<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1997
REGISTRATION NO. 33-58303
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
POST EFFECTIVE AMENDMENT NO. 2
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MERRILL LYNCH LIFE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARKANSAS
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6312
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER
91-1325756
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(609) 282-1429
(ADDRESS INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
BARRY G. SKOLNICK, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
MERRILL LYNCH LIFE INSURANCE COMPANY
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(609) 282-1429
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004
If any of the securities that have been registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box [X].
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus contained
herein also relates to Registration Statement Nos. 33-26322, 33-46827, 33-52254
and 33-60290.
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MERRILL LYNCH LIFE INSURANCE COMPANY
------------------------
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
FORM S-1 ITEM NO. AND CAPTION LOCATION
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<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover of
Prospectus................................. Capsule Summary of the Contract; Table of
Contents
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Outside Front Cover Page; Capsule Summary
of the Contract; Definitions
4. Use of Proceeds............................ Investments
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Distribution of the Contracts
9. Description of Securities to be
Registered................................. Capsule Summary of the Contract;
Description of the Contract
10. Interest of Named Experts and Counsel...... Legal Matters
11. Information with Respect to the
Registrant................................. Merrill Lynch Life Insurance Company;
Federal Tax Considerations; More
Information About Merrill Lynch Life
Insurance Company; Directors and Executive
Officers; Legal Proceedings
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Part II, Item 14
</TABLE>
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PROSPECTUS
MAY 1, 1997
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.
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<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <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................................................................... 30
E. CONTRACT OWNER ACCOUNT BALANCES............................................... 30
F. INVESTMENTS................................................................... 31
G. COMPETITION................................................................... 31
H. CERTAIN AGREEMENTS............................................................ 31
I. EMPLOYEES..................................................................... 32
J. PROPERTIES.................................................................... 32
K. STATE REGULATION.............................................................. 32
DIRECTORS AND EXECUTIVE OFFICERS....................................................... 33
EXECUTIVE COMPENSATION................................................................. 34
LEGAL PROCEEDINGS...................................................................... 36
LEGAL MATTERS.......................................................................... 36
EXPERTS................................................................................ 36
REGISTRATION STATEMENT................................................................. 36
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE COMPANY........................... G-1
APPENDIX............................................................................... A-1
</TABLE>
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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.
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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.
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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.
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<PAGE> 7
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
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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.
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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
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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
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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, 1998, that the participant's annuity date is on
August 1, 2003, 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, 2003. 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, 2003. 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 and may also select by telephone the
subaccounts from which any 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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<PAGE> 19
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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<PAGE> 20
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. Additionally,
certain transfers of a Contract for less than full and adequate consideration,
such as a gift, will trigger tax on the excess of the net account value over the
participant's "investment in the contract" (discussed below).
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" 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
18
<PAGE> 21
same ratio that the "investment in the contract" bears to the total expected
value of the annuity payments for 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 (or this Certificate along with one or more other annuity
certificates or contracts) for one or more new annuity certificates or contracts
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, except certain distributions under certain 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
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<PAGE> 22
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other 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 (except in 1997, 1998, and 1999),
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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<PAGE> 23
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. For a
non-governmental Section 457 plan, all account values will be subject to the
claims of the employer's creditors and the employee has no rights or vested
interest in the Contract or Certificate. The employee 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 1996, life insurance and annuity sales were
made in all states Merrill Lynch Life was licensed in, with the largest
concentration in Florida, 17%, Texas, 12%, and California, 10%, 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,
1996, approximately 11,801 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,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Investment Income................. $ 336,661 $ 376,166 $ 433,536 $ 586,461 $ 712,739
Earnings Before Federal Income Tax.... $ 117,279 $ 118,785 $ 89,883 $ 72,775 $ 25,667
Net Earnings.......................... $ 79,387 $ 76,482 $ 66,005 $ 47,860 $ 17,031
Total Assets.......................... $12,737,493 $12,402,003 $11,604,074 $12,249,577 $11,783,961
Stockholder's Equity.................. $ 489,820 $ 596,837 $ 559,571 $ 687,055 $ 762,474
</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 securities brokers, and
financial planners. Demographically, the population is aging, which favors life
insurance and annuity products. In particular, management anticipates that
markets will expand for estate planning products, annuities, long term care and
business insurance.
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. The product lines which
Merrill Lynch Life offers are focused in the highly competitive market segments
of retirement and estate planning. Merrill Lynch Life competes in these market
segments by integrating its products into Merrill Lynch's planning-based
financial management program.
Merrill Lynch Life's financial management is based on conservative investment
and liability management and regular monitoring of its risk profile. 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 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. The variable annuity products provide
tax deferred savings with the opportunity for diversified investing in a wide
selection of underlying mutual fund portfolios. The 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. Merrill Lynch Life
offers two primary types of variable life insurance. Both
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<PAGE> 27
types allow the policyholder to allocate the cash value of the policy to
underlying diversified mutual fund portfolios. The first type of variable life
insurance product provides life insurance protection with the potential for
maximum cash value accumulation in accordance with federal income tax
requirements. The second type of variable life insurance product adopts a
universal life design and is primarily utilized in clients' estate planning
strategies. The following table summarizes Merrill Lynch Life's sales activity
for the three years ending December 31, 1996:
<TABLE>
<CAPTION>
PREMIUMS COLLECTED % CHANGE
---------------------- --------------------
1996 1995 1994 1996 - 1995 1995 - 1994
---- ---- ------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Variable Annuities:
New Premium.................................. $407 $359 $ 765 13% (53)%
Internal Tax Free Exchange................... 105 137 763 (23)% (82)%
---- ---- ------ --- ---
512 497 1,528 3% (68)%
---- ---- ------ --- ---
Modified Guaranteed Annuities:
New Premium.................................. 30 114 110 (74)% 3%
---- ---- ------ --- ---
Internal Tax Free Exchange................... 27 140 209 (81)% (33)%
---- ---- ------ --- ---
56 254 319 (78)% (21)%
---- ---- ------ --- ---
Variable Life Insurance:
Cash Value Accumulation...................... 54 47 44 15% 8%
Estate Planning.............................. 30 22 19 36% 16%
84 69 63 21% 10%
---- ---- ------ --- ---
Other............................................. 21 25 28 (15)% (11)%
---- ---- ------ --- ---
Total Premiums.......................... $674 $844 $1,939 (20)% (56)%
==== ==== ====== ======== ========
New Premium....................................... $542 $567 $ 967 (4)% (41)%
Internal Tax Free Exchange........................ 132 277 972 (52)% (71)%
---- ---- ------ --- ---
Total Premiums.......................... $674 $844 $1,939 (20)% (56)%
==== ==== ====== ======== ========
</TABLE>
During 1996, Merrill Lynch Life's sales volume continued the decline begun in
1995, but at a significantly reduced rate. Approximately 85% of the decline in
sales volume between 1996 and 1995 and 63% between 1995 and 1994 was
attributable to an anticipated reduction in internal tax free exchanges of fixed
rate annuity contracts reaching the end of interest rate guarantees.
Specifically, at the expiration of an interest rate guarantee period of a fixed
rate annuity contract, 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
a fixed rate contract the opportunity to exchange their contract for either a
variable annuity or modified guaranteed annuity contract issued by Merrill Lynch
Life. The amount of fixed rate annuity contracts which reached the expiration of
their interest rate guarantee period was $291 million, $630 million and $1.832
billion for 1996, 1995 and 1994, respectively. This decrease was the primary
contributing factor to the reduction in internal tax free exchanges.
During 1996, new premiums declined by 4% as compared to a 41% decline during
1995. The 1996 decline was attributable to reduced sales of the modified
guaranteed annuity product. Sales volumes of this product are reflective of the
current interest rate environment and will increase and decrease in a direct
relationship with the increase and decrease in interest rates. Sales of this
product during the three years ending December 31, 1996, were concentrated
during the second half of 1994 and the first half of 1995, generally reflecting
higher interest rates during this period.
25
<PAGE> 28
Partially offsetting the decline in modified guaranteed annuity sales was a 13%
increase in variable annuity sales during 1996 as compared to 1995. This
compares to a 53% decrease in variable annuity sales during 1995 as compared to
1994. Management attributes the changes in variable annuity sales to several
factors. First, during both 1995 and 1996, the equity markets rose steadily,
reflected by increases in the Standard and Poor's 500 Composite Stock Price
Index in those years of 34% and 20%, respectively. Management believes that the
generally favorable equity markets have contributed to the increase in sales of
the variable annuity products, which reflect some delay in investor recognition
regarding these rising markets. Second, during 1996, Merrill Lynch began
offering to Merrill Lynch Life variable annuity contract owners an asset
allocation service. A portfolio manager allocates the participating contract
owner's account value among the available underlying mutual fund portfolios
based on the contract owner's investment objectives and risk tolerance. Merrill
Lynch Life does not receive any financial remuneration from Merrill Lynch for
this service; however, management believes that its availability has had a
positive effect on variable annuity sales volume.
During December 1996, Merrill Lynch Life added five underlying mutual fund
portfolios managed by three unaffiliated investment advisors to certain of its
variable annuity products. Merrill Lynch Life plans to add these portfolios to
certain variable life products in 1997. A number of these mutual fund portfolios
generally have aggressive growth investment objectives and complement the
underlying portfolios managed by Merrill Lynch Asset Management, L.P., an
indirect subsidiary of Merrill Lynch.
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 1996, Merrill Lynch continued offering for sale several non-proprietary
variable annuity products, which resulted in reduced sales of Merrill Lynch
Life's variable annuity product. Merrill Lynch Life's market share of variable
annuity sales within the Merrill Lynch distribution system was 38%, 53% and 71%
for 1996, 1995 and 1994, respectively, reflecting the increased competition.
Additionally, Merrill Lynch Life's variable annuity products received relatively
negative performance evaluations by certain mutual fund research firms during
1995. These negative evaluations stemmed from the performance of several of the
products' core underlying fund portfolios which did not meet or exceed fund
category averages. During the fourth quarter of 1995, the senior portfolio
manager was changed for three of the variable annuity's core underlying fund
portfolios. The new manager has restructured the investment composition of these
three portfolios and has had some early success improving their performance.
However, mutual fund managers are generally evaluated based on three years of
performance data, and as such the effect of this change on 1996 variable annuity
sales was minimal in management's opinion.
Variable life sales as measured by premiums increased 21% during 1996 as
compared to 1995 and 10% during 1995 as compared to 1994. Management attributes
this increase to Merrill Lynch's planning-based financial management program for
individual investors. Approximately 65% of all financial plans completed
contained a recommendation that the purchase of life insurance may resolve an
identified need. The implementation of these recommendations has, in
management's view, contributed to the growth in variable life premiums.
Both interest-sensitive and variable deferred annuities currently provide
certain tax advantages that similar noninsurance investments do not possess.
Congressional action could limit or eliminate this tax advantage. Such actions
would have significant competitive consequences on the insurance industry and
Merrill Lynch Life.
Financial Condition
At December 31, 1996, Merrill Lynch Life's assets were $12.737 billion, or $335
million higher than the $12.402 billion in assets at December 31, 1995. The
increase in assets is attributable to increases in the market value of
investments in the separate accounts. Separate accounts investments increased
$737 million as a result of market value increases from the strong equity
markets, which were partially offset by the increasing interest rate
environment. During 1996, interest rates increased in excess of 69 basis points,
resulting in a
26
<PAGE> 29
$90 million decrease 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 decreased $70
million during 1996 as a result of the increasing interest rate environment.
During 1996, Merrill Lynch Life continued to experience contract owner
withdrawals exceeding deposits. Withdrawals for 1996 were $923 million compared
to deposits of $542 million, resulting in a net cash outflow from contract owner
activity of $381 million.
During 1996, Merrill Lynch Life continued 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, 1996 and 1995,
Merrill Lynch Life's percentage of separate accounts assets to total assets was
60% and 55%, 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........................................... 68%
Policy Loans......................................................................... 24%
Non-Investment Grade Fixed Maturity Securities....................................... 4%
Mortgages Loans...................................................................... 2%
Equity Securities.................................................................... 1%
Real Estate.......................................................................... 1%
-----
100%
=====
</TABLE>
Merrill Lynch Life's investment in collateralized mortgage obligations ("CMO")
and mortgage backed securities ("MBS") had a carrying value of $514 million as
of December 31, 1996. At December 31, 1996, approximately 69% 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, 1996
approximately $85 million of CMO and MBS securities which had relatively higher
projected cash flow volatility in changing interest rate environments as
compared to the Company'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 1996, Merrill Lynch Life foreclosed on two commercial mortgage loans with
an outstanding principal balance of $45 million and a carrying value of $29
million. The carrying value approximates the fair value of this property.
Merrill Lynch Life also allowed one commercial mortgage with an outstanding
principal amount of $6 million to be satisfied for $5 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 $29 million of Merrill Lynch Life's
investment in mortgage loans as of December 31, 1996 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.
27
<PAGE> 30
During 1996, Merrill Lynch Life sold two real estate properties with a carrying
value of $4 million for a realized loss of $0.2 million.
As of December 31, 1996, Merrill Lynch Life had 66,432 life insurance and
annuity contracts in-force with interest rate guarantees. The estimated average
rate of interest credited on behalf of contract owners was 5.34% during 1996.
The liabilities related to insurance contracts with interest rate guarantees
were supported by invested assets with an estimated effective yield of 7.37%
during 1996.
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, 1996 and 1995, Merrill Lynch Life had accrued an
estimated liability for future guaranty fund assessments of $19 million and $21
million, respectively. Merrill Lynch Life regularly monitors public information
regarding insurer insolvencies and adjusts its estimated liability as
appropriate.
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, 1996, Merrill Lynch Life's assets included $2.896 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
("GAAP") in two major respects. First, under statutory accounting practices, the
acquisition costs of new business are charged to expense, while under GAAP they
are amortized over a period of time. Second, under statutory accounting
practices, 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 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, 1996 and 1995, based on the RBC
formula, Merrill Lynch Life's total adjusted capital level was well in excess of
the minimum amount of capital required to avoid regulatory action.
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
dividends to MLIG of $175 million, $100 million and $150 million during 1996,
1995 and 1994, respectively.
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:
(i) 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 (ii) the charges imposed on variable life insurance and
variable
28
<PAGE> 31
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.
1996 compared to 1995
Merrill Lynch Life recorded net earnings of $79 million and $76 million for 1996
and 1995, respectively.
Net investment income and interest credited to policyholders' account balances
for 1996 as compared to 1995 have declined by approximately $40 million and $27
million, respectively, resulting in a $13 million reduction in interest spread.
The reductions in net investment income and interest spread are primarily
attributable to the reduction in fixed rate contracts in-force and stockholder
dividend payments. The reduction of interest credited to policyholders' account
balances is primarily attributable to the reduction in fixed rate contracts in-
force.
Merrill Lynch Life experienced net realized investment gains of $9 million and
$5 million during 1996 and 1995, respectively. The change in realized investment
gains is primarily attributable to an increase in sales in the investment
portfolio supporting the modified guaranteed annuity product to fund an increase
in surrender activity of the product and to normal sales activity from the
available for sale portfolios.
Policy charge revenue increased approximately $17 million during the current
year as compared to 1995. This increase is primarily attributable to an increase
in the average variable annuity contract holders' account balances during 1996
as compared to 1995.
Policy benefits increased approximately $2 million during the current year to
$21 million. This increase was primarily attributable to mortality costs
associated with Merrill Lynch Life's variable life product.
Reinsurance premium ceded increased $2 million to $16 million during 1996. This
increase in attributable to the combined effect of the increasing age of policy
holders and increased insurance in-force resulting from the strong equity
markets.
Amortization of deferred policy acquisition costs increased $3 million during
the current year as compared to 1995. This change is primarily attributable to
the period to period difference in amortization associated with the
retrospective adjustment of deferred policy acquisition costs as a result of
revising the assumptions of estimated future gross profits of certain life and
annuity products.
Insurance expenses and taxes increased $3 million during 1996 to $47 million.
Approximately $2 million of the increase was attributable to a reduction in the
amount of expenses which were capitalized reflecting the decline in sales volume
of Merrill Lynch Life's annuity products. Additionally, the increase in the
variable annuity products policyholders' account balances resulted in a $1
million increase in asset based commissions during 1996 as compared to 1995.
Total general operating expenses increased $1 million during 1996 to $38 million
as compared to 1995 as a result of normal increases in operating expenses and
product development initiatives.
Merrill Lynch Life's effective federal income tax rate decreased from 36% for
1995 to 32% for 1996 principally as a result of year to year differences in
certain permanent adjustments.
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
29
<PAGE> 32
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 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.
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 1996.
Inflation
Merrill Lynch Life's operations have not been materially impacted by inflation
and changing prices during the preceding three years.
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.
30
<PAGE> 33
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, 1996 invested assets
supporting Contract guarantees consisted of $3,302 million of fixed maturity
securities, $1,092 million of policy loans, $71 million of mortgage loans, $36
million of equity securities, and $29 million of real estate.
At December 31, 1996, Merrill Lynch Life's assets included $2,896 million of
cash, short-term investments, and investment grade publicly traded fixed
maturity securities supporting Contract guarantees.
At December 31, 1996, approximately $1,272 million (approximately 39% of Merrill
Lynch Life's general account portfolio of fixed maturity securities) was
invested in 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, 1996, approximately $181 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.
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 $2.3 million, $2.6 million,
and $2.7 million during the years ended December 31, 1996, 1995, and 1994,
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
31
<PAGE> 34
$44.5 million, $43.0 million, and $44.2 million for the years ended December 31,
1996, 1995, and 1994, 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 $42.6 million, $44.0 million, and $84.2 million during the years
ended December 31, 1996, 1995, and 1994, respectively. (See "Distribution of the
Contracts" on page 16.)
I. EMPLOYEES
Merrill Lynch Life has two employees at its office in Little Rock, Arkansas, and
the cost of their services is incurred by Merrill Lynch Life. Under its
Management Services Agreement with MLIG, however, 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 33.)
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 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.
32
<PAGE> 35
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.
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 (55)........................ Chairman of the Board, President, and Chief
Executive Officer
Joseph E. Crowne, Jr. (50)................... Director, Senior Vice President, Chief
Financial Officer, Chief Actuary, and
Treasurer
Barry G. Skolnick (45)....................... Director, Senior Vice President, General
Counsel, and Secretary
David M. Dunford (48)........................ Director, Senior Vice President, and Chief
Investment Officer
Gail R. Farkas (45).......................... Director and Senior Vice President
Robert J. Boucher (51)....................... 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.
33
<PAGE> 36
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.
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 other most highly compensated executive officers of Merrill
Lynch Life.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS(1)
-----------------------
RESTRICTED
ANNUAL COMPENSATION 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 1996 $ 99,165 $411,012 $113,257 5,535 13,962(5)
Chairman of the Board, President and Chief 1995 65,184 293,220 65,160 5,079 8,458
Executive Officer 1994 63,469 267,383 48,615 5,445 7,292
(Since February 1994)
Joseph E. Crowne 1996 114,480 202,248 34,344 561 3,504(5)
Senior Vice President, Chief Actuary and 1995 113,100 165,503 28,275 735 5,468
Chief Financial Officer 1994 111,150 177,840 33,345 1,245 5,002
David M. Dunford 1996 161,875 211,825 50,436 823 7,758(5)
Senior Vice President, Chief Investment 1995 163,275 167,940 38,486 998 6,301
Officer 1994 162,575 157,930 34,838 1,301 4,181
Robert J. Boucher 1996 118,625 266,669 60,997 992 7,959(5)
Senior Vice President, Variable Life 1995 117,750 211,850 42,390 1,102 6,361
Administration 1994 112,625 193,715 40,545 1,514 5,406
Barry G. Skolnick 1996 91,414 137,122 44,075 718 6,976(5)
Senior Vice President, General Counsel 1995 88,270 115,430 45,832 1,188 5,775
1994 101,010 132,090 55,361 2,067 4,662
</TABLE>
- ---------------
(1) Awards were made in January or February of the succeeding fiscal year for
performance in the year indicated.
34
<PAGE> 37
(2) Amounts shown are for awards granted in February 1997 for performance in
1996, in February 1996 for performance in 1995, and in February 1995 for
performance in 1994. The 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 effective dates of grants of such
awards. The closing price on the last trading day prior to February 1,
1997, the effective date of the grant for performance in 1996, was $84.125.
All of the shares and units vest three years following grant and the shares
are restricted from transferability for an additional two years after
vesting.
(3) During the applicable vesting and restricted periods, dividends are paid on
Restricted Shares and dividend equivalents are paid on 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 27, 1996 are as
follows: Mr. Vespa (1,316 shares and 1,316 units--$221,705); Mr. Crowne
(744 shares and 743 units--$125,223); Mr. Dunford (864 shares and 863
units--$145,459 ); Mr. Boucher (982 shares and 981 units--$165,403); and
Mr. Skolnick (1,222 shares and 1,221 units-- $205,880). These amounts do
not include Restricted Shares and Restricted Units awarded in 1997 for
performance in 1996.
(5) Amounts shown for 1996 consist of the following: (i) contributions made in
1996 by Merrill Lynch Life to accounts of employees under the Merrill Lynch
401(k) Savings and Investment Plan--Mr. Vespa ($783), Mr. Dunford ($1,388),
Mr. Boucher ($1,424) and Mr. Skolnick ($979); and (ii) allocations made in
1996 to accounts of employees under the defined contribution retirement
program--Mr. Vespa ($13,180), Mr. Crowne ($3,504), Mr. Dunford ($6,370),
Mr. Boucher ($6,536) and Mr. Skolnick ($5,996).
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
FISCAL OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME YEAR(1) GRANTED FISCAL YEAR ($ PER SHARE) DATE(2) VALUE(3)
- ------------------------------- ------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa............... 1996 5,535 .08% $ 81.1875 1/29/2007 $146,985
Joseph E. Crowne............... 1996 561 .01% 81.1875 1/29/2007 14,896
David M. Dunford............... 1996 823 .01% 81.1875 1/29/2007 21,862
Robert J. Boucher.............. 1996 992 .01% 81.1875 1/29/2007 26,335
Barry G. Skolnick.............. 1996 718 .01% 81.1875 1/29/2007 19,074
</TABLE>
- ---------------
(1) Reflects awards made in January 1997 for performance in 1996. Excludes
awards made in January 1996 for performance in 1995, which were reflected in
Merrill Lynch Life's Prospectus for the Contracts dated May 1, 1996.
(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 ($81.1875) 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 29, 1997, the effective date of grant.
The assumptions used for the variables in the model were: 26.87% volatility
(which is the volatility of the Merrill Lynch Common Stock for the 36 months
preceding grant); a 6.78% 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 2007, as quoted in The Wall Street Journal); a 1.48% 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 realized 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.
35
<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
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa.......... 0 $ 0 1,361 9,163 $ 66,785 $ 351,144
Joseph E. Crowne.......... 1,444 35,350 0 2,628 0 112,546
David M. Dunford.......... 0 0 8,958 3,064 566,491 128,176
Robert J. Boucher......... 2,340 59,179 0 3,288 0 137,341
Barry G. Skolnick......... 0 0 4,407 3,992 223,314 169,092
</TABLE>
- ---------------
(1) This valuation represents the difference between $84.25, the closing price
of Merrill Lynch Common Stock on December 27, 1996 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, L.L.P. 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, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 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.
36
<PAGE> 39
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, 1996
and 1995, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
February 24, 1997
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1996 - $3,232,643; 1995 - $3,648,983) $ 3,301,588 $ 3,807,870
Equity securities, at estimated fair value
(cost: 1996 - $32,988; 1995 - $19,683) 35,977 21,433
Mortgage loans 70,503 121,248
Real estate held-for-sale 28,851 5,874
Policy loans on insurance contracts 1,092,071 1,039,267
-------------- --------------
Total Investments 4,528,990 4,995,692
-------------- --------------
CASH AND CASH EQUIVALENTS 94,991 48,924
ACCRUED INVESTMENT INCOME 86,186 91,942
DEFERRED POLICY ACQUISITION COSTS 366,461 372,418
FEDERAL INCOME TAXES - DEFERRED - 2,222
REINSURANCE RECEIVABLES 2,642 1,552
OTHER ASSETS 42,861 54,900
SEPARATE ACCOUNTS ASSETS 7,615,362 6,834,353
-------------- --------------
TOTAL ASSETS $ 12,737,493 $ 12,402,003
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(continued)(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,480,048 $ 4,851,718
Claims and claims settlement expenses 39,666 29,812
-------------- --------------
Total policy liabilities and accruals 4,519,714 4,881,530
OTHER POLICYHOLDER FUNDS 19,420 13,607
LIABILITY FOR GUARANTY FUND ASSESSMENTS 18,773 21,144
FEDERAL INCOME TAXES - DEFERRED 6,714 -
FEDERAL INCOME TAXES - CURRENT 20,968 7,033
AFFILIATED PAYABLES - NET 6,164 2,429
OTHER LIABILITIES 50,726 53,566
SEPARATE ACCOUNTS LIABILITIES 7,605,194 6,825,857
-------------- --------------
Total Liabilities 12,247,673 11,805,166
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 402,937 501,455
Retained earnings 79,387 76,482
Net unrealized investment gain on investment securities 5,496 16,900
-------------- --------------
Total Stockholder's Equity 489,820 596,837
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,737,493 $ 12,402,003
============== ==============
</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, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 336,661 $ 376,166 $ 433,536
Net realized investment gains (losses) 8,862 4,525 (14,543)
Policy charge revenue 158,829 141,722 126,284
----------- ----------- -----------
Total Revenues 504,352 522,413 545,277
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 235,255 261,760 313,585
Market value adjustment expense 6,071 5,805 6,307
Policy benefits (net of reinsurance recoveries: 1996 - $8,317;
1995 - $6,482; 1994 - $6,338) 21,052 19,374 16,858
Reinsurance premium ceded 15,582 13,896 13,909
Amortization of deferred policy acquisition costs 62,036 58,669 69,662
Insurance expenses and taxes 47,077 44,124 35,073
----------- ----------- -----------
Total Benefits and Expenses 387,073 403,628 455,394
----------- ----------- -----------
Earnings Before Federal Income Tax Provision 117,279 118,785 89,883
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION:
Current 22,814 38,335 22,503
Deferred 15,078 3,968 1,375
----------- ----------- -----------
Total Federal Income Tax Provision 37,892 42,303 23,878
----------- ----------- -----------
NET EARNINGS $ 79,387 $ 76,482 $ 66,005
=========== =========== ===========
</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, 1996, 1995 AND 1994
(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, 1994 $ 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
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
============ ============ ============= ============ ============
</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, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 79,387 $ 76,482 $ 66,005
Adjustments to reconcile net earnings to net cash and
cash equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 62,036 58,669 69,662
Capitalization of policy acquisition costs (43,668) (54,014) (108,829)
Amortization, (accretion) and depreciation of investments (4,836) (6,763) (4,516)
Net realized investment (gains) losses (8,862) (4,525) 14,543
Interest credited to policyholders' account balances 235,255 261,760 313,585
Provision for deferred Federal income tax 15,078 3,968 1,375
Changes in operating assets and liabilities:
Accrued investment income 5,756 3,191 25,204
Affiliated payables - net 3,735 5,542 (2,324)
Claims and claims settlement expenses 9,854 3,635 5,882
Federal income taxes - current 13,935 4,759 (7,848)
Other policyholder funds 5,813 (7,614) (7,547)
Liability for guaranty fund assessments (2,371) (3,630) (3,309)
Policy loans on insurance contracts (52,804) (54,054) (60,634)
Trading investment securities - - 11,352
Other, net 8,106 (9,296) (39,206)
Net cash and cash equivalents provided ----------- ----------- ----------
by operating activities 326,414 278,110 273,395
----------- ----------- ----------
</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, 1996, 1995 AND 1994
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Sales of available-for-sale securities $ 834,120 $ 633,824 $ 864,095
Maturities of available-for-sale securities 536,449 570,923 1,323,705
Purchases of available-for-sale securities (954,368) (832,519) (678,974)
Mortgage loans principal payments received 22,789 30,767 32,341
Purchases of mortgage loans - (3,608) -
Sales of real estate held-for-sale 5,407 9,710 25,346
Improvements to real estate held-for-sale - improvements acquired - (683) (1,060)
Recapture of investment in Separate Accounts 8,829 6,559 -
Investment in Separate Accounts (10,063) (377) (15,212)
------------- ------------- -------------
Net cash and cash equivalents provided by investing activities 443,163 414,596 1,550,241
------------- ------------- -------------
FINANCING ACTIVITIES:
Dividends paid to parent (175,000) (100,000) (150,000)
Policyholders' account balances:
Deposits 542,062 567,430 966,861
Withdrawals (net of transfers to/from Separate Accounts) (1,090,572) (1,250,299) (2,623,628)
------------- ------------ ------------
Net cash and cash equivalents used by financing activities (723,510) (782,869) (1,806,767)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 46,067 (90,163) 16,869
CASH AND CASH EQUIVALENTS
Beginning of year 48,924 139,087 122,218
------------- ------------ ------------
End of year $ 94,991 $ 48,924 $ 139,087
============= ============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 8,880 $ 33,576 $ 30,351
Intercompany interest 988 1,310 679
</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 and
prevailing industry practices, both of which require management
to make estimates that affect the reported amounts and
disclosure of contingencies in the financial statements. 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% - 5.75%
Interest-sensitive deferred annuities 3.20% - 8.77%
Immediate annuities 3.00% - 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.
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.
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 $576 that can be drawn upon for
delinquent reinsurance recoverables.
As of December 31, 1996, the Company had life insurance in-
force that was ceded to other life insurance companies of
$2,511,780.
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, that 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. 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>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 124,833 $ 133,388 $ 139,647
Capitalized amounts 5,077 13,708 12,517
Interest accrued 10,669 11,620 12,582
Amortization (28,330) (33,883) (31,358)
----------- ----------- -----------
Ending balance $ 112,249 $ 124,833 $ 133,388
=========== =========== ===========
</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.
1997 $12,547
1998 8,958
1999 8,474
2000 8,142
2001 7,811
Investments: The Company's investments in fixed maturity and
equity securities are classified as available-for-sale
securities, which 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 theas net realized investment gains (losses).
During 1994, the Company classified certain of its investments
as trading securities, which were carried at estimated fair
value with unrealized gains and losses included in the
statements 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 is being amortized into
income based on the Company's premium amortization and discount
accretion 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 non-investment grade. The Company defines non-
investment grade fixed maturity securities as unsecured
corporate debt obligations that 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.
The Company has outstanding certain interest rate swap
contracts that are carried at estimated fair value and recorded
as a component of fixed maturity securities. Interest income
and realized and unrealized gains and losses are recorded on
the same basis as fixed maturity securities available-for-sale.
Mortgage loans 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 mortgage loans
that 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 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.
Impairments of mortgage loans are established as valuation
allowances and recorded to net realized investment gains or
losses.
The Company has previously made commercial mortgage loans
collateralized by real estate. The return on and the ultimate
recovery of these loans are generally dependent on the
successful operation, sale or refinancing of the real estate.
The Company monitors the effects of current and expected real
estate market conditions and other factors when assessing the
collectibility of mortgage loans. 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 held-for-sale, is stated at cost less valuation
allowances and estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
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 uses the asset and liability method in providing
income taxes on all transactions that have been recognized in
the financial statements. The asset and liability method
requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or
realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums
and in substantially all states are exempt from state income
taxes.
Separate Accounts: Separate Accounts are established in
conformity with Arkansas State 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 claims of
the Company only to the extent the value of such assets exceeds
Separate Accounts liabilities.
Assets and liabilities of 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
Financial instruments are carried at fair value or amounts that
approximate the fair value. The carrying value of financial
instruments as of December 31 were:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities:
Securities (1) $ 3,301,858 $ 3,807,310
Interest rate swaps (2) (270) 560
-------------- --------------
Total fixed maturity securities 3,301,588 3,807,870
-------------- --------------
Equity securities (1) 35,977 21,433
Mortgage loans (3) 70,503 121,248
Policy loans on insurance contracts (4) 1,092,071 1,039,267
Cash and cash equivalents (5) 94,991 48,924
Separate Accounts assets (6) 7,615,362 6,834,353
-------------- ---------------
Total financial instruments recorded as assets $ 12,210,492 $ 11,873,095
============== ===============
</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 model, 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, 1996 and 1995, securities
without a readily ascertainable market value, having an
amortized cost of $338,515, and $425,469, had an estimated
fair value of $348,066, and $448,785, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cash flow model.
(3) The estimated fair value of mortgage loans 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 Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity securities and equity securities as of December
31 were:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,652,225 $ 67,590 $ 11,765 $ 2,708,050
Mortgage-backed securities 503,997 12,447 1,948 514,496
U.S. Government and agencies 54,386 2,303 158 56,531
Foreign governments 18,111 182 140 18,153
Municipals 3,924 434 - 4,358
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 3,232,643 $ 82,956 $ 14,011 $ 3,301,588
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 30,554 $ 2,983 $ 85 $ 33,452
Common stocks 2,434 91 - 2,525
--------------- -------------- -------------- --------------
Total equity securities $ 32,988 $ 3,074 $ 85 $ 35,977
=============== ============== ============== ==============
1995
------------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Fixed maturity securities:
Corporate debt securities $ 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 95,002 6,061 - 101,063
Foreign governments 6,210 280 - 6,490
Municipals 4,277 532 - 4,809
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 3,648,983 $ 167,130 $ 8,243 $ 3,807,870
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 16,937 $ 1,428 $ 113 $ 18,252
Common stocks 2,746 498 63 3,181
-------------- -------------- -------------- --------------
Total equity securities $ 19,683 $ 1,926 $ 176 $ 21,433
============== ============== ============== ==============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996 by contractual maturity were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Fixed maturity securities:
Due in one year or less $ 270,571 $ 271,303
Due after one year through five years 1,486,819 1,521,334
Due after five years through ten years 763,475 781,372
Due after ten years 207,781 213,083
------------- -------------
2,728,646 2,787,092
Mortgage-backed securities 503,997 514,496
------------- -------------
Total fixed maturity securities $ 3,232,643 $ 3,301,588
============= =============
</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 at December 31, 1996 by rating agency equivalent
were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
AAA $ 716,749 $ 730,513
AA 181,962 185,000
A 910,355 932,417
BBB 1,245,457 1,272,901
Non-investment grade 178,120 180,757
------------- -------------
Total fixed maturity securities $ 3,232,643 $ 3,301,588
============= =============
</TABLE>
<PAGE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with investments classified as available-for-sale.
The Company adjusts those assets and liabilities as if the
unrealized investment gains or losses from securities
classified as available-for-sale had actually been realized,
with corresponding credits or charges reported directly to
stockholder's equity. The following reconciles the net
unrealized investment gain on investment securities classified
as available-for-sale as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Assets:
Fixed maturity securities $ 68,945 $ 158,887
Equity securities 2,989 1,750
Deferred policy acquisition costs (4,630) (17,041)
Federal income taxes - deferred (2,959) (9,100)
Separate Accounts assets 168 (164)
------------- -------------
64,513 134,332
------------- -------------
Liabilities:
Policyholders' account balances 59,017 117,432
------------- -------------
Stockholder's equity:
Net unrealized investment gain on investment securities $ 5,496 $ 16,900
============= =============
</TABLE>
The Company has entered into interest rate swap contracts for
the purpose of minimizing exposure to fluctuations in interest
rates related to specific investment securities held.
The notional amount of such swaps outstanding at December 31,
1996 and 1995 was approximately $9,000 and $30,000,
respectively. The swaps were transacted with investment
grade counterparties. As of December 31, 1996, the Company's
interest rate swap contract was in a $270 unrealized loss
position. There were no outstanding interest rate swaps in a
loss position at December 31, 1995. During 1994, net realized
investment gains of $470 were recorded in connection with
interest rate swap activity. During 1996 and 1995, there
were no realized investment gains or losses recorded.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Proceeds $ 834,120 $ 633,824 $ 864,095
Gross realized investment gains 19,078 14,196 11,091
Gross realized investment losses 10,749 10,813 11,026
</TABLE>
During 1994, $7,285 of unrealized holding losses from
investment trading securities were recorded in net realized
investment gains (losses).
The Company owned investment securities with a carrying
value of $27,726 and $28,166 that were deposited with
insurance regulatory authorities at December 31, 1996 and
1995, respectively.
At December 31, 1996 and 1995, the Company had invested
$10,168 and $8,496 in Separate Accounts, including unrealized
gains (losses) of $168 and $(164), respectively. The
investments in 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 are principally
collateralized by commercial real estate. The largest
concentrations of commercial real estate mortgage loans at
December 31, 1996, as measured by the outstanding principal
balance, are for properties located in Illinois ($27,877 or
32%), Rhode Island ($19,291 or 22%) and California ($11,953 or
14%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1996
and 1995 are:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Carrying value $ 44,239 $ 88,068
Valuation allowance 17,652 35,881
</TABLE>
Additional information on impaired loans for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Average investment in impaired loans $ 61,891 $ 123,949 $ 112,043
Interest income recognized (cash-basis) 4,848 5,482 6,542
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, $28,555,
$1,300 and $4,652, respectively, of real estate held-for-sale
was acquired in satisfaction of debt.
<PAGE>
Net investment income arose from the following sources for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities $ 266,916 $ 305,648 $ 368,023
Equity securities 1,876 1,329 2,408
Mortgage loans 9,764 12,250 15,014
Real estate held-for-sale 563 153 406
Policy loans on insurance contracts 56,512 53,576 50,232
Cash and cash equivalents 6,710 8,463 5,936
Other 899 1,753 (447)
----------- ----------- ------------
Gross investment income 343,240 383,172 441,572
Less investment expenses (6,579) (7,006) (8,036)
----------- ----------- ------------
Net investment income $ 336,661 $ 376,166 $ 433,536
=========== =========== ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities $ 4,690 $ 1,908 $ (13,314)
Equity securities 3,639 1,475 910
Investment in Separate Accounts 106 (369) -
Mortgage loans 599 334 (4,967)
Real estate held-for-sale (171) 1,177 2,828
Cash and cash equivalents (1) - -
----------- ----------- -----------
Net realized investment gains (losses) $ 8,862 $ 4,525 $ (14,543)
=========== =========== ===========
</TABLE>
The following is a reconciliation of the change in valuation
allowances that have been recorded to reflect other-than-
temporary declines in estimated fair value of mortgage loans
and real estate held-for-sale 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:
1996 $ 35,881 $ - $ 18,229 $ 17,652
1995 40,070 - 4,189 35,881
1994 45,924 4,966 10,820 40,070
Real estate held-for-sale:
1996 2,200 - - 2,200
1995 5,766 - 3,566 2,200
1994 7,628 - 1,862 5,766
</TABLE>
<PAGE>
The Company held investments at December 31, 1996 of $1,182
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, 1996, $2,027 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 earnings before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal statutory rate $ 41,048 $ 41,575 $ 31,459
Increase (decrease) in income taxes resulting from:
Release of policyholders' surplus - 1,991 -
Tax deductible interest - (718) -
Dividend received deduction (3,135) (532) (7,363)
Other (21) (13) (218)
----------- ----------- -----------
Federal income tax provision $ 37,892 $ 42,303 $ 23,878
=========== =========== ===========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1996 was 35%.
The Company provides for deferred income taxes resulting from
temporary differences that 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>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (5,770) $ (2,179) $ 6,416
Policyholders' account balances 15,004 66 5,322
Liability for guaranty fund assessments 760 249 (153)
Investment adjustments 5,122 5,563 3,276
Other (38) 269 (13,486)
------------ ----------- -----------
Deferred Federal income tax provision $ 15,078 $ 3,968 $ 1,375
============ =========== ===========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 79,083 $ 94,087
Investment adjustments 5,671 10,793
Liability for guaranty fund assessments 6,571 7,331
----------- -----------
Total deferred tax assets 91,325 112,211
=========== ===========
Deferred tax liabilities:
Deferred policy acquisition costs 91,092 96,862
Net unrealized investment gain on investment securities 2,959 9,100
Other 3,988 4,027
----------- -----------
Total deferred tax liabilities 98,039 109,989
----------- -----------
Net deferred tax asset (liability) $ (6,714) $ 2,222
=========== ===========
</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 accounting, 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 $43,515, $41,729 and $43,497 for the years
ended December 31, 1996, 1995 and 1994, 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 $988, $1,310 and $679 for 1996,
1995 and 1994, 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
$2,279, $2,635 and $2,732 for 1996, 1995 and 1994,
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 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 its allocable share of such compensation in the
amount of $16,514, $13,293 and $12,600 during 1996, 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 $42,639, $43,984 and $84,231 for
1996, 1995 and 1994, 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 interest rate swap contracts with
Merrill Lynch Capital Services, Inc. ("MLCS") with a guarantee
from Merrill Lynch & Co. As of December 31, 1996 and 1995, the
notional amount of such interest rate swap contracts
outstanding was $9,000 and $10,000, respectively. 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 $(117), $256, and $782 for 1996, 1995 and 1994,
respectively.
<PAGE>
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1996, 1995, and 1994 the Company paid dividends of
$175,000, $100,000, and $150,000, respectively, to MLIG. Of
these stockholder's dividends, $175,000, $73,757, and $112,779,
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, 1996 and 1995, approximately $24,970 and
$30,195, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1996 and 1995, was $251,697 and $303,950,
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
Company's statutory net income for 1996, 1995 and 1994 was
$93,532, $121,451 and $42,382, 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, 1996 and 1995, based on the
RBC formula, the Company's total adjusted capital level was
403% and 395%, 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, 1996 and 1995, the Company has established an
estimated liability for future guaranty fund assessments of
$18,773 and $21,144, respectively. The Company regularly
monitors public information regarding insurer insolvencies and
will adjusts its estimated liability as 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>
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
<PAGE> 42
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
<PAGE> 43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following provisions regarding the Indemnification of Directors and Officers
of the Registrant are applicable:
AMENDED AND RESTATED BY-LAWS OF MERRILL LYNCH LIFE INSURANCE COMPANY, ARTICLE VI
Sections 1, 2, 3 and 4--Indemnification of Directors, Officers, Employees
and Incorporators
Section 1. Actions Other Than by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact that he
is or was a director, officer or employee of the Corporation, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 2. Actions by or in the Right of the Corporation. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer or employee of the Corporation, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the Court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other Court shall deem proper.
Section 3. Right to Indemnification. To the extent that a director, officer or
employee of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 1 and 2 of
this Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 4. Determination of Right to Indemnification. Any indemnification under
Sections 1 and 2 of this Article (unless ordered by a Court) shall be made by
the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, or employee is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 and 2 of this Article. Such determination shall be made (i) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders.
II-1
<PAGE> 44
BY-LAWS OF MERRILL LYNCH & CO., INC.,
Section 2--Indemnification by Corporation
Any persons serving as an officer, director or trustee of a corporation, trust,
or other enterprise, including the Registrant, at the request of Merrill Lynch
are entitled to indemnification from Merrill Lynch, to the fullest extent
authorized or permitted by law, for liabilities with respect to actions taken or
omitted by such persons in any capacity in which such persons serve Merrill
Lynch or such other corporation, trust, or other enterprise. Any action
initiated by any such person for which indemnification is provided shall be
approved by the Board of Directors of Merrill Lynch prior to such initiation.
DIRECTORS' AND OFFICERS' INSURANCE
Merrill Lynch has purchased from Corporate Officers' and Directors' Assurance
Company directors' and officers' liability insurance policies which cover, in
addition to the indemnification described above, liabilities for which
indemnification is not provided under the By-Laws. The Company will pay an
allocable portion of the insurance premium paid by Merrill Lynch with respect to
such insurance policy.
ARKANSAS BUSINESS CORPORATION LAW
In addition, Section 4-26-814 of the Arkansas Business Corporation Law generally
provides that a corporation has the power to indemnify a director or officer of
the corporation, or a person serving at the request of the corporation as a
director or officer of another corporation or other enterprise against any
judgments, amounts paid in settlement, and reasonably incurred expenses in a
civil or criminal action or proceeding if the director or officer acted in good
faith in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation (or, in the case of a criminal action or
proceeding, if he or she in addition had no reasonable cause to believe that his
or her conduct was unlawful).
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<S> <C>
1(a) Underwriting Agreement Between Merrill Lynch Life Insurance Company and
Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-58303, Filed March 29,
1995.)
1(b) Amendment 1 to Underwriting Agreement Between Merrill Lynch Life Insurance
Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Incorporated
by Reference to Registrant's Form S-1 Registration No. 33-58303, Filed March
29, 1995.)
</TABLE>
II-2
<PAGE> 45
<TABLE>
<S> <C>
2(a) 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 Registrant's
Post-Effective Amendment No. 4 to Form S-1 Registration No. 33-26322, Filed
September 5, 1991.)
2(b) Plan and Agreement of Merger Between Merrill Lynch Life Insurance Company and
Tandem Insurance Group, Inc. (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 4 to Form S-1 Registration No. 33-26322, Filed
September 5, 1991.)
3(a) Articles of Incorporation of Merrill Lynch Life Insurance Company
(Incorporated by Reference to Registrant's Form S-1 Registration No.
33-26322, Filed January 3, 1989.)
3(b) By-Laws of Merrill Lynch Life Insurance Company (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-26322, Filed January 3, 1989.)
3(c) Articles of Amendment, Restatement and Redomestication of the Articles of
Incorporation of Merrill Lynch Life Insurance Company (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-46827, Filed March 30,
1992.)
3(d) Amended and Restated By-laws of Merrill Lynch Life Insurance Company
(Incorporated by Reference to Registrant's Form S-1 Registration No.
33-46827, Filed March 30, 1992.)
4(a)(1) Group Modified Guaranteed Annuity Contract, ML-AY-361 (Incorporated by
Reference to Registrant's Pre-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed February 23, 1989.)
4(a)(2) Group Modified Guaranteed Annuity Contract, ML-AY-361/94 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 3 to Form S-1
Registration No. 33-60290, Filed December 7, 1994.)
4(b)(1) Individual Certificate, ML-AY-362 (Incorporated by Reference to Registrant's
Pre-Effective Amendment No. 1 to Form S-1 Registration No. 33-26322, Filed
February 23, 1989.)
4(b)(2) Individual Certificate, ML-AY-362 KS (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 1 to Form S-1 Registration No.
33-26322, Filed March 9, 1990.)
4(b)(3) Individual Certificate, ML-AY-378 (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 1 to Form S-1 Registration No. 33-26322, Filed
March 9, 1990.)
4(b)(4) Individual Certificate, ML-AY-362/94 (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 3 to Form S-1 Registration No.
33-60290, Filed December 7, 1994.)
4(c)(1) Individual Tax-Sheltered Annuity Certificate, ML-AY-372 (Incorporated by
Reference to Registrant's Pre-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed February 23, 1989.)
4(c)(2) Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(c)(3) Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 3 to Form S-1
Registration No. 33-60290, Filed December 7, 1994.)
4(d)(1) Qualified Retirement Plan Certificate, ML-AY-373 (Incorporated by Reference
to Registrant's Form S-1 Registration No. 33-26322, Filed January 3, 1989.)
4(d)(2) Qualified Retirement Plan Certificate, ML-AY-373 KS (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
</TABLE>
II-3
<PAGE> 46
<TABLE>
<S> <C>
4(d)(3) Qualified Retirement Plan Certificate, ML-AY-373/94 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 3 to Form S-1
Registration No. 33-60290, Filed December 7, 1994.)
4(e)(1) Individual Retirement Annuity Certificate, ML-AY-374 (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-26322, Filed January
3, 1989.)
4(e)(2) Individual Retirement Annuity Certificate, ML-AY-374 KS (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(e)(3) Individual Retirement Annuity Certificate, ML-AY-375 KS (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(e)(4) Individual Retirement Annuity Certificate, ML-AY-379 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(e)(5) Individual Retirement Annuity Certificate, ML-AY-374/94 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 3 to Form S-1
Registration No. 33-60290, Filed December 7, 1994.)
4(f)(1) Individual Retirement Account Certificate, ML-AY-375 (Incorporated by
Reference to Registrant's Pre-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed February 23, 1989.)
4(f)(2) Individual Retirement Account Certificate, ML-AY-380 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(f)(3) Individual Retirement Account Certificate, ML-AY-375/94 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 3 to Form S-1
Registration No. 33-60290, Filed December 7, 1994.)
4(g)(1) Section 457 Deferred Compensation Plan Certificate, ML-AY-376 (Incorporated
by Reference to Registrant's Form S-1 Registration No. 33-26322, Filed
January 3, 1989.)
4(g)(2) Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS
(Incorporated by Reference to Registrant's Post-Effective Amendment No. 1 to
Form S-1 Registration No. 33-26322, Filed March 9, 1990.)
4(g)(3) Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94
(Incorporated by Reference to Registrant's Post-Effective Amendment No. 3 to
Form S-1 Registration No. 33-60290, Filed December 7, 1994.)
4(h)(1) Tax-Sheltered Annuity Endorsement, ML-AY-366 (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-26322, Filed January 3, 1989.)
4(h)(2) Tax-Sheltered Annuity Endorsement, ML-AY-366 190 (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 1 to Form S-1 Registration No.
33-26322, Filed March 9, 1990.)
4(h)(3) Tax-Sheltered Annuity Endorsement, ML-AY-366 1096.
4(i)(1) Qualified Retirement Plan Endorsement, ML-AY-364 (Incorporated by Reference
to Registrant's Form S-1 Registration No. 33-26322, Filed January 3, 1989.)
4(i)(2) Qualified Retirement Plan Endorsement, ML-AY-364 190. (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-26322, Filed March 9,
1990.)
4(j)(1) Individual Retirement Annuity Endorsement, ML-AY-368 (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-26322, Filed January
3, 1989.)
</TABLE>
II-4
<PAGE> 47
<TABLE>
<S> <C>
4(j)(2) Individual Retirement Annuity Endorsement, ML-AY-368 190 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(j)(3) Individual Retirement Annuity Endorsement, ML009 (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 1 to Form S-1 Registration No.
33-60290, Filed March 31, 1994.)
4(k)(1) Individual Retirement Account Endorsement, ML-AY-365 (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-26322, Filed January
3, 1989.)
4(k)(2) Individual Retirement Account Endorsement, ML-AY-365 190 (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 1 to Form S-1
Registration No. 33-26322, Filed March 9, 1990.)
4(l)(1) Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 (Incorporated
by Reference to Registrant's Form S-1 Registration No. 33-26322, Filed
January 3, 1989.)
4(l)(2) Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190
(Incorporated by Reference to Registrant's Post-Effective Amendment No. 1 to
Form S-1 Registration No. 33-26322, Filed March 9, 1990.)
4(m)(1) Qualified Plan Endorsement, ML-AY-369 (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-26322, Filed January 3, 1989.)
4(m)(2) Qualified Plan Endorsement, ML-AY-448 (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 1 to Form S-1 Registration No.
33-26322, Filed March 9, 1990.)
4(m)(3) Qualified Plan Endorsement, ML-AY-448/94 (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 3 to Form S-1 Registration No.
33-60290, Filed December 7, 1994.)
4(n) Application for Group Modified Guaranteed Annuity Contract (Incorporated by
Reference to Registrant's Form S-1 Registration No. 33-26322, Filed January
3, 1989.)
4(o) Application for Individual Certificate Under Modified Guaranteed Annuity
Contract (Incorporated by Reference to Registrant's Form S-1 Registration No.
33-26322, Filed January 3, 1989.)
4(p) Form of Company name change endorsement (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 4 to Form S-1 Registration No.
33-26322, Filed September 5, 1991.)
5 Opinion of Barry G. Skolnick, Esq. and Consent to its use as to the legality
of the securities being registered.
10(a) Management Services Agreement Between Merrill Lynch Life Insurance Company
and Family Life Insurance Company (Incorporated by Reference to Registrant's
Form S-1 Registration No. 33-26322, Filed January 3, 1989.)
10(b) General Agency Agreement Between Merrill Lynch Life Insurance and Merrill
Lynch Life Agency, Inc. (Incorporated by Reference to Registrant's
Pre-Effective Amendment No. 1 to Form S-1 Registration No. 33-26322, Filed
February 23, 1989.)
10(c) Amended Service Agreement Between Merrill Lynch Life Insurance Company and
Merrill Lynch Insurance Group, Inc. (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 1 to Form S-1 Registration No.
33-60290, Filed March 31, 1994.)
10(d) Indemnity Reinsurance Agreement Between Merrill Lynch Life Insurance Company
and Family Life Insurance Group (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 2 to Form S-1 Registration No. 33-26322, Filed
March 13, 1991.)
</TABLE>
II-5
<PAGE> 48
<TABLE>
<S> <C>
10(e) Amendment No. 1 to Indemnity Reinsurance Agreement Between Merrill Lynch Life
Insurance Company and Family Life Insurance Group (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 3 to Form S-1 Registration No.
33-26322, Filed April 24, 1991.)
10(f) 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 Registrant's
Post-Effective Amendment No. 4 to Form S-1 Registration No. 33-26322, Filed
September 5, 1991.)
10(g) Amended General Agency Agreement Between Merrill Lynch Life Insurance Company
and Merrill Lynch Life Agency Inc. (Incorporated by Reference to Registrant's
Form S-1 Registration No. 33-46827, Filed March 30, 1992.)
10(h) Indemnity Agreement Between Merrill Lynch Life Insurance Company and Merrill
Lynch Life Agency Inc. (Incorporated by Reference to Registrant's Form S-1
Registration No. 33-46827, Filed March 30, 1992.)
10(i) Management Agreement Between Merrill Lynch Life Insurance Company and Merrill
Lynch Asset Management, Inc. (Incorporated by Reference to Registrant's Form
S-1 Registration No. 33-46827, Filed March 30, 1992.)
23(a) Written Consent of Sutherland, Asbill & Brennan, L.L.P.
23(b) Written Consent of Deloitte & Touche LLP, independent auditors.
24(a) Power of Attorney from Joseph E. Crowne. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 29, 1995.)
24(b) Power of Attorney from David M. Dunford. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 29, 1995.)
24(c) Power of Attorney from John C.R. Hele. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 29, 1995.)
24(d) Power of Attorney from Allen N. Jones. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 29, 1995.)
24(e) Power of Attorney from Barry G. Skolnick. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 29, 1995.)
24(f) Power of Attorney from Anthony J. Vespa. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 29, 1995.)
24(g) Power of Attorney from Gail R. Farkas. (Incorporated by Reference to
Registrant's Form S-1 Registration No. 33-58303, Filed March 26, 1996.)
27 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
None.
</TABLE>
II-6
<PAGE> 49
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this amendment to its registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Plainsboro,
State of New Jersey, on this 26th day of March, 1997.
<TABLE>
<S> <C>
ATTEST: MERRILL LYNCH LIFE INSURANCE COMPANY
(Registrant)
/s/ EDWARD W. DIFFIN, JR. By: /s/ BARRY G. SKOLNICK
- --------------------------------------------- --------------------------------------------
Edward W. Diffin, Jr. Barry G. Skolnick
Vice President Senior Vice President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the registration statement has been signed below by the following persons in the
capacities indicated on this 26th day of March, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
* Chairman of the Board, President, and Chief
- --------------------------------------------- Executive Officer
Anthony J. Vespa
* Director, Senior Vice President, Chief
- --------------------------------------------- Financial Officer, Chief Actuary, and
Joseph E. Crowne, Jr. Treasurer
* Director, Senior Vice President, and Chief
- --------------------------------------------- Investment Officer
David M. Dunford
* Director and Senior Vice President
- ---------------------------------------------
Gail R. Farkas
*By: /s/ BARRY G. SKOLNICK In his own capacity as Director, Senior Vice
---------------------------------------- President, and General Counsel and as
Barry G. Skolnick Attorney-in-Fact
</TABLE>
II-8
<PAGE> 51
EXHIBIT INDEX
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- -------- -------------------------------------------------------------------------- -----
<S> <C> <C>
4(h)(3) Tax-Sheltered Annuity Endorsement, ML-AY-366 1096.........................
5 Opinion of Barry G. Skolnick, Esq. and Consent to its use as to the
legality of the securities being registered...............................
23(a) Written Consent of Sutherland, Asbill & Brennan, L.L.P. ..................
23(b) Written Consent of Deloitte & Touche LLP, independent auditors............
27 Financial Data Schedule...................................................
</TABLE>
<PAGE> 1
EXHIBIT 4(h)(3)
MERRILL LYNCH LIFE INSURANCE COMPANY
TAX-SHELTERED ANNUITY ENDORSEMENT
The Certificate to which this endorsement is attached is amended as follows:
1. The Annuitant is the Participant, "you." The Certificate under the
contract is not transferable and may not be sold, assigned, discounted or
pledged as security for a loan or as security for any other obligation, other
than to Merrill Lynch Life Insurance Company. Annuity payments under the
contract cannot be surrendered, commuted, assigned, encumbered or anticipated
in any way. Your interest under the contract is nonforfeitable.
2. Premiums must be paid by an organization described in Section
403(b)(1)(A) of the Internal Revenue Code, "IRC." The Participants must be
employees of such an organization. Premium payments will be limited as
provided in IRC Section 402(g). Payments in excess of such amounts will be
returned by Merrill Lynch Life Insurance Company as permitted by law.
3. Distributions under the contract must satisfy the minimum distribution
rules in IRC Section 401(a)(9), including the incidental death benefit
requirement. The Annuity Date may not be later than the Required Beginning
Date. The term "Required Beginning Date" will mean the following:
a.) For years beginning before 1997, Required Beginning Date means
April 1 of the calendar year following the calendar year you attain
age 70 1/2. If you attained age 70 1/2 before January 1, 1988, or you
are in a governmental plan or a church plan [as defined in IRC Section
401(a)(9)(C)], Required Beginning Date means April 1 of the calendar
year following the later of (i) the calendar year you attain age 70
1/2, or (ii) the calendar year you retire.
b.) For years beginning in 1997 and after, Required Beginning Date
means April 1 of the calendar year following the later of (i) the
calendar year you attain age 70 1/2, or (ii) the calendar year you
retire. Except in the case of a governmental plan or a church plan
[as defined in IRC Section 401(a)(9)(C)], if you are a 5% owner (as
defined in IRC Section 416), Required Beginning Date means April 1 of
the calendar year following the calendar year you attain age 70 1/2.
4. If you die before the Annuity Date and your surviving spouse continues
this contract in force under the provisions of the contract, the Annuity Date
may be any date prior to the later of (i) December 31 of the calendar year
immediately following the calendar year in which you died, and (ii) December 31
of the calendar year in which you would have obtained age 70 1/2.
5. Under "OPTION 1 - PAYMENTS OF A FIXED AMOUNT," the term over which
annuity payments are made may not exceed your life expectancy, or the joint
life expectancy of you or your spouse (or, if you are not married, a designated
second person), at the Annuity Date.
<PAGE> 2
If you die before the Annuity Date, the term may not exceed the life expectancy
of your surviving spouse.
6. Under "OPTION 2 - PAYMENTS FOR A FIXED PERIOD," the period may not
exceed your life expectancy, or the joint life expectancy of you and your
spouse (or, if you are not married, a designated second person), at the Annuity
Date. If you die before the Annuity Date, the period may not exceed the life
expectancy of your surviving spouse.
7. Under "OPTION 4 - LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20
YEARS," the guarantee period selected may not exceed your life expectancy or
the joint life expectancy of you and your spouse, (or, if you are not married a
designated second person), at the Annuity Date. If you die before the Annuity
Date, the guarantee period selected may not exceed the life expectancy of your
surviving spouse.
8. Under "OPTION 5 - LIFE ANNUITY WITH GUARANTEED RETURN OF NET ACCOUNT
VALUE," the period required for distribution of the net account value may not
exceed your life expectancy or the joint life expectancy of you and your
spouse, (or, if you are not married, a designated second person), at the
annuity date. If you die before the Annuity Date, the period required for
distribution of such net account value may not exceed the life expectancy of
your surviving spouse.
9. If "OPTION 6 - JOINT AND SURVIVOR LIFE ANNUITY" is chosen, the second
person must be your spouse if you have a spouse. If you die before the Annuity
Date, Option 6 is not available to the beneficiary.
10. Life expectancy will be determined according to Internal Revenue
Service regulations and rulings.
11. Distributions for the contract attributable to contributions made
pursuant to a salary reduction agreement may be made only (1) after you attain
age 59 1/2, (2) upon separation from service, (3) upon death or disability, or
(4) for an amount not greater than the total of such contributions in the case
of hardship. Any withdrawal from the contract shall effect a surrender of the
contract to the extent of such withdrawal. Any premium payments thereafter may
be made only with Merrill Lynch Life Insurance Company's consent.
12. You, your spouse, or your former spouse, who is the alternate payee
under a Qualified Domestic Relations Order, "Distributee," may elect to have
any portion of an eligible rollover distribution paid directly to an eligible
retirement plan. This is called a direct rollover. An eligible rollover
distribution, "Distribution," is any distribution unless it is:
a.) One of a series of substantially equal periodic payments (made
at least annually) for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of the
Distributee and the Distributee's Designated Beneficiary, or for a
specified period of ten years or more; or
<PAGE> 3
b.) Any required distribution under IRC Section 403(b)(10); or
c.) Any part of a distribution that is not includible in income.
An eligible retirement plan is an IRC Section 403(b) annuity or an individual
retirement plan as defined in Internal Revenue Code Section 7701(a)(37), "IRA,"
that accepts Distributions. However, in the case of a Distribution to the
surviving spouse, an eligible retirement plan is an IRA.
This section 12 applies to all Distributions made after December 31, 1992.
This endorsement controls over any contrary provisions of the contract.
MERRILL LYNCH LIFE INSURANCE COMPANY
By /s/ Barry G. Skolnick
Secretary
<PAGE> 1
EXHIBIT 5
March 26, 1997
Board of Directors
Merrill Lynch Life Insurance Company
320 West Capitol Avenue
Little Rock, Arkansas 72201
Gentlemen:
In my capacity as General Counsel of Merrill Lynch Life Insurance Company
("Company"), I have supervised the preparation of Post-Effective Amendment No. 2
to the registration statement on Form S-1 (File No. 33-58303) for the ASSET I
group modified guaranteed annuity contract ("Contract") to be filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933.
I am of the following opinion:
(1) The Company was organized in accordance with the laws of the
State of Washington and redomesticated in accordance with the
laws of the State of Arkansas and is a duly authorized stock life
insurance company under the laws of Arkansas and the laws of
those states in which the Company is admitted to do business;
(2) The Company is authorized to issue the Contracts in those states
in which it is admitted and upon compliance with applicable local
law;
(3) The Contracts, when issued in accordance with the prospectus
contained in the aforesaid registration statement and upon
compliance with applicable local law, will be legal and binding
obligations of the Company in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the aforesaid
registration statement and to the reference to me under the caption "Legal
Matters" in the prospectus contained in said registration statement.
Sincerely,
/s/ Barry G. Skolnick
Barry G. Skolnick
Senior Vice President and
General Counsel
<PAGE> 1
EXHIBIT 23(A)
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
CONSENT OF SUTHERLAND, ASBILL & BRENNAN, L.L.P.
We consent to the reference to our firm under the heading "Legal Matters" in the
prospectus included in Post-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 33-58303) for certain modified guaranteed
annuity contracts issued by Merrill Lynch Life Insurance Company. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
/s/ Sutherland, Asbill & Brennan,
L.L.P.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
Washington, D.C.
March 26, 1997
<PAGE> 1
EXHIBIT 23(B)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 33-58303 of Merrill Lynch Life Insurance Company on Form S-1 of
our report dated February 24, 1997 appearing in the Prospectus, which is a part
of such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
New York, New York
March 27, 1997
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