total Federal Income Tax Provision 42,303 23,878 24,915
----------- ----------- -----------
NET EARNINGS $ 76,482 $ 66,005 $ 47,860
=========== =========== ===========
</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, 1995, 1994 AND 1993
(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, 1993 $ 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
Dividend to Parent (33,995) (66,005) (100,000)
Net earnings 76,482 76,482
Net unrealized investment gain 60,784 60,784
---------- ------------ ------------ -------------- -----------------
BALANCE, DECEMBER 31, 1995 $ 2,000 $ 501,455 $ 76,482 $ 16,900 $ 596,837
========== ============ ============ ============== =================
</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
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1994
(Dollars in Thousands)
=========================================================================
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 76,482 $ 66,005 $ 47,860
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 58,669 69,662 109,456
Capitalization of policy acquisition costs (54,014) (108,829) (91,189)
Depreciation, (accretion) and amortization of investments (6,763) (4,516) 1,142
Net realized investment (gains) losses (4,525) 14,543 (63,052)
Interest credited to policyholders' account balances 261,760 313,585 454,671
Provision for deferred Federal income tax 3,968 1,375 4,803
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 3,191 25,204 18,460
Receivables from affiliates - net 5,542 (2,324) (3,427)
Claims and claims settlement expenses 3,635 5,882 12,730
Federal income taxes - current 4,759 (7,848) (19,888)
Other policyholder funds (7,614) (7,547) 14,131
Liability for guaranty fund assessments (3,630) (3,309) 979
Policy loans (54,054) (60,634) (90,118)
Investment trading securities 0 11,352 (145,972)
Other, net (9,296) (39,206) 49,424
Net cash and cash equivalents provided ------------- ------------ -------------
by operating activities 278,110 273,395 300,010
------------- ------------ -------------
</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, 1995, 1994 AND 1993
(Concluded) (Dollars In Thousands)
========================================================================
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Fixed maturity securities sold 618,101 845,227 571,337
Fixed maturity securities matured 570,923 1,323,705 2,776,992
Fixed maturity securities purchased (814,535) (676,976) (1,866,857)
Equity securities available for sale sold 15,723 18,868 6,451
Equity securities available for sale purchased (17,984) (1,998) (8,983)
Mortgage loans on real estate principal payments received 30,767 32,341 35,561
Mortgage loans on real estate acquired (3,608) 0 (674)
Real estate held for sale sold 9,710 25,346 7,408
Real estate held for sale - improvements acquired (683) (1,060) 0
Recapture of investment in Separate Accounts 6,559 0 29,389
Investment in Separate Accounts (377) (15,212) (20,000)
------------- ------------ -------------
Net cash and cash equivalents provided
by investing activities 414,596 1,550,241 1,530,624
------------- ------------ -------------
FINANCING ACTIVITIES:
Dividends paid to parent (100,000) (150,000) (120,000)
Policyholders' account balances:
Deposits 567,430 966,861 814,314
Withdrawals (net of transfers to/from Separate Accounts) (1,250,299) (2,623,628) (2,574,854)
------------- ------------ -------------
Net cash and cash equivalents used
by financing activities (782,869) (1,806,767) (1,880,540)
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (90,163) 16,869 (49,906)
CASH AND CASH EQUIVALENTS
Beginning of year 139,087 122,218 172,124
------------- ------------ -------------
End of year $ 48,924 $ 139,087 $ 122,218
============= ============ =============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 33,576 $ 30,351 $ 40,000
Intercompany interest 1,310 679 737
</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, Incorporated ("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. 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.
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 policyholders' 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% - 6.90%
Interest sensitive deferred annuities 3.08% - 8.77%
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.
<PAGE>
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 $567 that can be
drawn upon for delinquent reinsurance recoverables.
As of December 31, 1995, the Company had life insurance in-
force which was ceded to other life insurance companies of
$2,302,776.
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. It is reasonably
possible that estimates of future gross profits could be
reduced in the future, resulting in a material reduction in the
carrying amount of deferred policy acquisition costs.
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 estimated future gross
profits over the anticipated life of the acquired insurance
contracts utilizing an interest methodology.
The Company has 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 related to the reinsurance agreement for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance $ 133,388 $ 139,647 $ 150,450
Capitalized amounts 13,708 12,517 6,987
Interest accrued 11,620 12,582 13,136
Amortization (33,883) (31,358) (30,926)
---------- ---------- ----------
Ending balance $ 124,833 $ 133,388 $ 139,647
========== ========== ==========
</TABLE>
The following table presents the expected amortization, net of
interest accrued, 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.
1996 $14,917
1997 11,418
1998 7,639
1999 6,676
2000 6,028
Investments: In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"),
<PAGE>
the Company classifies its investments in fixed maturity
securities and equity securities as available for sale
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 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.
During 1993 and 1994, the Company utilized the trading
securities classification available under SFAS No. 115. Trading
securities represented securities that were managed with an
investment objective to maximize total return subject to the
Company's quality guidelines. These securities were carried at
estimated fair value with unrealized gains and losses included
in the statement of earnings. 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.
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted 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 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, 1995 and 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 to be realized on
those mortgage loans which 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.
During 1995 the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures" which was an amendment to
SFAS No. 114. 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. There was no impact on
either financial position or earnings as a result of adopting
SFAS No. 114, as amended.
<PAGE>
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. 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.
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 primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
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 were:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale:
Securities (1) $ 3,807,310 $ 3,866,886
Interest rate swaps (2) 560 947
------------ ------------
Total fixed maturity securities available for sale 3,807,870 3,867,833
------------ ------------
Equity securities available for sale (1) 21,433 16,777
Mortgage loans on real estate (3) 121,248 149,249
Policy loans on insurance contracts (4) 1,039,267 985,213
Cash and cash equivalents (5) 48,924 139,087
Separate Accounts assets (6) 6,834,353 5,798,973
------------ ------------
Total financial instruments recorded as assets $11,873,095 $10,957,132
============ ============
</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, 1995 and 1994, securities
without a readily ascertainable market value, having an
amortized cost of $425,469 and $564,665, had an estimated
fair value of $448,785 and $564,682, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cash flow 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 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) 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 were:
<TABLE>
<CAPTION>
1995
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate debt $ 2,917,628 $ 138,159 $ 7,526 $ 3,048,261
Mortgage-backed securities 625,866 22,098 717 647,247
U.S. Government and agencies 99,213 6,286 0 105,499
Municipals 4,277 532 0 4,809
Foreign governments 1,999 55 0 2,054
------------ ------------ ------------ ------------
Total fixed maturity securities
available for sale $ 3,648,983 $ 167,130 $ 8,243 $ 3,807,870
============ ============ ============ ============
Equity securities available for sale:
Common stocks $ 2,746 $ 498 $ 63 $ 3,181
Non-redeemable preferred stocks 16,937 1,428 113 18,252
------------ ------------ ------------ ------------
Total equity securities available for sale $ 19,683 $ 1,926 $ 176 $ 21,433
============ ============ ============ ============
</TABLE>
<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 $ 2,968,683 $ 20,386 $ 139,915 $ 2,849,154
Mortgage-backed securities 897,290 5,764 29,243 873,811
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>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1995 by
contractual maturity were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 288,438 $ 290,754
Due after one year through five years 1,678,038 1,741,211
Due after five years through ten years 904,067 964,956
Due after ten years 152,574 163,702
------------ ------------
3,023,117 3,160,623
Mortgage-backed securities 625,866 647,247
Total fixed maturity securities ------------ ------------
available for sale $ 3,648,983 $ 3,807,870
============ ============
</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, 1995 by rating
agency equivalent were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
AAA $ 848,951 $ 881,712
AA 243,349 253,214
A 1,059,367 1,105,910
BBB 1,292,081 1,356,964
Non-investment grade 205,235 210,070
Total fixed maturity securities ------------ ------------
available for sale $ 3,648,983 $ 3,807,870
============ ============
</TABLE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with adjustments required by SFAS No. 115. The
Company adjusts 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:
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale $ 158,887 $ (146,439)
Equity securities available for sale 1,750 831
Deferred policy acquisition costs (17,041) 72,220
Federal income taxes - deferred (9,100) 23,629
Separate Account assets (164) (549)
---------- -----------
134,332 (50,308)
---------- -----------
Liabilities:
Policyholders' account balances 117,432 (6,424)
---------- -----------
Stockholder's equity:
Net unrealized investment gain (loss) $ 16,900 $ (43,884)
========== ===========
</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, 1995 and 1994 was $30,000.
The Company has outstanding at December 31, 1995, 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,
1995 will expire at various times during 1996. The average
unexpired term at December 31, 1995 and 1994 was .25 years and
1.2 years, respectively. All three interest rate swap contracts
were with investment grade counterparties at December 31, 1995.
There are no outstanding interest rate swaps in a loss position
at December 31, 1995 and 1994. During 1995, 1994 and 1993, a
net investment gain of $0, $470 and $0, respectively, was
recorded in connection with interest rate swap activity.
During 1995, 1994 and 1993, 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 and gross realized investment gains and losses from
the sale of fixed maturity securities available for sale and
held to maturity for the years ended December 31 were:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Proceeds $ 618,101 $ 845,227 $ 571,337
Gross realized investment gains 11,694 8,398 71,599
Gross realized investment losses 9,786 9,823 4,126
</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,
$(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 $28,166 and $26,651
held on deposit with insurance regulatory authorities at
December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company retained $8,496 and
$14,662 in the Separate Accounts, including unrealized losses
of $164 and $549, respectively. The investments in the
<PAGE>
Separate Accounts are for the purpose of providing original
funding of certain mutual fund portfolios available as
investment options to variable life and annuity policyholders.
The Company's investment in mortgage loans on real estate are
principally collateralized by commercial real estate. The
largest concentrations of commercial real estate mortgage loans
at December 31, 1995, as measured by the outstanding principal
balance, are for properties located in California ($36,476 or
23%), Illinois ($28,299 or 18%) and Rhode Island ($19,404 or
12%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1995
and 1994 are:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Carrying value $ 88,068 $ 71,973
Valuation allowance 35,881 40,070
</TABLE>
Additional information on impaired loans for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Average investment in impaired loans $123,949 $112,043 $109,876
Interest income recognized (cash-basis) 5,482 6,542 7,387
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, $1,300,
$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>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities $ 305,648 $ 368,023 $ 511,655
Equity securities 1,329 2,408 4,143
Mortgage loans on real estate 12,250 15,014 20,342
Real estate held for sale 153 406 32
Policy loans on insurance contracts 53,576 50,232 46,129
Cash equivalents 8,463 5,936 3,480
Other 1,753 (447) 7,655
__________ __________ __________
Gross investment income 383,172 441,572 593,436
Less investment expenses (7,006) (8,036) (6,975)
__________ __________ __________
Net investment income $ 376,166 $ 433,536 $ 586,461
========== ========== ==========
</TABLE>
<PAGE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities available for sale $ 1,908 $ (1,425) $ 67,473
Fixed maturity securities held for trading 0 (11,889) 5,562
Equity securities available for sale 1,475 1,490 22
Equity securities held for trading 0 (580) 2,587
Investment in Separate Account (369) 0 1,422
Mortgage loans on real estate 334 (4,967) (9,310)
Real estate held for sale 1,177 2,828 (4,733)
Other 0 0 29
-------- ---------- ---------
Net realized investment gains (losses) $ 4,525 $ (14,543) $ 63,052
======== ========== =========
</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:
1995 $ 40,070 $ 0 $ 4,189 $ 35,881
1994 45,924 4,966 10,820 40,070
1993 55,610 9,310 18,996 45,924
Real estate held for sale:
1995 5,766 0 3,566 2,200
1994 7,628 0 1,862 5,766
1993 4,300 3,328 0 7,628
</TABLE>
The Company held investments at December 31, 1995 of $8,609
which have been non-income producing for the preceding twelve
months.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1995, $920 has 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:
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 41,575 $ 31,459 $ 25,471
Increase (decrease) in income taxes resulting from:
Release of policyholders' surplus 1,991 0 0
Tax deductible interest (718) 0 0
Federal tax rate increase 0 0 (631)
Dividend received deduction (532) (7,363) (28)
Other (13) (218) 103
--------- --------- ---------
Federal income tax provision $ 42,303 $ 23,878 $ 24,915
========= ========= =========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1995 was 35%.
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>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (2,179) $ 6,416 $ (9,030)
Policyholders' account balances 66 5,322 6,433
Estimated liability for guaranty fund assessments 249 (153) (1,066)
Investment adjustments 5,563 3,276 7,941
Other 269 (13,486) 525
Deferred Federal income tax --------- ---------- ---------
provision $ 3,968 $ 1,375 $ 4,803
========= ========== =========
</TABLE>
Deferred tax assets and liabilities as of December 31, are
determined as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 94,087 $ 94,153
Net unrealized investment losses 0 23,629
Investment adjustments 10,793 16,356
Estimated liability for guaranty fund assessments 7,331 7,580
---------- ----------
Total deferred tax assets 112,211 141,718
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 96,862 99,041
Net unrealized investment gains 9,100 0
Other 4,027 3,758
---------- ----------
Total deferred tax liabilities 109,989 102,799
---------- ----------
Net deferred tax asset $ 2,222 $ 38,919
========== ==========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
<PAGE>
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 $43,039, $44,176 and $55,843 for the years ended
December 31, 1995, 1994 and 1993, 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 $1,310, $679 and $737 for 1995,
1994 and 1993, 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 services 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
$2,635, $2,732 and $2,800 for 1995, 1994 and 1993,
respectively.
MLAM and MLIG have entered into an agreement with respect to
administrative services for the 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 and variable
annuities the Company has in-force. Under this agreement, MLAM
pays compensation to MLIG in an amount equal to a portion of
the annual gross investment advisory fees paid by the Series
Fund and the Variable Series Funds to MLAM. The Company
received from MLIG it's allocable share of such compensation in
the amount of $13,293 and $12,600 during 1995 and 1994,
respectively.
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 $43,984, $84,231 and $67,102 for
1995, 1994 and 1993, 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.
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,
1995 and 1994, the notional amount of such interest rate swap
contracts outstanding was $10,000. 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
$256, $782, and $6,876 for 1995, 1994 and 1993, respectively
(See Note 3).
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1995, 1994, and 1993 the Company paid dividends of
$100,000, $150,000, and $120,000, respectively, to MLIG. Of
these stockholder's dividends, $73,757, $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, 1995 and 1994, approximately $30,195 and
$26,243, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1995 and 1994, was $303,950 and $264,432,
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
income taxes and valuing securities on a different basis. The
<PAGE>
Company's statutory net income for 1995, 1994 and 1993 was
$121,451, $42,382 and $45,604, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes 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. As of December 31, 1995 and 1994, based on the
RBC formula, the Company's total adjusted capital level was
395% and 270%, respectively, of the minimum amount of capital
required to avoid regulatory action.
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, 1995 and 1994, the Company has established an
estimated liability for future guaranty fund assessments of
$21,144 and $24,774, 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> 15
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, Jr.
Date: March 26, 1996 By:
--------------------------------
Joseph E. Crowne, Jr.
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 26, 1996
Anthony J. Vespa and Chief Executive Officer --------------
/s/ JOSEPH E. CROWNE, JR.
- --------------------------- Director, Senior Vice President, March 26, 1996
Joseph E. Crowne, Jr. Chief Financial Officer, Chief --------------
Actuary and Treasurer
/s/ BARRY G. SKOLNICK
- --------------------------- Director, Senior Vice President March 26, 1996
Barry G. Skolnick and General Counsel* --------------
*
- --------------------------- Director and Senior Vice March 26, 1996
David M. Dunford President --------------
*
- --------------------------- Director and Senior Vice March 26, 1996
Gail R. Farkas President --------------
*
- --------------------------- Director and Senior Vice March 26, 1996
John C.R. Hele President --------------
</TABLE>
*Signing in his own capacity and as Attorney-in-Fact.
<PAGE> 16
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> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- --------
<S> <C> <C>
2.1 Merrill Lynch Life Insurance Company Board of Directors Incorporated by reference to Exhibit 2.1, filed
Resolution in Connection with the Merger between Merrill September 5, 1991, as part of Post-Effective
Lynch Life Insurance Company and Tandem Insurance Group, Amendment No. 4 to the Registrant's
Inc. registration statement on Form S-1, File No.
33-26322.
2.2 Plan and Agreement of Merger between Merrill Lynch Life Incorporated by reference to Exhibit 2.1a,
Insurance Company and Tandem Insurance Group, Inc. 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 Incorporated by reference to Exhibit 3.1 to the
Insurance Company. 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 Incorporated by reference to Exhibit 3(c) to
of the Articles of Incorporation of Merrill Lynch Life the Registrant's registration statement on Form
Insurance Company. S-1, File No. 33-46827, filed March 30, 1992.
3.4 Amended and Restated By-Laws of Merrill Lynch Life Incorporated by reference to Exhibit 3(d) to
Insurance Company. the Registrant's registration statement on Form
S-1, File No. 33-46827, filed March 30, 1992.
</TABLE>
- E-1 -
<PAGE> 18
<TABLE>
<S> <C> <C>
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 Incorporated by reference to Exhibit 4.3, filed
Certificate, ML-AY-372. 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> 19
<TABLE>
<S> <C> <C>
4.3a Individual Tax-Sheltered Annuity Certificate, ML-AY-372 Incorporated by reference to Exhibit 4.3a,
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-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.
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 Incorporated by reference to Exhibit 4.5a,
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, ML-AY-375 Incorporated by reference to Exhibit 4.5b,
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> 20
<TABLE>
<S> <C> <C>
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, Incorporated by reference to Exhibit 4.7 to the
ML-AY-376. Registrant's registration statement on Form
S-1, File No. 33-26322, filed January 3, 1989.
4.7a Section 457 Deferred Compensation Plan Certificate, Incorporated by reference to Exhibit 4.7a,
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-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.
</TABLE>
- E-4 -
<PAGE> 21
<TABLE>
<S> <C> <C>
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 Incorporated by reference to Exhibit 4.10a,
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.
4.10b Individual Retirement Annuity Endorsement, ML-009. 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.
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.
</TABLE>
- E-5 -
<PAGE> 22
<TABLE>
<S> <C> <C>
4.11a Individual Retirement Account Endorsement, ML-AY-365 Incorporated by reference to Exhibit 4.11a,
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.
4.12 Section 457 Deferred Compensation Plan Endorsement, Incorporated by reference to Exhibit 4.12 to
ML-AY-367. 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, Incorporated by reference to Exhibit 4.12a,
ML-AY-367 190. 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.
4.13 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 Endorse ment, 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 Incorporated by reference to Exhibit 4.14 to
Contract. 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> 23
<TABLE>
<S> <C> <C>
Individual Certificate Under to Exhibit 4.15 to the Registrant's
Modified 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 Certificate. 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. 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
</TABLE>
- E-7 -
<PAGE> 24
<TABLE>
<S> <C> <C>
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 Certificate. 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. 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 Incorporated by reference to Exhibit 10.1 to the
Insurance Company and Merrill Lynch Life Insurance Registrant's registration statement on Form S-1,
Company. File No. 33-26322, filed January 3, 1989.
10.2 General Agency Agreement between Incorporated by reference to Exhibit 10.2, filed
Merrill Lynch Life Insurance Company February 23, 1989, as
</TABLE>
- E-8 -
<PAGE> 25
<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 Insurance Group, Incorporated by reference to Exhibit 10.3, filed
Family Life Insurance Company and Merrill Lynch Life March 13, 1991, as part of Post-Effective
Insurance Company. 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 Incorporated by reference to Exhibit 10(c)(2) to
Insurance Group, Family Life Insurance Company and Post-Effective Amendment No. 1 to the
Merrill Lynch Life Insurance Company. Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.
10.4 Indemnity Reinsurance Agreement between Merrill Lynch Incorporated by reference to Exhibit 10.4, filed
Life Insurance Company and Family Life Insurance March 13, 1991, as part of Post-Effective
Company. 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 Incorporated by reference to Exhibit 10.6, filed
Life Insurance Company, Tandem Insurance Group, Inc. and April 24, 1991, as part of Post-Effective
Royal Tandem Life Insurance Company and Family Life Amendment No. 3 to the Registrant's registration
Insurance Company. statement on Form S-1, File No. 33-26322.
10.6 Amended General Agency Agreement between Merrill Lynch Incorporated by reference to Exhibit 10(g) to
Life Insurance Company and Merrill Lynch Life Agency, the Registrant's registration statement on Form
Inc. S-1, File No. 33-46827, filed March 30, 1992.
</TABLE>
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<TABLE>
<S> <C> <C>
10.7 Indemnity Agreement between Incorporated by reference to Exhibit 10(h) to
Merrill Lynch Life Insurance Company the Registrant's registration statement on Form
and Merrill Lynch Life Agency, Inc. S-1, File No. 33-46827, filed March 30, 1992.
10.8 Management Agreement between Merrill Incorporated by reference to Exhibit 10(i) to
Lynch Life Insurance the Registrant's registration statement on Form
Company and Merrill Lynch Asset S-1, File No. 33-46827, filed March 30, 1992.
Management, Inc.
10.9 Amendment No. 1 to Indemnity Incorporated by reference to Exhibit 10.5, filed
Reinsurance Agreement between April 24, 1991, as part of Post-Effective
Family Life Insurance Company and Amendment No. 3 to the Registrant's registration
Merrill Lynch Life Insurance Company. 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 29, 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 29, 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 29, 1995.
</TABLE>
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<PAGE> 27
<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 29, 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 29, 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 29, 1995.
24.7 Power of Attorney of Gail R. Farkas Incorporated by reference to Exhibit 24(g) to
Post- Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 26, 1996.
99.1 Preliminary prospectus contained in Post-Effective Exhibit 99.1
Amendment No. 1 to the Registrant's registration
statement, filed March 26, 1996, pursuant to the
Securities Act of 1933, File No. 33-58303.
</TABLE>
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<PAGE> 1
Exhibit 99.1
<PAGE> 2
PROSPECTUS
MAY 1, 1996
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.
------------------------
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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............................. 22
MORE INFORMATION ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY............................ 22
A. HISTORY AND BUSINESS.......................................................... 22
B. SELECTED FINANCIAL DATA....................................................... 24
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................... 24
D. REINSURANCE................................................................... 31
E. CONTRACT OWNER ACCOUNT BALANCES............................................... 31
F. INVESTMENTS................................................................... 31
G. COMPETITION................................................................... 31
H. CERTAIN AGREEMENTS............................................................ 32
I. EMPLOYEES..................................................................... 32
J. PROPERTIES.................................................................... 32
K. STATE REGULATION.............................................................. 32
DIRECTORS AND EXECUTIVE OFFICERS....................................................... 34
EXECUTIVE COMPENSATION................................................................. 35
LEGAL PROCEEDINGS...................................................................... 37
LEGAL MATTERS.......................................................................... 37
EXPERTS................................................................................ 37
REGISTRATION STATEMENT................................................................. 37
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE COMPANY........................... 38
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> 4
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> 5
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> 6
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.
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> 7
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 20.) 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 19.)
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> 8
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> 9
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 18.)
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
8
<PAGE> 10
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, 1997, that the participant's annuity date is on
August 1, 2002, 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, 2002. 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, 2002. 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
18.) 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 20.)
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" below 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 4.8% and the five year rate were 5.0%, the interpolated
rate would be 4.95%, 4.8% times .25 plus 5.0% 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 4.7%. Assume also that the guaranteed interest rates currently
offered for Guarantee Periods of 4 and 5 years are 4.8% and 5.0%, respectively.
"B" is equal to 4.95%, the sum of 5.0% times .75 and 4.8% times .25. To
calculate the Market Value Adjustment Merrill Lynch Life divides the sum of 1
and "B", 1.0495, by the sum of 1 and the guaranteed interest rate for the
affected subaccount, 1.047. The resulting figure, 1.0023878, is then taken to
the "n"/365 power, or 4.75 (1,734/365), which is 1.0113929. 1.0113929 is
subtracted from 1 and the resulting figure, -.0113929, is multiplied by the
amount of the withdrawal, $20,000, to give -$227.86. 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 4.45%, instead of 4.95%,
the Market Value Adjustment would have been +225.83, 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 6%, 7%, and 8%,
the Market Value Adjustment would have been -$1,207.33, -$2,174.62 and
- -$3,176.40, 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 -$119.60 or
- -$71.68, 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 5% per year, the
withdrawal charge will be 2.5%. The amount of the charge remains the same
whether or not six months'
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interest has been credited to the subaccount. For a full withdrawal, the amount
withdrawn is the net account value. 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 5.0%,
the other with a Guarantee Period of three years and a guaranteed interest rate
of 4.8%, 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 22.5% and that the adjustment
applied to the three year Guarantee Period operates to reduce its value by 10%.
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 $900 (22.5% of $4,000) and the
withdrawal charge of $100 (.05% 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, $300 (10% of $3,000), and the withdrawal charge, $72.00
(4.8% divided by 2 times $3,000), resulting in a remaining subaccount value of
$1,628.00.
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. Merrill Lynch Life currently
permits participants to select an annuity date that is any 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 (or by telephone, once a proper authorization form is
submitted to the 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.)
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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.
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 contained in the
Contract, it may be advantageous for the participant to designate an annuity
date that
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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 written 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. Generally, 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.
However, a participant (and, once a proper authorization form is submitted to
Merrill Lynch Life's Service Center, a participant's Financial Consultant) may
select by telephone the subaccounts in which the subaccount value at the end of
a Guarantee Period is to be invested. Participants may also select by telephone
the subaccounts from which partial withdrawals are to be made. 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.
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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 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.
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THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
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
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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.
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
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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).
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
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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.
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 accumulate retirement
savings 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,
including earnings, 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.
Restrictions under Qualified Contracts
Other restrictions with respect to the election, commencement, or distribution
of benefits may apply under qualified contracts or under the terms of the plans
in respect of which qualified contracts are issued.
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.
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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. Premium tax rates vary from jurisdiction to
jurisdiction and currently range from 0% to 5%.
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. 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
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.
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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.
On October 1, 1991, 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 1995, 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, 8%, as measured by
total contract owner deposits.
Merrill Lynch Life's insurance products are sold primarily by licensed agents
affiliated with MLLA 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,
1995, approximately 9,780 agents affiliated with MLLA were authorized to act for
Merrill Lynch Life.
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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,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Investment Income................. $ 376,166 $ 433,536 $ 586,461 $ 712,739 $ 787,603
Earnings Before Federal Income Tax.... $ 118,785 $ 89,883 $ 72,775 $ 25,667 $ 14,068
Net Earnings.......................... $ 76,482 $ 66,005 $ 47,860 $ 17,031 $ 11,608
Total Assets.......................... $12,402,003 $11,604,074 $12,249,577 $11,783,961 $12,241,054
Stockholder's Equity.................. $ 596,837 $ 559,571 $ 687,055 $ 762,474 $ 741,314
</TABLE>
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
Merrill Lynch Life conducts its business in the life insurance and annuity
markets of the financial services industry. These markets are faced with an
increased strengthening of the regulatory environment with particular emphasis
on company solvency and sales practice monitoring. The legal barriers which have
historically segregated many of the markets in the financial services industry
are being challenged through both legislative and judicial processes. The
distribution channels for life insurance and annuity products are diversifying
and now include banks, full service and discount brokers, and financial
planners. Demographically, the population is aging, which favors life insurance
and annuity products. In particular, markets are anticipated to expand for
estate planning products, annuities, long term care and business insurance.
However, changes in tax laws that are currently being debated by Congress and
the President of the United States may reduce or eliminate the tax advantages of
certain of these products, resulting in either their reduced marketability or
their obsolescence.
Summary
Merrill Lynch Life sells variable and interest sensitive life insurance and
annuity products through Merrill Lynch's retail network of Financial
Consultants. Merrill Lynch Life competes for Merrill Lynch's clients' life
insurance and annuity business with non-affiliated insurers whose products are
also sold through Merrill Lynch's retail network ("non-proprietary products"),
and with insurers who solicit this business directly. In the view of management,
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'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.
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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 are designed to address the retirement and estate
planning needs of Merrill Lynch's clients.
Both interest sensitive and variable deferred annuities currently provide
certain tax advantages that similar non-insurance investments do not possess.
Congressional action could limit or eliminate this tax advantage. Such actions
could have significant competitive consequences on the insurance industry in
general and Merrill Lynch Life in particular.
During 1995 Merrill Lynch Life experienced a substantial decrease in sales
volume of its variable annuity product. A significant portion of the decline was
anticipated. During 1994 and 1993, Merrill Lynch Life had $1.9 billion and $1.3
billion, respectively, of fixed rate annuity contracts which reached the
expiration of their interest rate guarantee period. Primarily as a result of the
low interest rate environment during 1993 and the first half of 1994, a
substantial portion of such contract owners elected to tax-free exchange into
Merrill Lynch Life's variable annuity. During 1995, the amount of fixed rate
annuity contracts which reached the expiration of their interest rate guarantee
period declined substantially, resulting in approximately 61% of the reduction
in variable annuity sales volume. Management attributes the remaining reduction
in sales volume to two additional factors. During 1995, Merrill Lynch began
offering for sale several non-proprietary variable annuity products resulting in
reduced sales of Merrill Lynch Life's variable annuity product. Additionally,
Merrill Lynch Life's variable annuity received relatively negative performance
evaluations by certain mutual fund research firms, during 1995, as a result of
the performance of several of the product's core fund portfolios which did not
meet or exceed fund category averages.
There are several factors which management believes may positively impact sales
on a medium term and long term basis. As previously stated, one of Merrill Lynch
Life's core goals is to provide superior customer service to its clients. As
evidence of progression towards this goal, during 1995, Merrill Lynch Life's
annuity service center was awarded the Florida Governor's Sterling Award for
Quality and Excellence in the Service Sector and the Rochester Institute of
Technology's College of Business/USA Today Quality Cup for Service
Organizations. During the fourth quarter of 1995, the senior portfolio manager
for four of the variable annuity's core fund portfolios was changed. The new
manager is currently in the process of restructuring the investment composition
of these portfolios with the goal of achieving enhanced performance. In
addition, Merrill Lynch Life has several product development and enhancement
initiatives ongoing with implementation anticipated during 1996.
The following describes Merrill Lynch Life's primary products and discusses the
sales activity for the three years ended December 31, 1995:
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. Deposits received from sales of this product were $497
million, $1.528 billion and $1.348 billion for 1995, 1994 and 1993,
respectively. A significant portion of the deposits received from sales of the
variable annuity product during each of these periods was a result of tax-free
exchanges from Merrill Lynch Life's fixed rate annuity products. For 1995, 1994
and 1993, approximately $137 million, $763 million and $649 million,
respectively, of deposits were a result of internal 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. Deposits received from the sales of this product were $254
million, $319 million and $153 million for 1995, 1994 and 1993, respectively.
For 1995, 1994 and 1993, approximately $140 million, $209 million and $70
million, respectively, of deposits were a result of internal tax-free exchanges
from Merrill Lynch Life's fixed rate annuity products. Sales of this product
were concentrated during the second half of 1994 and the first half of 1995
reflecting the movement of interest rates which peaked during December 1994.
Merrill Lynch Life offers two primary types of variable life insurance. These
products allow the policyholder to allocate the cash value of the policy to
underlying diversified mutual fund portfolios. The first type of variable
25
<PAGE> 27
life insurance product provides 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 1995, 1994 and 1993
were approximately $69 million, $63 million and $32 million, respectively.
During 1995, 1994 and 1993, Merrill Lynch Life had approximately $630 million,
$1.892 billion and $1.269 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 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Renewed with an adjustment to the applicable
interest crediting rate...................... $161 26% $ 309 16% $ 273 22%
Exchanged into either the variable annuity
product or the modified guaranteed annuity
product...................................... 199 31% 854 45% 453 36%
Surrendered.................................... 270 43% 729 39% 543 42%
------ ------ ------ ------ ------ ------
Total.......................................... $630 100% $1,892 100% $1,269 100%
====== ===== ====== ===== ====== =====
</TABLE>
As described above, Merrill Lynch Life has been strategically migrating from
underwriting interest sensitive, general account products to underwriting
primarily 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 provided under Arkansas insurance law. Since the contract
owner assumes most investment risks with variable products, many of the
conventional risks an insurer of general account products assumes, such as
interest rate risk, asset/ liability matching and asset default risk, are not
borne by Merrill Lynch Life. Since Merrill Lynch Life does not bear those risks
in connection with its variable products, 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 $100 million, $150 million and $120 million dividends
during 1995, 1994 and 1993, respectively, to MLIG.
Financial Condition
At December 31, 1995, Merrill Lynch Life's assets were $12.402 billion, or $798
million higher than the $11.604 billion at December 31, 1994. The increase in
assets is attributable to increases in the market value of investments in both
the general account and separate accounts. During 1995, interest rates declined
in excess of 200 basis points resulting in a $305 million increase in the market
value of general account fixed maturity securities investments. After
adjustments to deferred policy acquisition costs and Federal income taxes --
deferred, total general account assets increased $185 million during 1995 as a
result of the declining interest rate environment. Separate accounts investments
increased $644 million as a result of market value increases benefiting from
both the declining interest rate environment and the strong equity markets.
During 1995 the Dow Jones Industrial Average increased 33% and the Standard and
Poor's 500 Index increased 34% from their December 31, 1994 levels.
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<PAGE> 28
During 1995, Merrill Lynch Life continued to experience contract owner
withdrawals exceeding deposits. Withdrawals for 1995 were $1.068 billion
compared to deposits of $567 million resulting in a net cash outflow of $501
million.
Merrill Lynch Life continued during 1995 to concentrate its marketing emphasis
on the sale of variable products, resulting in the reallocation of assets from
the general account to the separate accounts. As of December 31, 1995 and 1994,
Merrill Lynch Life's percentage of separate accounts assets to total assets was
55% and 50%, respectively. Merrill Lynch Life anticipates that the percentage of
separate accounts assets to total assets will continue to increase.
Merrill Lynch Life maintains a conservative general account 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......................................................................... 21%
Non-Investment Grade Fixed Maturity Securities....................................... 4%
Mortgage Loans on Real Estate........................................................ 2%
Equity Securities.................................................................... 1%
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 $647 million as
of December 31, 1995. At December 31, 1995, approximately 61% 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, 1995
approximately $87 million of CMO and MBS securities which had relatively higher
projected cash flow volatility in changing interest rate environments as
compared to Merrill Lynch Life's CMO and MBS investment portfolio taken as a
whole. 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 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 1995, Merrill Lynch Life foreclosed on one commercial mortgage loan with
an outstanding principal balance of $2 million and a carrying value of $1
million. The carrying value approximates the fair value of this property.
Merrill Lynch Life also allowed three commercial mortgages with an outstanding
principal amount of $10 million to be satisfied for $7 million. 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 collateralized
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 $88 million of Merrill Lynch Life's
investment in mortgage loans as of December 31, 1995 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 1995, Merrill Lynch Life sold four real estate properties with a carrying
value of $8 million for a realized gain of $1 million.
As of December 31, 1995, Merrill Lynch Life had 76,685 life insurance and
annuity contracts in-force with interest rate guarantees. The estimated average
rate of interest credited on behalf of contract owners was
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<PAGE> 29
5.73% during 1995. The liabilities related to insurance contracts with interest
rate guarantees were supported by invested assets with an estimated effective
yield of 7.95% during 1995.
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, 1995 and 1994, Merrill Lynch Life had accrued an
estimated liability for future guaranty fund assessments of $21 million and $25
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 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, 1995, Merrill Lynch Life's assets included $3.223 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 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 National Association of Insurance Commissioners ("NAIC") utilizes 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. As of December 31, 1995 and 1994, 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.
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<PAGE> 30
1995 compared to 1994
Merrill Lynch Life recorded net earnings of $76 million and $66 million for 1995
and 1994, respectively.
Net investment income and interest credited to policyholders' account balances
for 1995 as compared to 1994 have declined by approximately $57 million and $52
million, respectively, resulting in a $5 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 gains of $5 million
during 1995 as compared to net realized investment losses of $15 million during
1994. During 1994, Merrill Lynch Life's trading portfolios experienced $12
million of realized and unrealized losses during the first ten months of 1994.
Merrill Lynch Life ceased utilizing the trading portfolio classification on
November 1, 1994. During 1994, Merrill Lynch Life established $5 million of
valuation allowances for mortgage loans on real estate. No valuation allowances
were established during 1995. Normal sales activity in Merrill Lynch Life's
fixed maturity securities available for sale portfolios benefited from the
declining interest rates during 1995 and contributed to the $3 million increase
in gains from these securities.
Policy charge revenue increased approximately $15 million during the current
year as compared to 1994. The increase is primarily attributable to the 21%
increase in policyholders' account balances, as compared to December 31, 1994,
of the variable annuity product.
Policy benefits increased approximately $2 million during the current year to
$19 million. This increase was primarily attributable to mortality costs
associated with Merrill Lynch Life's variable annuity product reflecting the
growth in contracts in-force.
Amortization of deferred policy acquisition costs declined $11 million during
the current year as compared to 1994. Approximately $8 million of the decrease
in amortization is attributable to the retrospective adjustment of deferred
policy acquisition costs as a result of revising the assumptions of estimated
future gross profits of certain annuity and life products. The remaining change
was attributable to the period to period decline in fixed rate annuity contracts
in-force partially offset by the period to period increase in variable annuity
contracts in-force.
Insurance expenses and taxes increased $9 million during 1995 to $44 million.
Approximately $6 million of the increase was attributable to a reduction in the
amount of expenses which were capitalized reflecting the decline in sales volume
of Merrill Lynch Life's annuity products. Additionally, the increase in the
variable annuity products policyholders' account balances resulted in a $4
million increase in asset based commissions during 1995 as compared to 1994.
Partially offsetting these items was an approximate $1 million decrease in the
amount of allowances established for future assessments related to the
rehabilitation of insolvent and/or impaired life insurance companies. Total
general operating expenses of $37 million were unchanged during 1995 as compared
to 1994.
Merrill Lynch Life's effective federal income tax rate increased from 27% for
1994 to 36% for 1995 principally as a result of recording an adjustment to prior
years' tax liabilities during 1994.
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 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 were 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
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<PAGE> 31
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 1994 as
compared to 1993. During 1994, Merrill Lynch Asset Management, L.P. ("MLAM") and
MLIG entered into an agreement with respect to administrative services for the
Merrill Lynch Series Fund, Inc. ("Series Fund") and Merrill Lynch Variable
Series Funds, Inc. ("Variable Series Funds"). Merrill Lynch Life invests in the
various mutual fund portfolios of the Series Fund and the Variable Series Funds
in connection with the variable life and variable annuities Merrill Lynch Life
has in-force. Under this agreement, MLAM pays compensation to MLIG in an amount
equal to a portion of the annual gross investment advisory fees paid by the
Series Fund and the Variable Series Funds to MLAM. Merrill Lynch Life received
from MLIG its allocable share of such compensation in the amount of $13 million
during 1994. The remaining increase was 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 experienced a decrease in surrenders during 1994 as
compared to 1993. The decrease in surrender activity and the recent rise in
interest rates 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 1994. This increase was 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
1994 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 1994 as compared to 1993 contributed
to the reduction in amortization of deferred policy acquisition costs.
Additionally, contributing to the decrease in amortization was a decline in
fixed rate annuity contracts in-force partially offset by the increase in the
variable annuity contracts in-force.
Insurance expenses and taxes decreased $13 million during 1994 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 was 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 1994.
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 1995.
Inflation
Merrill Lynch Life's operations have not been materially impacted by inflation
and changing prices during the preceding three years.
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<PAGE> 32
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 certain of its 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.
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, 1995 invested assets
supporting Contract guarantees consisted of $3,808 million of fixed maturity
securities available for sale, $1,039 million of policy loans, $121 million of
mortgage loans on real estate, $21 million of equity securities available for
sale, and $6 million of real estate.
At December 31, 1995, Merrill Lynch Life's assets included $3,223 million of
cash, short-term investments, and investment grade publicly traded fixed
maturity securities supporting Contract guarantees.
At December 31, 1995, approximately $1,357 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, 1995, approximately $210 million (5.5%) 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.
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<PAGE> 33
H. CERTAIN AGREEMENTS
Investment Management Agreement
Merrill Lynch Life has entered into an investment management agreement with
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 $2.6 million, $2.7 million,
and $2.8 million during the years ended December 31, 1995, 1994, and 1993,
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 $43.0 million, $44.2 million, and $55.8
million for the years ended December 31, 1995, 1994, and 1993, respectively.
General Agency Agreement
Merrill Lynch Life has entered into a general agency agreement with 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 $44.0 million, $84.2 million, and $67.1 million during the years
ended December 31, 1995, 1994, and 1993, respectively. (See "Distribution of the
Contracts" on page 16.)
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 34.)
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 leases certain office space in
Springfield, Massachusetts from Picknelly Family Limited Partnership. 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
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<PAGE> 34
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 NAIC.
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 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 28.
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 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.
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<PAGE> 35
DIRECTORS AND EXECUTIVE OFFICERS
Merrill Lynch Life's directors and executive officers and their positions with
Merrill Lynch Life are as follows:
<TABLE>
<CAPTION>
NAME (AGE) POSITION(S) WITH MERRILL LYNCH LIFE
- --------------------------------------------- ---------------------------------------------
<S> <C>
Anthony J. Vespa (54)........................ Chairman of the Board, President, and Chief
Executive Officer
Joseph E. Crowne (49)........................ Director, Senior Vice President, Chief
Financial Officer, Chief Actuary, and
Treasurer
Barry G. Skolnick (44)....................... Director, Senior Vice President, General
Counsel, and Secretary
David M. Dunford (47)........................ Director, Senior Vice President, and Chief
Investment Officer
Gail R. Farkas (44).......................... Director and Senior Vice President
Robert J. Boucher (50)....................... 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 Merrill Lynch Life's indirect parent, Merrill Lynch. The
principal positions of Merrill Lynch Life'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 MLPF&S. From February 1991 to
February 1994, he held the position of District Director and First Vice
President of MLPF&S. Prior to February 1991, he held the position of Senior
Resident Vice President of MLPF&S.
Mr. Crowne joined Merrill Lynch Life in June 1991. Prior to June 1991, he was a
Principal with Coopers & Lybrand.
Mr. Skolnick joined Merrill Lynch Life in November 1990. Since May 1992, he has
held the position of Assistant General Counsel of Merrill Lynch and First Vice
President of MLPF&S. Prior to May 1992, he held the position of Senior Counsel
of Merrill Lynch.
Mr. Dunford joined Merrill Lynch Life in July 1990.
Ms. Farkas joined Merrill Lynch Life in August 1995. Prior to August 1995, she
held the position of Director of Market Planning of MLPF&S.
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 MLIG. 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.
34
<PAGE> 36
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, 1995 paid by Merrill Lynch Life exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION(1)
-------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
AWARDS
-----------------------
<CAPTION>
RESTRICTED
STOCK SECURITIES
AWARDS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (2)(3)(4) OPTIONS COMPENSATION
- -------------------------------------------- ---- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 1995 $ 65,184 $293,220 $ 65,160 5,079 8,458(5)
Chairman of the Board, President and Chief 1994 63,469 267,383 48,615 5,445 7,292
Executive Officer
(Since February 1994)
Joseph E. Crowne 1995 113,100 165,503 28,275 735 5,468(5)
Senior Vice President, Chief Actuary and 1994 111,150 177,840 33,345 1,245 5,002
Chief Financial Officer 1993 109,800 219,600 32,940 1,017 5,766
David M. Dunford 1995 163,275 167,940 38,486 998 6,301(5)
Senior Vice President, Chief Investment 1994 162,575 157,930 34,838 1,301 4,181
Officer 1993 159,950 173,660 41,130 1,270 5,143
Robert J. Boucher 1995 117,750 211,850 42,390 1,102 6,361(5)
Senior Vice President, Variable Life 1994 112,625 193,715 40,545 1,514 5,406
Administration 1993 107,000 192,600 38,520 1,190 6,583
Barry G. Skolnick 1995 88,270 115,430 45,832 1,188 5,775(5)
Senior Vice President, General Counsel 1994 101,010 132,090 55,361 2,067 4,662
1993 84,150 153,000 51,638 1,591 5,701
</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 1996 for performance in
1995, in February 1995 for performance in 1994, and in February 1994 for
performance in 1993. The February 1994 awards were of Restricted Units; the
other awards were split equally between Restricted Shares and Restricted
Units. All awards have been valued for this table using closing prices of
Common Stock of Merrill Lynch on the Consolidated Transaction Reporting
System on the dates of grant of such awards; the closing price on February
1, 1996, the effective date of the grant for performance in 1995, was
$57.25. Shares and units granted in February 1995 and February 1996 vest
three years following grant. Shares are restricted from transferability for
an additional two years after vesting. Units granted in February 1994 have
a four-year vesting period, but may vest following the end of the 1996
fiscal year based upon the achievement of a cumulative return on equity of
60%.
(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 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, 1995 are as
follows: Mr. Vespa (681 shares and 681 units--$69,462); Mr. Crowne (848
shares and 848 units--$86,496); Mr. Dunford (963 shares and 963
units--$98,226); Mr. Boucher (1,014 shares and 1,014 units--$103,428); and
Mr. Skolnick (1,371 shares and
35
<PAGE> 37
1,371 units--$139,842). These amounts do not include Restricted Shares and
Restricted Units awarded in 1996 for performance in 1995.
(5) Amounts shown for 1995 consist of the following: (i) contributions made in
1995 by Merrill Lynch Life to accounts of employees under the 401(k)
Savings and Investment Plan--Mr. Vespa ($611), Mr. Dunford ($1,400), Mr.
Boucher ($1,413) and Mr. Skolnick ($1,019); (ii) allocations made in 1995
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 ($7,847), Mr. Crowne
($2,640), Mr. Dunford ($4,901), Mr. Boucher ($4,948) and Mr. Skolnick
($4,756); and (iii) contributions made in 1995 to account of an employee
under the Employee Stock Purchase Plan--Mr. Crowne ($2,828).
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
%
OF
TOTAL
OPTIONS
NUMBER GRANTED
OF TO
SECURITIES EMPLOYEES EXERCISE GRANT
UNDERLYING IN PRICE DATE
FISCAL OPTIONS FISCAL ($ PER EXPIRATION PRESENT
NAME YEAR(1) GRANTED YEAR SHARE) DATE(2) VALUE(3)
- ----------------------------- ---- ----- --- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa............. 1995 5,079 .07% $54.5625 1/24/2006 $77,458
Joseph E. Crowne............. 1995 735 .01% 54.5625 1/24/2006 11,209
David M. Dunford............. 1995 998 .01% 54.5625 1/24/2006 15,220
Robert J. Boucher............ 1995 1,102 .01% 54.5625 1/24/2006 16,806
Barry G. Skolnick............ 1995 1,188 .01% 54.5625 1/24/2006 18,118
</TABLE>
- ---------------
(1) Reflects awards made in January 1996 for performance in 1995. Does not
include awards made in January 1995 for performance in 1994; these awards
were reflected in Merrill Lynch Life's Prospectus for the Contracts dated
May 1, 1995.
(2) All options are exercisable as follows: 20% after one year, 40% after two
years, 60% after three years, 80% after four years, and 100% after five
years.
(3) Valued using a modified Black-Scholes option pricing model. The exercise
price of each option ($54.5625) is equal to the average of the high and low
prices on the Consolidated Transaction Reporting System of a share of
Merrill Lynch Common Stock on January 24, 1996, the date of grant. The
assumptions used for the variables in the model were: 26% volatility (which
is the volatility of the Common Stock for the 36 months preceding grant); a
5.68% 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 2006 as
quoted in The Wall Street Journal); a 1.9% 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 Merrill Lynch Common Stock and cannot
be accurately forecast by application of an option pricing model.
36
<PAGE> 38
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa.......... 0 $ 0 0 5,445 $ 0 $86,100
Joseph E. Crowne.......... 2,331 27,658 0 3,230 0 50,385
David M. Dunford.......... 0 0 7,292 3,492 240,759 53,595
Robert J. Boucher......... 0 0 1,306 3,270 21,314 48,345
Barry G. Skolnick......... 0 0 3,841 4,678 95,522 71,228
</TABLE>
- ---------------
(1) This valuation represents the difference between $51.00, the closing price
of Merrill Lynch Common Stock on December 29, 1995 on the Consolidated
Transaction Reporting System, and the exercise price of these options.
(2) This valuation represents the difference between the average of the high and
low price of the Merrill Lynch Common Stock on the Consolidated Transaction
Reporting System on the date of exercise, and the exercise price of the
options exercised.
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, 1995 and 1994
and for each of the three years in the period ended December 31, 1995 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.
37
<PAGE> 39
<PAGE>
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, 1995
and 1994, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
February 26, 1996
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------ ------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1995 - $3,648,983; 1994 - $4,014,272) $ 3,807,870 $ 3,867,833
Equity securities available for sale, at estimated fair value
(cost: 1995 - $19,683; 1994 - $15,946) 21,433 16,777
Mortgage loans on real estate 121,248 149,249
Real estate held for sale
(accumulated depreciation: 1995 - $81; 1994 - $515) 5,874 12,955
Policy loans on insurance contracts 1,039,267 985,213
------------ ------------
Total Investments 4,995,692 5,032,027
CASH AND CASH EQUIVALENTS 48,924 139,087
ACCRUED INVESTMENT INCOME 91,942 95,133
DEFERRED POLICY ACQUISITION COSTS 372,418 466,334
FEDERAL INCOME TAXES - DEFERRED 2,222 38,919
REINSURANCE RECEIVABLES 1,552 1,832
RECEIVABLES FROM AFFILIATES - NET 0 3,113
OTHER ASSETS 54,900 28,656
SEPARATE ACCOUNTS ASSETS 6,834,353 5,798,973
------------ -------------
TOTAL ASSETS $12,402,003 $11,604,074
============ =============
</TABLE>
See notes to financial statements.
<PAGE>
==============================================================================
<TABLE>
(caption>
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
-------------- ------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,851,718 $ 5,148,971
Claims and claims settlement expenses 29,812 26,177
------------- ------------
Total policy liabilities and accruals 4,881,530 5,175,148
OTHER POLICYHOLDER FUNDS 13,607 21,221
LIABILITY FOR GUARANTY FUND ASSESSMENTS 21,144 24,774
OTHER LIABILITIES 53,566 36,775
FEDERAL INCOME TAXES - CURRENT 7,033 2,274
AFFILIATED PAYABLES - NET 2,429 0
SEPARATE ACCOUNTS LIABILITIES 6,825,857 5,784,311
------------- ------------
Total Liabilities 11,805,166 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 501,455 535,450
Retained earnings 76,482 66,005
Net unrealized investment gain (loss) 16,900 (43,884)
------------- ------------
Total Stockholder's Equity 596,837 559,571
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $12,402,003 $11,604,074
============= ============
</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, 1995, 1994 AND 1993
(Dollars in Thousands)
===================================================================
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 376,166 $ 433,536 $ 586,461
Net realized investment gains (losses) 4,525 (14,543) 63,052
Policy charge revenue 141,722 126,284 95,684
----------- ----------- -----------
Total Revenues 522,413 545,277 745,197
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 261,760 313,585 454,671
Market value adjustment expense 5,805 6,307 30,816
Policy benefits (net of reinsurance recoveries: 1995 - $6,482;
1994 - $6,338; 1993 - $6,004) 19,374 16,858 17,030
Reinsurance premium ceded 13,896 13,909 12,665
Amortization of deferred policy acquisition costs 58,669 69,662 109,456
Insurance expenses and taxes 44,124 35,073 47,784
----------- ----------- -----------
Total Benefits and Expenses 403,628 455,394 672,422
----------- ----------- -----------
Earnings Before Federal Income Tax Provision 118,785 89,883 72,775
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION:
Current 38,335 22,503 20,112
Deferred 3,968 1,375 4,803
----------- ----------- -----------
Total Federal Income Tax Provision 42,303 23,878 24,915
----------- ----------- -----------
NET EARNINGS $ 76,482 $ 66,005 $ 47,860
=========== =========== ===========
</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, 1995, 1994 AND 1993
(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, 1993 $ 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
Dividend to Parent (33,995) (66,005) (100,000)
Net earnings 76,482 76,482
Net unrealized investment gain 60,784 60,784
---------- ------------ ------------ -------------- -----------------
BALANCE, DECEMBER 31, 1995 $ 2,000 $ 501,455 $ 76,482 $ 16,900 $ 596,837
========== ============ ============ ============== =================
</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
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1994
(Dollars in Thousands)
=========================================================================
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 76,482 $ 66,005 $ 47,860
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 58,669 69,662 109,456
Capitalization of policy acquisition costs (54,014) (108,829) (91,189)
Depreciation, (accretion) and amortization of investments (6,763) (4,516) 1,142
Net realized investment (gains) losses (4,525) 14,543 (63,052)
Interest credited to policyholders' account balances 261,760 313,585 454,671
Provision for deferred Federal income tax 3,968 1,375 4,803
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 3,191 25,204 18,460
Receivables from affiliates - net 5,542 (2,324) (3,427)
Claims and claims settlement expenses 3,635 5,882 12,730
Federal income taxes - current 4,759 (7,848) (19,888)
Other policyholder funds (7,614) (7,547) 14,131
Liability for guaranty fund assessments (3,630) (3,309) 979
Policy loans (54,054) (60,634) (90,118)
Investment trading securities 0 11,352 (145,972)
Other, net (9,296) (39,206) 49,424
Net cash and cash equivalents provided ------------- ------------ -------------
by operating activities 278,110 273,395 300,010
------------- ------------ -------------
</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, 1995, 1994 AND 1993
(Concluded) (Dollars In Thousands)
========================================================================
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Fixed maturity securities sold 618,101 845,227 571,337
Fixed maturity securities matured 570,923 1,323,705 2,776,992
Fixed maturity securities purchased (814,535) (676,976) (1,866,857)
Equity securities available for sale sold 15,723 18,868 6,451
Equity securities available for sale purchased (17,984) (1,998) (8,983)
Mortgage loans on real estate principal payments received 30,767 32,341 35,561
Mortgage loans on real estate acquired (3,608) 0 (674)
Real estate held for sale sold 9,710 25,346 7,408
Real estate held for sale - improvements acquired (683) (1,060) 0
Recapture of investment in Separate Accounts 6,559 0 29,389
Investment in Separate Accounts (377) (15,212) (20,000)
------------- ------------ -------------
Net cash and cash equivalents provided
by investing activities 414,596 1,550,241 1,530,624
------------- ------------ -------------
FINANCING ACTIVITIES:
Dividends paid to parent (100,000) (150,000) (120,000)
Policyholders' account balances:
Deposits 567,430 966,861 814,314
Withdrawals (net of transfers to/from Separate Accounts) (1,250,299) (2,623,628) (2,574,854)
------------- ------------ -------------
Net cash and cash equivalents used
by financing activities (782,869) (1,806,767) (1,880,540)
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (90,163) 16,869 (49,906)
CASH AND CASH EQUIVALENTS
Beginning of year 139,087 122,218 172,124
------------- ------------ -------------
End of year $ 48,924 $ 139,087 $ 122,218
============= ============ =============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 33,576 $ 30,351 $ 40,000
Intercompany interest 1,310 679 737
</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, Incorporated ("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. 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.
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 policyholders' 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% - 6.90%
Interest sensitive deferred annuities 3.08% - 8.77%
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.
<PAGE>
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 $567 that can be
drawn upon for delinquent reinsurance recoverables.
As of December 31, 1995, the Company had life insurance in-
force which was ceded to other life insurance companies of
$2,302,776.
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. It is reasonably
possible that estimates of future gross profits could be
reduced in the future, resulting in a material reduction in the
carrying amount of deferred policy acquisition costs.
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 estimated future gross
profits over the anticipated life of the acquired insurance
contracts utilizing an interest methodology.
The Company has 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 related to the reinsurance agreement for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance $ 133,388 $ 139,647 $ 150,450
Capitalized amounts 13,708 12,517 6,987
Interest accrued 11,620 12,582 13,136
Amortization (33,883) (31,358) (30,926)
---------- ---------- ----------
Ending balance $ 124,833 $ 133,388 $ 139,647
========== ========== ==========
</TABLE>
The following table presents the expected amortization, net of
interest accrued, 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.
1996 $14,917
1997 11,418
1998 7,639
1999 6,676
2000 6,028
Investments: In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"),
<PAGE>
the Company classifies its investments in fixed maturity
securities and equity securities as available for sale
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 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.
During 1993 and 1994, the Company utilized the trading
securities classification available under SFAS No. 115. Trading
securities represented securities that were managed with an
investment objective to maximize total return subject to the
Company's quality guidelines. These securities were carried at
estimated fair value with unrealized gains and losses included
in the statement of earnings. 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.
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted 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 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, 1995 and 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 to be realized on
those mortgage loans which 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.
During 1995 the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures" which was an amendment to
SFAS No. 114. 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. There was no impact on
either financial position or earnings as a result of adopting
SFAS No. 114, as amended.
<PAGE>
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. 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.
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 primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
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 were:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale:
Securities (1) $ 3,807,310 $ 3,866,886
Interest rate swaps (2) 560 947
------------ ------------
Total fixed maturity securities available for sale 3,807,870 3,867,833
------------ ------------
Equity securities available for sale (1) 21,433 16,777
Mortgage loans on real estate (3) 121,248 149,249
Policy loans on insurance contracts (4) 1,039,267 985,213
Cash and cash equivalents (5) 48,924 139,087
Separate Accounts assets (6) 6,834,353 5,798,973
------------ ------------
Total financial instruments recorded as assets $11,873,095 $10,957,132
============ ============
</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, 1995 and 1994, securities
without a readily ascertainable market value, having an
amortized cost of $425,469 and $564,665, had an estimated
fair value of $448,785 and $564,682, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cash flow 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 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) 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 were:
<TABLE>
<CAPTION>
1995
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate debt $ 2,917,628 $ 138,159 $ 7,526 $ 3,048,261
Mortgage-backed securities 625,866 22,098 717 647,247
U.S. Government and agencies 99,213 6,286 0 105,499
Municipals 4,277 532 0 4,809
Foreign governments 1,999 55 0 2,054
------------ ------------ ------------ ------------
Total fixed maturity securities
available for sale $ 3,648,983 $ 167,130 $ 8,243 $ 3,807,870
============ ============ ============ ============
Equity securities available for sale:
Common stocks $ 2,746 $ 498 $ 63 $ 3,181
Non-redeemable preferred stocks 16,937 1,428 113 18,252
------------ ------------ ------------ ------------
Total equity securities available for sale $ 19,683 $ 1,926 $ 176 $ 21,433
============ ============ ============ ============
</TABLE>
<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 $ 2,968,683 $ 20,386 $ 139,915 $ 2,849,154
Mortgage-backed securities 897,290 5,764 29,243 873,811
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>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1995 by
contractual maturity were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 288,438 $ 290,754
Due after one year through five years 1,678,038 1,741,211
Due after five years through ten years 904,067 964,956
Due after ten years 152,574 163,702
------------ ------------
3,023,117 3,160,623
Mortgage-backed securities 625,866 647,247
Total fixed maturity securities ------------ ------------
available for sale $ 3,648,983 $ 3,807,870
============ ============
</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, 1995 by rating
agency equivalent were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
AAA $ 848,951 $ 881,712
AA 243,349 253,214
A 1,059,367 1,105,910
BBB 1,292,081 1,356,964
Non-investment grade 205,235 210,070
Total fixed maturity securities ------------ ------------
available for sale $ 3,648,983 $ 3,807,870
============ ============
</TABLE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with adjustments required by SFAS No. 115. The
Company adjusts 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:
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale $ 158,887 $ (146,439)
Equity securities available for sale 1,750 831
Deferred policy acquisition costs (17,041) 72,220
Federal income taxes - deferred (9,100) 23,629
Separate Account assets (164) (549)
---------- -----------
134,332 (50,308)
---------- -----------
Liabilities:
Policyholders' account balances 117,432 (6,424)
---------- -----------
Stockholder's equity:
Net unrealized investment gain (loss) $ 16,900 $ (43,884)
========== ===========
</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, 1995 and 1994 was $30,000.
The Company has outstanding at December 31, 1995, 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,
1995 will expire at various times during 1996. The average
unexpired term at December 31, 1995 and 1994 was .25 years and
1.2 years, respectively. All three interest rate swap contracts
were with investment grade counterparties at December 31, 1995.
There are no outstanding interest rate swaps in a loss position
at December 31, 1995 and 1994. During 1995, 1994 and 1993, a
net investment gain of $0, $470 and $0, respectively, was
recorded in connection with interest rate swap activity.
During 1995, 1994 and 1993, 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 and gross realized investment gains and losses from
the sale of fixed maturity securities available for sale and
held to maturity for the years ended December 31 were:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Proceeds $ 618,101 $ 845,227 $ 571,337
Gross realized investment gains 11,694 8,398 71,599
Gross realized investment losses 9,786 9,823 4,126
</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,
$(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 $28,166 and $26,651
held on deposit with insurance regulatory authorities at
December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company retained $8,496 and
$14,662 in the Separate Accounts, including unrealized losses
of $164 and $549, respectively. The investments in the
<PAGE>
Separate Accounts are for the purpose of providing original
funding of certain mutual fund portfolios available as
investment options to variable life and annuity policyholders.
The Company's investment in mortgage loans on real estate are
principally collateralized by commercial real estate. The
largest concentrations of commercial real estate mortgage loans
at December 31, 1995, as measured by the outstanding principal
balance, are for properties located in California ($36,476 or
23%), Illinois ($28,299 or 18%) and Rhode Island ($19,404 or
12%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1995
and 1994 are:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Carrying value $ 88,068 $ 71,973
Valuation allowance 35,881 40,070
</TABLE>
Additional information on impaired loans for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Average investment in impaired loans $123,949 $112,043 $109,876
Interest income recognized (cash-basis) 5,482 6,542 7,387
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, $1,300,
$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>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities $ 305,648 $ 368,023 $ 511,655
Equity securities 1,329 2,408 4,143
Mortgage loans on real estate 12,250 15,014 20,342
Real estate held for sale 153 406 32
Policy loans on insurance contracts 53,576 50,232 46,129
Cash equivalents 8,463 5,936 3,480
Other 1,753 (447) 7,655
__________ __________ __________
Gross investment income 383,172 441,572 593,436
Less investment expenses (7,006) (8,036) (6,975)
__________ __________ __________
Net investment income $ 376,166 $ 433,536 $ 586,461
========== ========== ==========
</TABLE>
<PAGE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities available for sale $ 1,908 $ (1,425) $ 67,473
Fixed maturity securities held for trading 0 (11,889) 5,562
Equity securities available for sale 1,475 1,490 22
Equity securities held for trading 0 (580) 2,587
Investment in Separate Account (369) 0 1,422
Mortgage loans on real estate 334 (4,967) (9,310)
Real estate held for sale 1,177 2,828 (4,733)
Other 0 0 29
-------- ---------- ---------
Net realized investment gains (losses) $ 4,525 $ (14,543) $ 63,052
======== ========== =========
</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:
1995 $ 40,070 $ 0 $ 4,189 $ 35,881
1994 45,924 4,966 10,820 40,070
1993 55,610 9,310 18,996 45,924
Real estate held for sale:
1995 5,766 0 3,566 2,200
1994 7,628 0 1,862 5,766
1993 4,300 3,328 0 7,628
</TABLE>
The Company held investments at December 31, 1995 of $8,609
which have been non-income producing for the preceding twelve
months.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1995, $920 has 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:
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 41,575 $ 31,459 $ 25,471
Increase (decrease) in income taxes resulting from:
Release of policyholders' surplus 1,991 0 0
Tax deductible interest (718) 0 0
Federal tax rate increase 0 0 (631)
Dividend received deduction (532) (7,363) (28)
Other (13) (218) 103
--------- --------- ---------
Federal income tax provision $ 42,303 $ 23,878 $ 24,915
========= ========= =========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1995 was 35%.
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>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (2,179) $ 6,416 $ (9,030)
Policyholders' account balances 66 5,322 6,433
Estimated liability for guaranty fund assessments 249 (153) (1,066)
Investment adjustments 5,563 3,276 7,941
Other 269 (13,486) 525
Deferred Federal income tax --------- ---------- ---------
provision $ 3,968 $ 1,375 $ 4,803
========= ========== =========
</TABLE>
Deferred tax assets and liabilities as of December 31, are
determined as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 94,087 $ 94,153
Net unrealized investment losses 0 23,629
Investment adjustments 10,793 16,356
Estimated liability for guaranty fund assessments 7,331 7,580
---------- ----------
Total deferred tax assets 112,211 141,718
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 96,862 99,041
Net unrealized investment gains 9,100 0
Other 4,027 3,758
---------- ----------
Total deferred tax liabilities 109,989 102,799
---------- ----------
Net deferred tax asset $ 2,222 $ 38,919
========== ==========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
<PAGE>
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 $43,039, $44,176 and $55,843 for the years ended
December 31, 1995, 1994 and 1993, 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 $1,310, $679 and $737 for 1995,
1994 and 1993, 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 services 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
$2,635, $2,732 and $2,800 for 1995, 1994 and 1993,
respectively.
MLAM and MLIG have entered into an agreement with respect to
administrative services for the 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 and variable
annuities the Company has in-force. Under this agreement, MLAM
pays compensation to MLIG in an amount equal to a portion of
the annual gross investment advisory fees paid by the Series
Fund and the Variable Series Funds to MLAM. The Company
received from MLIG it's allocable share of such compensation in
the amount of $13,293 and $12,600 during 1995 and 1994,
respectively.
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 $43,984, $84,231 and $67,102 for
1995, 1994 and 1993, 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.
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,
1995 and 1994, the notional amount of such interest rate swap
contracts outstanding was $10,000. 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
$256, $782, and $6,876 for 1995, 1994 and 1993, respectively
(See Note 3).
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1995, 1994, and 1993 the Company paid dividends of
$100,000, $150,000, and $120,000, respectively, to MLIG. Of
these stockholder's dividends, $73,757, $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, 1995 and 1994, approximately $30,195 and
$26,243, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1995 and 1994, was $303,950 and $264,432,
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
income taxes and valuing securities on a different basis. The
<PAGE>
Company's statutory net income for 1995, 1994 and 1993 was
$121,451, $42,382 and $45,604, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes 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. As of December 31, 1995 and 1994, based on the
RBC formula, the Company's total adjusted capital level was
395% and 270%, respectively, of the minimum amount of capital
required to avoid regulatory action.
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, 1995 and 1994, the Company has established an
estimated liability for future guaranty fund assessments of
$21,144 and $24,774, 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> 40
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 5.5%. Table 2 assumes the premium is allocated to
a subaccount with a 5 year Guarantee Period with a guaranteed rate of 5.0%. The
Market Value Adjustments are based on interpolated current interest rates
(defined in the Contract as "B") of 3.5%, 5.5% and 7.5% in the 10 year guarantee
table (see Table 1 below) and 3.0%, 5.0% and 7.0% 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
[CAPTION]
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------
3.50% 5.50% 7.50%
------------------------------------------------------------------------------------------------------------------
MARKET NET MARKET NET MARKET NET
END OF SUB- VALUE WITH- SUB- VALUE WITH- SUB- VALUE WITH- 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 10,550 1,920 334 12,137 -0- 282 10,268 (1,603) 239 8,707
2 11,130 1,784 346 12,569 -0- 298 10,832 (1,517) 257 9,356
3 11,742 1,632 358 13,017 -0- 314 11,428 (1,412) 276 10,054
4 12,388 1,462 371 13,480 -0- 332 12,057 (1,288) 297 10,803
5 13,070 1,274 384 13,960 -0- 350 12,720 (1,143) 319 11,608
6 13,788 1,065 398 14,456 -0- 369 13,419 (973) 343 12,472
7 14,547 835 412 14,970 -0- 389 14,157 (777) 369 13,402
8 15,347 582 426 15,503 -0- 411 14,936 (551) 396 14,400
9 16,191 304 441 16,054 -0- 433 15,758 (293) 425 15,472
10 17,081 -0- -0- 17,081 -0- -0- 17,081 -0- -0- 17,081
------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 2
[CAPTION]
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------
3.00% 5.00% 7.00%
------------------------------------------------------------------------------------------------------------------
MARKET NET MARKET NET MARKET NET
END OF SUB- VALUE WITH- SUB- VALUE WITH- SUB- VALUE WITH- 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 10,500 818 276 11,041 -0- 256 10,244 (746) 238 9,516
2 11,025 638 284 11,378 -0- 269 10,756 (593) 254 10,178
3 11,576 442 293 11,726 -0- 282 11,294 (419) 272 10,885
4 12,155 230 302 12,083 -0- 296 11,859 (222) 291 11,642
5 12,763 -0- -0- 12,763 -0- -0- 12,763 -0- -0- 12,763
------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 41
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
