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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290; 33-58303
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1997 - $3,124,356; 1996 - $3,232,643) $ 3,181,788 $ 3,301,588
Equity securities, at estimated fair value
(cost: 1997 - $42,462; 1996 - $32,988) 43,165 35,977
Mortgage loans 30,579 70,503
Real estate held-for-sale 28,851 28,851
Policy loans on insurance contracts 1,094,917 1,092,071
-------------- --------------
Total Investments 4,379,300 4,528,990
CASH AND CASH EQUIVALENTS 166,737 94,991
ACCRUED INVESTMENT INCOME 85,597 86,186
DEFERRED POLICY ACQUISITION COSTS 362,863 366,461
FEDERAL INCOME TAXES - DEFERRED 3,504 -
REINSURANCE RECEIVABLES 4,327 2,642
OTHER ASSETS 44,661 42,861
SEPARATE ACCOUNTS ASSETS 8,599,545 7,615,362
-------------- --------------
TOTAL ASSETS $ 13,646,534 $ 12,737,493
============== ==============
</TABLE>
See notes to financial statements. (Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Continued) (Dollars in Thousands, except per share amounts) (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,325,377 $ 4,480,048
Claims and claims settlement expenses 51,254 39,666
-------------- --------------
Total policy liabilities and accruals 4,376,631 4,519,714
OTHER POLICYHOLDER FUNDS 19,537 19,420
LIABILITY FOR GUARANTY FUND ASSESSMENTS 16,423 18,773
FEDERAL INCOME TAXES - DEFERRED - 6,714
FEDERAL INCOME TAXES - CURRENT 34,267 20,968
AFFILIATED PAYABLES - NET 2,036 6,164
OTHER LIABILITIES 64,313 50,726
SEPARATE ACCOUNTS LIABILITIES 8,599,545 7,605,194
-------------- --------------
Total Liabilities 13,112,752 12,247,673
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 402,937 402,937
Retained earnings 118,866 79,387
Net unrealized gain on investment securities available-for-sale 9,979 5,496
-------------- --------------
Total Stockholder's Equity 533,782 489,820
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 13,646,534 $ 12,737,493
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 158,082 $ 171,603
Net realized investment gains 6,920 7,720
Policy charge revenue 83,345 78,026
-------------- --------------
Total Revenues 248,347 257,349
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 105,775 120,704
Market value adjustment expense 1,655 4,504
Policy benefits (net of reinsurance recoveries: 1997 - $7,263;
1996 - $4,434) 13,702 10,897
Reinsurance premium ceded 8,841 7,679
Amortization of deferred policy acquisition costs 36,568 32,638
Insurance expenses and taxes 23,692 23,457
-------------- --------------
Total Benefits and Expenses 190,233 199,879
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Earnings Before Federal Income Tax Provision 58,114 57,470
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 31,267 2,052
Deferred (12,632) 15,536
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Total Federal Income Tax Provision 18,635 17,588
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NET EARNINGS $ 39,479 $ 39,882
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------------
1997 1996
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<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 78,444 $ 84,694
Net realized investment gains 1,135 992
Policy charge revenue 42,229 39,068
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Total Revenues 121,808 124,754
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 52,669 59,106
Market value adjustment expense 712 873
Policy benefits (net of reinsurance recoveries: 1997 - $4,326;
1996 - $2,321) 6,946 5,368
Reinsurance premium ceded 4,481 3,918
Amortization of deferred policy acquisition costs 14,644 15,694
Insurance expenses and taxes 11,915 11,449
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Total Benefits and Expenses 91,367 96,408
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Earnings Before Federal Income Tax Provision 30,441 28,346
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 21,333 (5,082)
Deferred (10,753) 13,983
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Total Federal Income Tax Provision 10,580 8,901
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NET EARNINGS $ 19,861 $ 19,445
============== =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 2,000 $ 501,455 $ 76,482 $ 16,900 $ 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Net unrealized investment loss (11,404) (11,404)
-------------- -------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 489,820
Net earnings 39,479 39,479
Net unrealized investment gain 4,483 4,483
-------------- -------------- -------------- -------------- --------------
BALANCE, JUNE 30, 1997 $ 2,000 $ 402,937 $ 118,866 $ 9,979 $ 533,782
============== ============== ============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 39,479 $ 39,882
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 36,568 32,638
Capitalization of policy acquisition costs (32,379) (20,843)
Amortization, (accretion) and depreciation of investments (1,553) (2,540)
Net realized investment gains (6,920) (7,720)
Interest credited to policyholders' account balances 105,775 120,704
Provision for deferred Federal income tax (12,632) 15,536
Changes in operating assets and liabilities:
Accrued investment income 589 (99)
Claims and claims settlement expenses 11,588 6,297
Federal income taxes - current 13,299 (1,981)
Other policyholder funds 117 1,911
Liability for guaranty fund assessments (2,350) (482)
Affiliated payables (4,128) 2,912
Policy loans on insurance contracts (2,846) (23,865)
Other, net 10,104 (11,559)
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Net cash and cash equivalents provided by operating activities 154,711 150,791
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INVESTING ACTIVITIES:
Sale of available-for-sale securities 317,511 479,313
Maturities of available-for-sale securities 300,114 299,314
Purchases of available-for-sale securities (511,341) (562,933)
Mortgage loans principal payments received 39,924 1,106
Sales of real estate held-for-sale - 2,567
Recapture of investment in Separate Accounts 11,026 5,323
Investment in Separate Accounts (21) (285)
-------------- --------------
Net cash and cash equivalents provided by investing activities 157,213 224,405
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</TABLE>
See notes to financial statements. (continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1997 1996
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<S> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 519,177 $ 259,314
Withdrawals (net of transfers to/from Separate Accounts) (759,355) (568,921)
-------------- --------------
Net cash and cash equivalents used by financing activities (240,178) (309,607)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 71,746 65,589
CASH AND CASH EQUIVALENTS:
Beginning of year 94,991 48,924
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End of period $ 166,737 $ 114,513
============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 17,968 $ 4,033
Intercompany interest 369 547
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly-
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The unaudited condensed financial statements included herein have
been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. The preparation of financial statements in conformity
with generally accepted accounting principles and prevailing
industry practice requires management to make estimates that
affect the reported amounts and disclosure of contingencies in
the financial statements. Actual results could differ from
those estimates. Results for the three-month and six-month
periods ended June 30, 1997 and 1996 are not necessarily
indicative of annual results. These unaudited financial
statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 1996
Annual Report on Form 10-K ("1996 Report").
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners. Statutory
capital and surplus at June 30, 1997 and December 31, 1996, was
$303 million and $252 million, respectively. For the six month
periods ended June 30, 1997 and 1996, statutory net income was
$47 million and $44 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as available-for-sale and are recorded at fair value.
The Company is required to adjust deferred policy acquisition
costs and certain policyholder liabilities associated with
investments classified as available-for-sale. These adjustments
are recorded in stockholder's equity and assume that the
unrealized gain or loss on available-for-sale securities was
realized. These investments primarily support in-force, universal
life-type contracts. The following reconciles the net unrealized
investment gain recorded in stockholder's equity at June 30, 1997
and December 31, 1996:
1997 1996
---------- ----------
(In Thousands)
Assets:
Fixed maturity securities $ 57,432 $ 68,945
Equity securities 703 2,989
Cash and cash equivalents 5 -
Deferred policy acquisition costs (4,039) (4,630)
Federal income taxes - deferred (5,373) (2,959)
Separate Account Assets - 168
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48,728 64,513
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Liabilities:
Policyholders' account balances 38,749 59,017
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Stockholder's equity:
Net unrealized gain on investment
securities available-for-sale $ 9,979 $ 5,496
========== ==========
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
should be read in conjunction with the accompanying unaudited
financial statements and notes thereto, in addition to the 1996
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations filed in the 1996 Report.
Changes in revenues and expenses in most cases are similar for
the three month and six month periods. Therefore, the discussion
emphasizes the comparison between the six months of 1997 and
1996, with additional information on the three month periods
presented where appropriate.
Business Overview
The Company's earnings are principally derived from two sources:
the net investment income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. The costs associated with acquiring contract owner
deposits are deferred and amortized over the period in which the
Company anticipates holding those funds. In addition, the Company
incurs expenses associated with the maintenance of in-force
contracts.
Life insurance premiums and annuity deposits received in the
first six months of 1997 and 1996 were $567 million and $333
million, respectively. New variable annuity sales increased $244
million during 1997, as a result of enhanced sales efforts
related to the Company's introduction of five new investment
options managed by entities not affiliated with Merrill Lynch &
Co. and an index fund managed by Merrill Lynch Asset Management,
LP. Management also attributes the increase in variable annuity
sales to the generally rising equity markets during the past two
and a half years. New variable life sales as measured by
premiums increased $15 million during the first six months of
1997 as compared to the same period in 1996. Management
attributes this increase to Merrill Lynch & Co.'s planning based
financial management program for individual investors. The
financial plans developed from this program include an analysis
of financial needs which may include identification of a need
which can be addressed through the purchase of life insurance.
The implementation of these plans has, in management's view,
contributed to the growth in variable life premiums. Partially
offsetting the increase in new variable life and annuity sales
was the anticipated reduction of $26 million in internal tax free
exchanges of maturing fixed products during the first six months
of 1997 compared to the same period in 1996.
During the first six months of 1997, separate account assets
increased $984 million (13%) to $8.6 billion. The increase is
attributable to two factors. First, the separate accounts
benefited from strong fund performance associated with the
generally rising equity markets. During the first six months of
1997, the separate accounts increased $790 million due to price
appreciation in the underlying funds supporting the variable
products. Second, net cash flow for variable products, during the
same period, increased $204 million due to significantly
increased sales. Partially offsetting these increases was the
$10 million repayment of the general account's investment in the
separate account.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of June 30, 1997, the
Company's assets included $2.9 billion of cash, short-term
investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
As of June 30, 1997, approximately $208 million (6.5%) of the
Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured corporate debt obligations which do not have a rating
equivalent to Standard and Poor's BBB or higher (or similar
rating agency), and are not guaranteed by an agency of the
federal government. Non-investment grade securities are
speculative and are subject to significantly greater risks
related to the creditworthiness of the issuers and the liquidity
of the market for such securities. The Company carefully selects,
and closely monitors, such investments.
Results of Operations
For the six month periods ended June 30, 1997 and 1996, the
Company reported net earnings of $39 million and $40 million,
respectively. For the three month periods ended June 30, 1997 and
1996, the Company reported net earnings of $20 million and $19
million, respectively.
Net investment income and interest credited to policyholders'
account balances for the six months ended June 30, 1997 as
compared to the same period in 1996 have declined by
approximately $14 million and $15 million, respectively,
resulting in a $1 million increase in interest spread. The
reductions in net investment income are primarily a result of the
fourth quarter 1996 stockholder dividend payments and the
declining fixed rate contracts in-force. The reductions in
interest credited to policyholders' account balances are
primarily attributable to the declining fixed rate contracts in-
force.
Net realized investment gains decreased approximately $1 million
during the current six month period as compared to the same
period during 1996. The decrease is primarily attributable to
reduced sales activity of investment securities as a result of
decreased modified guaranteed annuity surrender activity.
Management attributes the decrease in surrender activity to
interest rates being, on average, 33 basis points higher during
the six month period ended June 30, 1997 as compared to the same
period in 1996.
Policy charge revenue increased approximately $5 million during
the current six month period as compared to the same period in
1996 primarily as a result of the increase in policyholders'
variable annuity account balances.
Policy benefits increased approximately $3 million to $14 million
during the current six month period from $11 million in the same
period during 1996. The increase is primarily due to the
increase in average mortality during 1997.
The market value adjustment expense is attributable to the
Company's modified guaranteed annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts which are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense has decreased $3 million during
the current six month period as compared to the same period
during 1996 primarily as a result of decreased surrender activity
in a higher interest rate environment during 1997 as compared to
1996.
Amortization of deferred policy acquisition costs increased $4
million during the current period as compared to the same period
during 1996. The increase in amortization is primarily
attributable to revised future gross profit assumptions
associated with management's decision to pay trail commissions on
certain in-force life insurance contracts during the first
quarter 1997.
I-1
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PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
I-2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE, JR.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: August 13, 1997
I-3
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EXHIBIT INDEX
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Exhibit
No. Description
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27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 3,181,788
<EQUITIES> 43,165
<MORTGAGE> 30,579
<REAL-ESTATE> 28,851
<TOTAL-INVEST> 4,379,300
<CASH> 166,737
<RECOVER-REINSURE> 4,327
<DEFERRED-ACQUISITION> 362,863
<TOTAL-ASSETS> 13,646,534
<POLICY-LOSSES> 51,254
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 19,537
<POLICY-HOLDER-FUNDS> 4,325,377
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 531,782
<TOTAL-LIABILITY-AND-EQUITY> 13,646,534
0
<INVESTMENT-INCOME> 158,032
<INVESTMENT-GAINS> 6,920
<OTHER-INCOME> 83,345
<BENEFITS> 13,702
<UNDERWRITING-AMORTIZATION> 36,658
<UNDERWRITING-OTHER> 23,692
<INCOME-PRETAX> 58,114
<INCOME-TAX> 18,635
<INCOME-CONTINUING> 39,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,479
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
