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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
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<S> <C>
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
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<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
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ASSETS
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,692,020; 1997 - $2,927,562) $ 2,761,516 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $129,459; 1997 - $72,599) 128,528 73,612
Trading account securities, at estimated fair value 17,276 15,625
Real estate held-for-sale 28,034 31,805
Policy loans on insurance contracts 1,119,801 1,118,139
-------------- --------------
Total Investments 4,055,155 4,247,789
CASH AND CASH EQUIVALENTS 51,239 86,388
ACCRUED INVESTMENT INCOME 77,794 78,224
DEFERRED POLICY ACQUISITION COSTS 368,018 365,105
FEDERAL INCOME TAXES - DEFERRED 5,675 -
REINSURANCE RECEIVABLES 2,641 1,617
AFFILIATED RECEIVABLES - NET 2,228 166
RECEIVABLES FROM SECURITIES SOLD 16,145 75,820
OTHER ASSETS 47,837 49,353
SEPARATE ACCOUNTS ASSETS 10,287,621 9,149,119
-------------- --------------
TOTAL ASSETS $ 14,914,353 $ 14,053,581
============== ==============
</TABLE>
See notes to finanical statements.
(continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Continued) (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
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<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
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LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,961,752 $ 4,188,110
Claims and claims settlement expenses 62,659 50,574
-------------- --------------
Total policy liabilities and accruals 4,024,411 4,238,684
OTHER POLICYHOLDER FUNDS 23,424 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 14,481 15,374
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 13,736 24,438
PAYABLE FOR SECURITIES PURCHASED 16,497 95,135
OTHER LIABILITIES 58,418 54,434
SEPARATE ACCOUNTS LIABILITES 10,275,492 9,149,119
-------------- --------------
Total Liabilities 14,426,459 13,605,527
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STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 126,328 80,735
Accumulated other comprehensive income 12,242 17,995
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Total Stockholder's Equity 487,894 448,054
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,914,353 $ 14,053,581
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1997
------------ --------------
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REVENUES:
Investment revenue:
Net investment income $ 139,409 $ 158,082
Net realized investment gains 13,300 6,920
Policy charge revenue 100,661 83,345
------------ --------------
Total Revenues 253,370 248,347
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 100,317 105,775
Market value adjustment expense 2,919 1,655
Policy benefits (net of reinsurance recoveries: 1998 - $5,059
1997 - $7,263) 15,438 13,702
Reinsurance premium ceded 9,855 8,841
Amortization of deferred policy acquisition costs 35,215 36,568
Insurance expenses and taxes 24,810 23,692
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Total Benefits and Expenses 188,554 190,233
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Earnings Before Federal Income Tax Provision 64,816 58,114
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 22,984 31,267
Deferred (3,761) (12,632)
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Total Federal Income Tax Provision 19,223 18,365
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NET EARNINGS $ 45,593 $ 39,479
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------------
1998 1997
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REVENUES:
Investment revenue:
Net investment income $ 68,410 $ 78,444
Net realized investment gains 2,842 1,135
Policy charge revenue 52,616 42,229
-------------- --------------
Total Revenues 123,868 121,808
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 49,998 52,669
Market value adjustment expense 1,527 712
Policy benefits (net of reinsurance recoveries: 1998 - $1,318
1997 - $4,326) 7,706 6,946
Reinsurance premium ceded 4,985 4,481
Amortization of deferred policy acquisition costs 18,542 14,644
Insurance expenses and taxes 12,538 11,915
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Total Benefits and Expenses 95,296 91,367
-------------- --------------
Earnings Before Federal Income Tax Provision 28,572 30,441
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 10,736 21,333
Deferred (802) (10,753)
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Total Federal Income Tax Provision 9,934 10,580
-------------- --------------
NET EARNINGS $ 18,638 $ 19,861
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
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NET EARNINGS $ 45,593 $ 39,479
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding losses arising during the period (157) (7,376)
Reclassification adjustment for gains included in net earnings (13,208) (6,586)
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Net unrealized losses on investment securities (13,365) (13,962)
Adjustments for:
Policyholder liabilities 4,923 20,268
Deferred policy acquisition costs (408) 591
Income tax (expense) benefit related to items of
other comprehensive income 3,097 (2,414)
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Other comprehensive income, net of tax (5,753) 4,483
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COMPREHENSIVE INCOME $ 39,840 $ 43,962
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</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Three Months Ended
June 30,
------------------------------------
1998 1997
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NET EARNINGS $ 18,638 $ 19,861
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (3,604) 39,885
Reclassification adjustment for gains included in net earnings (2,804) (1,135)
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Net unrealized gains (losses) on investment securities (6,408) 38,750
Adjustments for:
Policyholder liabilities 775 (10,725)
Deferred policy acquisition costs (491) (7,140)
Income tax (expense) benefit related to items of
other comprehensive income 2,144 (7,309)
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Other comprehensive income, net of tax (3,980) 13,576
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COMPREHENSIVE INCOME $ 14,658 $ 33,437
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</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings income equity
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<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 2,000 $ 402,937 $ 79,387 $ 5,496 $ 489,820
Dividend to Parent (55,613) (79,387) (135,000)
Net earnings 80,735 80,735
Other comprehensive income, net of tax 12,499 12,499
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 2,000 347,324 80,735 17,995 448,054
Net earnings 45,593 45,593
Other comprehensive income, net of tax (5,753) (5,753)
------------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1998 $ 2,000 $ 347,324 $ 126,328 $ 12,242 $ 487,894
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net earnings $ 45,593 $ 39,479
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 35,215 36,568
Capitalization of policy acquisition costs (38,536) (32,379)
Amortization (accretion) and depreciation of investments (4,157) (1,553)
Net realized investment gains (13,300) (6,920)
Interest credited to policyholders' account balances 100,317 105,775
Benefit for deferred Federal income tax (3,761) (12,632)
Changes in operating assets and liabilities:
Accrued investment income 430 589
Affiliated receivables / payables (2,062) (4,128)
Claims and claims settlement expenses 12,085 11,588
Federal income taxes - current (10,702) 13,299
Other policyholder funds (3,736) 117
Liability for guaranty fund assessments (893) (2,350)
Policy loans on insurance contracts (1,662) (2,846)
Trading account securities (377) -
Other, net 4,476 6,153
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Net cash and cash equivalents provided by operating
activities 118,930 150,760
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INVESTING ACTIVITIES:
Sales of available-for-sale securities 492,553 311,893
Maturities of available-for-sale securities 269,089 300,114
Purchases of available-for-sale securities (592,830) (501,772)
Mortgage loans principal payments received - 39,924
Sales of real estate held-for-sale 10,862 -
Recapture of investment in Separate Accounts - 11,026
Investment in Separate Accounts (12,000) (21)
--------------- ---------------
Net cash and cash equivalents provided by investing
activities 167,674 161,164
--------------- ---------------
</TABLE>
See notes to financial statements.
(continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in Thousands) (Unaudited)
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<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
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FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 518,798 $ 519,177
Withdrawals (including transfers to/from Separate Accounts) (840,551) (759,355)
-------------- --------------
Net cash and cash equivalents used by financing activities (321,753) (240,178)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35,149) 71,746
CASH AND CASH EQUIVALENTS:
Beginning of year 86,388 94,991
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End of period $ 51,239 $ 166,737
============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 33,686 $ 17,968
Intercompany interest 470 369
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly-
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The unaudited condensed financial statements included herein have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. The preparation of financial statements in conformity
with generally accepted accounting principles and prevailing
industry practice requires management to make estimates that
affect the reported amounts and disclosure of contingencies in
the financial statements. Actual results could differ from
those estimates. Results for the three month and six month
periods ended June 30, 1998 and 1997 are not necessarily
indicative of annual results. These unaudited financial
statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 1997
Annual Report on Form 10-K ("1997 Report").
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners. Statutory
capital and surplus at June 30, 1998 and December 31, 1997, was
$293 million and $245 million, respectively. For the six month
periods ended June 30, 1998 and 1997, statutory net income was
$48 million and $47 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as either available-for-sale or trading and are
recorded at fair value. Unrealized gains and losses on available-
for-sale securities are included in accumulated other
comprehensive income, which is a component of stockholder's
equity. Unrealized gains and losses on trading account
securities are included in net realized investment gains.
The Company is required to adjust deferred policy acquisition
costs and certain policyholder liabilities associated with
available-for-sale securities. These adjustments are recorded in
the accumulated other comprehensive income component of
stockholder's equity and assume that the unrealized gain or loss
on available-for-sale securities was realized. These investments
primarily support in-force, universal life-type contracts. The
following reconciles the net unrealized investment gain recorded
in accumulated other comprehensive income at June 30, 1998 and
December 31, 1997:
June 30, December 31,
1998 1997
------------- -------------
(In Thousands)
Assets:
Fixed maturity securities $ 69,496 $ 81,046
Equity securities (931) 1,013
Deferred policy acquisition costs (5,860) (5,452)
Separate Accounts assets 129 -
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62,834 76,607
Liabilities:
Policyholders' account balances 44,000 48,923
Federal income taxes - deferred 6,592 9,689
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50,592 58,612
Stockholder's equity: ------------ -------------
Accumlated other comprehensive income $ 12,242 $ 17,995
============ =============
During the third quarter 1997, the Company provided $15 million
initial funding for a trading portfolio, composed of convertible
debt and equity securities. The net unrealized holding gains on
trading account securities earned during the first six months of
1998, and included in net realized investment gains was $284.
NOTE 4. COMPREHENSIVE INCOME:
During 1997, the Company early adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes
standards for reporting comprehensive income and its components
within the financial statements. Comprehensive income is defined
as all non-owner changes in equity during a period and is
reported in the Statements of Comprehensive Income included
herein for the three month and six month periods ended
June 30, 1998 and 1997.
NOTE 5. RECLASSIFICATIONS:
To facilitate comparison with the current year, certain amounts
in the prior year have been reclassified.
Item 2 Management's Narrative Analysis of the Results of Operations
This Management's Narrative Analysis of the Results of Operations
should be read in conjunction with the accompanying unaudited
financial statements and notes thereto, in addition to the 1997
Financial Statements and Notes to Financial Statements and the
Management's Narrative Analysis of the Results of Operations
included in the 1997 Report.
Changes in revenues and expenses in most cases are similar for
the three month and six month periods. Therefore, the discussion
emphasizes the comparison between the six months of 1998 and
1997, with additional information on the three month periods
presented where appropriate.
Business Overview
The Company's earnings are principally derived from two sources:
the net investment income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. The costs associated with acquiring contract owner
deposits are deferred and amortized over the period in which the
Company anticipates holding those funds. In addition, the Company
incurs expenses associated with the maintenance of in-force
contracts.
Life insurance premiums and annuity deposits recorded in the
first six months of 1998 and 1997 were $591 million and $567
million, respectively. Excluding internal tax-free exchanges,
new life insurance premiums and annuity deposits received
remained flat at $519 million for both periods. The following
discussion of year-to-date variances includes internal tax-free
exchanges.
Variable annuity deposits increased $24 million (or 5%) to $509
million. Management attributes the increase in variable annuity
sales to the continued strength of the U.S. equity markets.
During the first half of 1998, the Standard & Poor's 500
Composite Stock Price Index rose 17%, ending the quarter near its
historical high point. Future variable annuity sales could be
negatively impacted if the equity markets enter a period of
decline.
Variable life insurance premiums increased $17 million (or 30%)
to $72 million. This increase is due to the combined effects of
implementing a marketing focus program targeting the Company's
estate planning and business income specialists and the favorable
equity markets.
Modified guaranteed annuity sales, decreased $13 million (or 64%)
to $7 million. Sales volume of this product is reflective of the
current interest rate environment and will generally increase or
decrease in a direct relationship with changes in interest rates.
During the first six months of 1998, interest rates remained
generally lower with medium term rates on U.S Treasury securities
averaging approximately 5.5%. This represents an approximate 53
basis point decrease from the first half of 1997.
On June 5, 1998, the Company introduced five new investment
options for it's variable annuity product designed to complement
the investment objectives of the twenty-one pre-existing fund
options. Three of the new investment options are managed by
Merrill Lynch Asset Management, L.P., an affiliated investment
advisor, one is managed by Hotchkis & Wiley, an affiliated
investment advisor, and one is managed by an unaffiliated
investment advisor. Also, during 1998, the Company closed two
pre-existing funds to new allocations.
Policy and contract surrenders recorded in the first six months
of 1998 and 1997 were $475 million and $363 million,
respectively. Variable annuity surrenders increased $46 million
(or 42%) to $153 million primarily due to growth of that block of
business. Modified guaranteed annuity surrenders increased $76
million (or 98%) to $153 million due to the generally lower
interest rate environment during the first six months of 1998 as
compared to the same period in 1997. During periods of lower
interest rates, modified guaranteed annuity contractholders are
more inclined to surrender their contracts for two reasons.
First, contractholders can lock-in gains resulting from the
market value adjustment, which is applied to withdrawals made
prior to the expiration of the stated guarantee period. The
market value adjustment has an inverse relationship to changes in
interest rates. Second, interest crediting rates offered upon
renewal are generally lower than the rates that had been credited
prior to the renewal date.
During the first six months of 1998, separate account assets
increased $1,138 million (or 12%) to $10.3 billion. The increase
is attributable to three factors. First, the separate accounts
benefited from strong underlying fund performance associated with
the generally rising equity markets. During the first six months
of 1998, separate account assets increased $951 million due to
price appreciation in the underlying funds supporting the
variable products. Second, net cash inflow to the variable
products contributed $175 million to the growth in separate
account assets. Third, the general account invested $12 million
of seed money among two of the new variable annuity investment
options.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of June 30, 1998, the
Company's assets included $2.2 billion of cash, short-term
investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
As of June 30, 1998, approximately $199 million (or 7.2%) of the
Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured corporate debt obligations which do not have a rating
equivalent to Standard and Poor's BBB- or higher (or similar
rating agency). Non-investment grade securities are speculative
and are subject to significantly greater risks related to the
creditworthiness of the issuers and the liquidity of the market
for such securities. The Company carefully selects, and closely
monitors, such investments.
The modifications for Year 2000 systems compliance are proceeding
according to plan and are expected to be completed in early 1999.
Expenditures on Year 2000 systems compliance are not expected to
have a material adverse impact on the Company's financial position
in future periods. However, the failure of the Company's service
providers to resolve their own processing issues in a timely manner
could result in a material financial risk. The Company is in the
process of confirming that its service providers are adequately
addresing Year 2000 issues. It is not anticipated at this time that
contract owners will experience negative effects on their investment,
or on the sevices provided in connection therewith, as a result of
Year 2000 transition implementation. However, there cannot be
complete assurance of success, or that interaction with other service
providers will not impair the Company's services at that time.
Results of Operations
For the six month periods ended June 30, 1998 and 1997, the
Company reported net earnings of $46 million and $39 million,
respectively. For the three month periods ended June 30, 1998
and 1997, the Company reported net earnings of $19 million and
$20 million respectively.
The difference between the increase in 1998 versus 1997 year-to-
date earnings and the decrease in second quarter 1998 versus 1997
earnings is primarily the result of the following three items
quantified on an after-tax basis. First, second quarter 1997
interest credited to policyholders' account balances was reduced
$1.6 million due to the release of certain policyholder reserves
determined to be in excess of amounts required. Excluding this
adjustment, second quarter 1998 earnings increased $0.6 million
over second quarter 1997. Second, 1998 year-to-date earnings
benefited from a $4.6 million gain on the sale of one commercial
real estate property during the first quarter. Third, 1997 year-
to-date earnings were negatively impacted by a net $2.2 million
due to a $4.2 million charge related to increased amortization of
deferred policy acquisition costs associated with management's
decision to pay trail commissions on certain inforce life
insurance contracts partially offset by an additional $2.0
million reduction in excess policyholder reserves, both of which
were recorded during the first quarter .
Net investment income and interest credited to policyholders'
account balances for the six months ended June 30, 1998, as
compared to the same period in 1997, declined by approximately
$19 million and $5 million, respectively, resulting in a $14
million decrease in interest spread. During the first six months
of 1997, interest credited to policyholders' account balances
included a $6 million decrease due to reserve reductions for
amounts determined to be in excess of those required. Excluding
those reductions, interest credited to policyholders' account
balances and interest spread decreased $11 million and $8
million, respectively. The reduction in net investment income is
primarily a result of the Company's fourth quarter 1997 dividend
payment to its stockholder, the declining number of fixed rate
contracts in-force and the declining yield on the company's fixed
maturity portfolio. The reduction in interest credited to
policyholders' account balances is primarily attributable to the
declining number of fixed rate contracts in-force and the
declining crediting rate on newly issued and renewal fixed rate
contracts. The declines in investment yield and crediting rate
are a result of the current lower interest rate environment.
Net realized investment gains increased approximately $6 million
during the current six month period as compared to the same
period during 1997. The increase is primarily due to the $7
million gain on the sale of one commercial real estate property
during the first quarter 1998. Partially offsetting this gain
was $1.4 million in credit-related losses primarily from the sale
of fixed maturity securities of Pacific Rim issuers.
Policy charge revenue increased $17 million (or 21%) during the
first six months of 1998 as compared to the same period during
1997. The increase in policy charge revenue is primarily
attributable to the increase in policyholders' variable account
balances. Average variable account balances increased $1.8
billion (or 23%) during the first half of 1998 as compared to the
same period in 1997. Asset based policy charges increased $13
million (or 26%) consistent with the growth in separate account
assets. Non-asset based policy charges increased $4 million (or
12%) primarily due to higher cost of insurance charges.
The market value adjustment expense is attributable to the
Company's modified guaranteed annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts which are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense has increased $1.3 million (or
76%) during the current six month period consistent with an
increase in surrender activity resulting from the lower interest
rate environment in 1998.
Policy benefits increased approximately $1.7 million to $15
million during the current six month period from $14 million in
the same period during 1997. The increase is due to increased
mortality for both fixed and variable life products.
Reinsurance premium ceded increased $1 million (or 11%) to $10
million during 1998. This increase is attributable to the
combined effect of the increasing age of policyholders and
increased insurance in-force.
Amortization of deferred policy acquisition costs decreased $1.4
million during the current six month period and increased $3.9
million during the current three month period as compared to
their respective periods in 1997. During the first quarter 1997,
amortization increased $6.5 million due to revised future gross
profit assumptions associated with management's decision to pay
trail commissions on certain in-force life insurance contracts.
Excluding this adjustment, amortization for the current six month
period increased $5.1 million over 1997. These respective six
month and three month period increases over 1997 are primarily
attributable to the increase in policy charge revenue.
Insurance expenses and taxes increased $1.1 million during the
first six months of 1998 as compared to 1997. This is primarily
due to an increase in non-capitalizable commission expense paid
on in-force life and annuity contracts.
<PAGE>
I-1
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
I-2
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE, JR.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: August 14, 1998
I-3
<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 2,761,516
<EQUITIES> 128,528
<MORTGAGE> 0
<REAL-ESTATE> 28,034
<TOTAL-INVEST> 4,055,155
<CASH> 51,239
<RECOVER-REINSURE> 2,641
<DEFERRED-ACQUISITION> 368,018
<TOTAL-ASSETS> 14,914,353
<POLICY-LOSSES> 62,659
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 23,424
<POLICY-HOLDER-FUNDS> 3,961,752
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 485,894
<TOTAL-LIABILITY-AND-EQUITY> 14,914,353
0
<INVESTMENT-INCOME> 139,409
<INVESTMENT-GAINS> 13,300
<OTHER-INCOME> 100,661
<BENEFITS> 15,438
<UNDERWRITING-AMORTIZATION> 35,215
<UNDERWRITING-OTHER> 24,810
<INCOME-PRETAX> 64,816
<INCOME-TAX> 19,223
<INCOME-CONTINUING> 45,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,593
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
