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<PAGE> 1
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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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<PAGE> 2
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>
March 31, December 31,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1997 - $3,120,200; 1996 - $3,232,643) $ 3,139,079 $ 3,301,588
Equity securities, at estimated fair value
(cost: 1997 - $35,162; 1996 - $32,988) 35,609 35,977
Mortgage loans 40,476 70,503
Real estate held-for-sale 28,851 28,851
Policy loans on insurance contracts 1,095,068 1,092,071
--------------- ---------------
Total Investments 4,339,083 4,528,990
CASH AND CASH EQUIVALENTS 183,561 94,991
ACCRUED INVESTMENT INCOME 86,730 86,186
DEFERRED POLICY ACQUISITION COSTS 368,007 366,461
FEDERAL INCOME TAXES - DEFERRED 61 -
REINSURANCE RECEIVABLES 3,618 2,642
OTHER ASSETS 56,764 42,861
SEPARATE ACCOUNTS ASSETS 7,665,673 7,615,362
--------------- ---------------
TOTAL ASSETS $ 12,703,497 $ 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) (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,389,720 $ 4,480,048
Claims and claims settlement expenses 44,644 39,666
--------------- ---------------
Total policy liabilities and accruals 4,434,364 4,519,714
OTHER POLICYHOLDER FUNDS 17,468 19,420
LIABILITY FOR GUARANTY FUND ASSESSMENTS 18,210 18,773
FEDERAL INCOME TAXES - DEFERRED - 6,714
FEDERAL INCOME TAXES - CURRENT 12,934 20,968
AFFILIATED PAYABLES - NET 12,527 6,164
OTHER LIABILITIES 43,704 50,726
SEPARATE ACCOUNTS LIABILITIES 7,663,945 7,605,194
--------------- ---------------
Total Liabilities 12,208,593 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 99,004 79,387
Net unrealized gain (loss) on investment securities available-for-sale (3,596) 5,496
--------------- ---------------
Total Stockholder's Equity 500,345 489,820
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,703,497 $ 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>
Three Months Ended
March 31,
-------------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 79,638 $ 86,909
Net realized investment gains 5,785 6,728
Policy charge revenue 41,116 38,958
--------------- ---------------
Total Revenues 126,538 132,595
--------------- ---------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 53,106 61,598
Market value adjustment expense 943 3,631
Policy benefits (net of reinsurance recoveries: 1997 - $2,937;
1996 - $2,113) 6,756 5,529
Reinsurance premium ceded 4,360 3,761
Amortization of deferred policy acquisition costs 21,924 16,944
Insurance expenses and taxes 11,777 12,008
--------------- ---------------
Total Benefits and Expenses 98,866 103,471
--------------- ---------------
Earnings Before Federal Income Tax Provision 27,673 29,124
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 9,934 7,134
Deferred (1,879) 1,553
--------------- ---------------
Total Federal Income Tax Provision 8,055 8,687
--------------- ---------------
NET EARNINGS $ 19,617 $ 20,437
=============== ===============
</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 19,617 19,617
Net unrealized investment loss (9,092) (9,092)
------------ ------------ ------------ ------------ -------------
BALANCE, MARCH 31, 1997 $ 2,000 $ 402,937 $ 99,004 $ (3,596) $ 500,345
============ ============ ============ ============ =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 19,617 $ 20,437
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 21,924 16,944
Capitalization of policy acquisition costs (15,739) (10,371)
Amortization, (accretion) and depreciation of investments (681) (1,336)
Net realized investment gains (5,785) (6,728)
Interest credited to policyholders' account balances 53,106 61,598
Provision for deferred Federal income tax (1,879) 1,553
Changes in operating assets and liabilities:
Accrued investment income (544) (1,832)
Affiliated payables 6,363 3,923
Claims and claims settlement expenses 4,978 5,433
Federal income taxes - current (8,034) 3,101
Other policyholder funds (1,952) (2,464)
Liability for guaranty fund assessments (563) (1,448)
Policy loans on insurance contracts (2,997) (9,952)
Other, net (21,901) 4,032
--------------- ---------------
Net cash and cash equivalents provided by operating activities 45,913 82,890
--------------- ---------------
INVESTING ACTIVITIES:
Sale of available-for-sale securities 187,883 334,649
Maturities of available-for-sale securities 198,900 154,340
Purchases of available-for-sale securities (270,912) (305,408)
Mortgage loans principal payments received 30,027 275
Sales of real estate held-for-sale - 2,857
Recapture of investment in Separate Accounts 9,221 5,323
Investment in Separate Accounts (21) (226)
--------------- ---------------
Net cash and cash equivalents provided by investing activities 155,098 191,810
--------------- ---------------
</TABLE>
See notes to financial statements (continued)
<PAGE>
(continued)
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>
Three Months Ended
March 31,
-------------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 216,319 $ 121,566
Withdrawals (net of transfers to/from Separate Accounts) (328,760) (288,604)
--------------- ---------------
Net cash and cash equivalents used by financing activities (112,441) (167,038)
--------------- ---------------
NET INCREASE (DECREASES) IN CASH AND
CASH EQUIVALENTS 88,570 107,662
CASH AND CASH EQUIVALENTS:
Beginning of year 94,991 48,924
--------------- ---------------
End of period $ 183,561 $ 156,586
=============== ===============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 17,968 $ 4,033
Intercompany interest 175 295
</TABLE>
See notes to financial statements
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly-
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The condensed financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. The preparation of financial statements in conformity
with generally accepted accounting principles 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 periods ended March
31, 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 March 31, 1997 and December 31, 1996, was
$274 million and $252 million, respectively. For the three month
periods ended March 31, 1997 and 1996, statutory net income was
$18 million and $20 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 (loss) recorded in stockholder's equity at March
31, 1997 and December 31, 1996:
1997 1996
------------ ------------
(In Thousands)
Assets:
Fixed maturity securities available-for-sale $ 18,879 $ 68,945
Equity securities available-for-sale 447 2,989
Deferred policy acquisition costs 3,101 (4,630)
Federal income taxes - deferred 1,937 (2,959)
Separate Account Assets 64 168
------------ ------------
24,428 64,513
------------ ------------
Liabilities:
Policyholders' account balances 28,024 59,017
------------ ------------
Stockholder's equity:
Net unrealized gain (loss) on investment
securities available-for-sale $ (3,596) $ 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.
Business Overview
The Company's earnings are principally derived from two sources:
the net investment income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. The costs associated with acquiring contract owner
deposits are deferred and amortized over the period in which the
Company anticipates holding those funds. In addition, the Company
incurs expenses associated with the maintenance of in-force
contracts.
New life insurance premiums and annuity deposits received in the
first three months of 1997 and 1996 were $216 million and $122
million, respectively. New variable annuity sales increased $82
million as a result of enhanced sales efforts, during the first
quarter 1997, introducing five new externally managed funds and
an index fund managed by Merrill Lynch Asset Management, L.P.
New variable life sales as measured by premiums increased $11
million during the first quarter 1997 as compared to the first
quarter 1996. The implementation of Merrill Lynch & Co.'s
financial plans containing a recommendation that the purchase of
life insurance may help resolve an identified need has, in
management's view, contributed to the growth in variable life
premiums.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of March 31, 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 March 31, 1997, approximately $191 million (6.1%) 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 both three month periods ended March 31, 1997 and 1996, the
Company reported net earnings of $20 million.
Net investment income and interest credited to policyholders'
account balances for the three months ended March 31, 1997 as
compared to the same period in 1996 have declined by
approximately $7 million and $8 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 three month period as compared to the same
period during 1996. The decrease is primarily attributable to
reduced sales activity in the available-for-sale portfolio
resulting from decreased surrender activity in the modified
guaranteed annuity portfolio due to interest rates being, on
average, 69 basis points higher during the first quarter 1997 as
compared to the first quarter 1996.
Policy charge revenue increased approximately $2 million during
the current three month period as compared to the same period in
1996 as a result of the increase in policyholders' variable
annuity account balances.
Amortization of deferred policy acquisition costs increased $5
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.
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 three 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.
I-1
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
I-2
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE
-----------------------------------------
Joseph E. Crowne
Senior Vice President and
Chief Financial Officer
Date: May 13, 1997
I-3
<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 3,139,079
<EQUITIES> 35,609
<MORTGAGE> 40,476
<REAL-ESTATE> 28,851
<TOTAL-INVEST> 4,339,083
<CASH> 183,561
<RECOVER-REINSURE> 3,618
<DEFERRED-ACQUISITION> 368,007
<TOTAL-ASSETS> 12,703,497
<POLICY-LOSSES> 44,644
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 17,468
<POLICY-HOLDER-FUNDS> 4,389,720
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 498,345
<TOTAL-LIABILITY-AND-EQUITY> 12,703,497
0
<INVESTMENT-INCOME> 79,638
<INVESTMENT-GAINS> 5,785
<OTHER-INCOME> 41,116
<BENEFITS> 6,756
<UNDERWRITING-AMORTIZATION> 21,924
<UNDERWRITING-OTHER> 11,777
<INCOME-PRETAX> 27,673
<INCOME-TAX> 8,055
<INCOME-CONTINUING> 19,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,617
<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>
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