<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 33-58303
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
POST EFFECTIVE AMENDMENT NO. 3
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.
KIMBERLY J. SMITH, ESQ.
SUTHERLAND, ASBILL & BRENNAN LLP
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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PROSPECTUS
MAY 1, 1998
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, AND A WITHDRAWAL CHARGE.
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.
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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> 3
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......................................................... 23
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS............ 23
MORE INFORMATION ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY........... 23
A. HISTORY AND BUSINESS........................................ 23
B. SELECTED FINANCIAL DATA..................................... 25
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 25
D. REINSURANCE................................................. 32
E. CONTRACT OWNER ACCOUNT BALANCES............................. 32
F. INVESTMENTS................................................. 32
G. COMPETITION................................................. 33
H. CERTAIN AGREEMENTS.......................................... 33
I. EMPLOYEES................................................... 33
J. PROPERTIES.................................................. 34
K. STATE REGULATION............................................ 34
DIRECTORS AND EXECUTIVE OFFICERS...................................... 35
EXECUTIVE COMPENSATION................................................ 35
LEGAL PROCEEDINGS..................................................... 38
LEGAL MATTERS......................................................... 38
EXPERTS............................................................... 38
REGISTRATION STATEMENT................................................ 38
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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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, 1999, that the participant's annuity date is on
August 1, 2004, 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, 2004. 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, 2004. 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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<PAGE> 12
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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1 + B n/365
A X [ 1- ( ------- ) ]
1 + C
</TABLE>
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 4.75%, 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, $71.25
(4.75% divided by 2 times $3,000), resulting in a remaining subaccount value of
$1,628.75.
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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<PAGE> 14
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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<PAGE> 15
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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<PAGE> 16
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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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 status of the
individual concerned and on Merrill Lynch Life's tax status. In addition,
certain requirements must be satisfied in purchasing a qualified Contract with
proceeds from a tax qualified plan and receiving distributions from a qualified
Contract in order to continue receiving favorable tax treatment. Therefore,
purchasers of qualified Contracts or Certificates issued thereunder should seek
competent legal and tax advice regarding the suitability of a Contract for their
situation, the applicable requirements, and the tax treatment of the rights and
benefits of a Contract. The following discussion assumes that qualified
Contracts are purchased with proceeds from and/or contributions under retirement
plans that qualify for the intended special federal income tax treatment.
TAXATION OF MERRILL LYNCH LIFE
Merrill Lynch Life is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code. The assets underlying the Contracts
will be owned by Merrill Lynch Life. The income earned on such assets will be
income to Merrill Lynch Life.
TAX STATUS OF THE CONTRACT
Merrill Lynch Life believes that the Contract will be treated as an annuity
contract and that Merrill Lynch Life will be treated as owning the assets
supporting the Contract for federal income tax purposes. Merrill Lynch Life,
however, reserves the right to modify the Contract as necessary to prevent the
contract owner or participant from being considered the owner of the assets
supporting the Contract for federal tax purposes.
Furthermore, in order to be treated as an annuity contract for federal income
tax purposes, Section 72(s) of the Internal Revenue Code requires any
non-qualified Contract to provide that (a) if any participant dies on or after
the annuity commencement date but prior to the time the entire interest in the
Certificate has been distributed, the remaining portion of such interest will be
distributed at least as rapidly as under the method of distribution being used
as of the date of that participant's death; and (b) if any participant dies
prior to the annuity commencement date, the entire interest in the Certificate
will be distributed within five years after the date of the participant's death.
These requirements will be considered satisfied as to any portion of the
participant's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
participant's death. The participant's "designated beneficiary" (referred to
herein as the "participant's beneficiary") is the person designated by such
participant as a beneficiary and to whom the participant's interest in the
Certificate passes by reason of death and must be a natural person. However, if
the participant's "designated beneficiary" is the surviving spouse of the
participant, the Certificate may be continued with the surviving spouse as the
new participant. Solely for purposes of applying the provisions of Section 72(s)
of the Code, when non-qualified Contracts are held by other than a natural
person, the death of the annuitant is treated as the death of the participant.
The non-qualified Contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Internal Revenue Code, although no
regulations interpreting these requirements have yet been issued. Merrill Lynch
Life intends to review such provisions and modify them if necessary to assure
that they comply with the requirements of Internal Revenue Code Section 72(s)
when clarified by regulation or otherwise.
Other rules may apply to qualified Contracts.
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THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
FEDERAL TAXES
a. In General
Section 72 of the Internal Revenue Code governs taxation of annuities in
general. Merrill Lynch Life believes that a participant who is a natural person
generally is not taxed on increases in the value of a Contract until
distribution occurs by withdrawing all or part of the account value (e.g.,
partial withdrawals and surrenders) or as annuity payments under the annuity
option elected. For this purpose, the assignment, pledge, or agreement to assign
or pledge any portion of the account value (and in the case of a qualified
Contract, any portion of an interest in the qualified plan) generally will be
treated as a distribution. The taxable portion of a distribution (in the form of
a single sum payment or an annuity) is taxable as ordinary income. Additionally,
certain transfers of a Contract for less than full and adequate consideration,
such as a gift, will generate 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
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<PAGE> 20
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
Distributions generally are subject to withholding for the participant's federal
income tax liability. The withholding rate varies according to the type of
distribution and the participant's tax status. The participant will generally be
provided the opportunity to elect not to have tax withheld from distributions.
"Eligible rollover distributions" from Section 401(a) plans and Section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion of
any distribution from such a plan, except certain distributions such as
distributions required by the Internal Revenue Code or distributions in a
specified annuity form. The 20% withholding does not apply, however, if the
participant chooses a "direct rollover" from the plan to another tax-qualified
plan or individual retirement account or annuity.
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i. Possible Changes in Taxation
Although the likelihood of legislative change is uncertain, there is always the
possibility that the tax treatment of the Contracts could change by legislation
or other means. For instance, the President's 1999 Budget Proposal recommended
legislation that, if enacted, would adversely modify the federal taxation of the
Contracts. It is also possible that any change could be retroactive (that is,
effective prior to the date of the change). A tax adviser should be consulted
with respect to legislative developments and their effect on the Contract.
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,
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.
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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 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.
Earnings in an IRA are not taxed until distribution. IRA contributions are
limited each year to the lesser of $2,000 or 100% of the participant's adjusted
gross income and may be deductible in whole or in part depending on the
individual's income. The limit on the amount contributed to an IRA does not
apply to distributions from certain other types of qualified plans that are
"rolled over" on a tax-deferred basis into an IRA. Amounts in the IRA (other
than nondeductible contributions) are taxed when distributed from the IRA.
Distributions prior to age 59 1/2 (unless certain exceptions apply) are subject
to a 10% penalty tax.
Simplified Employee Pension (SEP) IRAs
Employers may establish Simplified Employee Pension (SEP) IRAs under Internal
Revenue Code Section 408(k) to provide IRA contributions on behalf of their
employees. In addition to all of the general Code rules governing IRAs, such
plans are subject to certain Internal Revenue Code requirements regarding
participation and amounts of contributions.
SIMPLE IRAs
Beginning January 1, 1997, certain small employers may establish SIMPLE plans as
provided by Section 408(p) of the Internal Revenue Code, under which employees
may elect to defer to a SIMPLE IRA a percentage of compensation up to $6,000 (as
increased for cost of living adjustments). The sponsoring employer is required
to make matching or non-elective contributions on behalf of employees.
Distributions from SIMPLE IRAs are subject to the same restrictions that apply
to IRA distributions and are taxed as ordinary income. Subject to certain
exceptions, premature distributions prior to age 59 1/2 are subject to a 10%
penalty tax, which is increased to 25% if the distribution occurs within the
first two years after the commencement of the employee's participation in the
plan.
Roth IRAs
A Certificate is available for purchase by an individual who has separately
established a Roth IRA custodial account with Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Effective January 1, 1998, Section 408A of the Code permits
certain eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible and must
be made in cash or as a rollover or transfer from another Roth IRA or other IRA.
A rollover from or conversion of an IRA to a Roth IRA may be subject to tax and
other special rules may apply. You should consult a tax adviser before combining
any converted amounts with any other Roth IRA contributions, including any other
conversion amounts from other tax years. Distributions from a Roth IRA generally
are not taxed, except that, once aggregate distributions exceed contributions to
the Roth IRA, income tax and a 10% penalty tax may apply to distributions made
(1) before age 59 1/2 (subject to certain exceptions) or (2) during the five
taxable years starting with the year in which the first contribution is made to
the Roth IRA.
Corporate Pension and Profit Sharing Plans
Section 401(a) of the Internal Revenue Code permits 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. Adverse tax consequences to the plan, to the participant, or to
both may
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result if the Contract is assigned or transferred to any individual as a means
to provide benefit payments. 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 state governments, local governments,
political subdivisions, agencies, instrumentalities and certain affiliates of
such entities, and certain 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 generally 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, and depending on the
terms of the particular plan, the employer may be entitled to draw on deferred
amounts for purposes unrelated to its Section 457 plan obligations. 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. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages. An employer intending to use the Contracts in connection with a
Section 457 plan should seek competent tax and legal advice.
Restrictions under Qualified Contracts
For qualified plans under Sections 401(a), 403(a), 403(b), and 457, the Internal
Revenue Code requires that distributions generally must commence no later than
April 1 of the calendar year following the calendar year in which the
participant (or qualified plan participant)(i) reaches age 70 1/2 or (ii) if
later, retires, and must be made in a specified form or manner. If the qualified
plan participant is a "5 percent owner" (as defined in the Internal Revenue
Code), distributions generally must begin no later than April 1 of the calendar
year following the calendar year in which the participant (or qualified plan
participant) reaches age 70 1/2. For IRAs described in Section 408,
distributions generally must commence no later than April 1 of the calendar year
following the calendar year in which the participant (or qualified plan
participant) reaches age 70 1/2.
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.
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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.
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 is engaged in the sale of life insurance and annuity
products. 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.
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
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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.
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 1997, life insurance and annuity sales were
made in all states Merrill Lynch Life was licensed in, with the largest
concentration in Florida, 16%, California, 11%, and Texas, 10%, as measured by
total contract owner deposits.
Merrill Lynch Life's insurance products are sold primarily by licensed agents
affiliated with MLLA. Insurance sales are 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, 1997, approximately 12,233 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,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Investment Income................. $ 308,702 $ 336,661 $ 376,166 $ 433,536 $ 586,461
Earnings Before Federal Income Tax.... $ 121,179 $ 117,279 $ 118,785 $ 89,883 $ 72,775
Net Earnings.......................... $ 80,735 $ 79,387 $ 76,482 $ 66,005 $ 47,860
Total Assets.......................... $14,053,581 $12,737,493 $12,402,003 $11,604,074 $12,249,577
Stockholder's Equity.................. $ 448,054 $ 489,820 $ 596,837 $ 559,571 $ 687,055
</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, financial
planners and the internet.
During the third quarter 1997, Congress passed the Taxpayer Relief Act of 1997
(the "Act"). Significant provisions of the Act include a reduction in the
long-term capital gains tax rate, a phased-in increase of the estate tax
exemption and the creation of new non-deductible Individual Retirement Accounts.
The effect of this new legislation improves the competitiveness of other
non-insurance products particularly in the individual retirement market;
however, its impact on insurance sales during 1997 was minimal.
Demographically, the population is aging, which favors life insurance and
annuity products. In particular, management anticipates that markets will expand
for estate planning products and annuities, albeit in a more competitive
environment. However, changes in tax laws that are currently being debated by
Congress and the President of the United States may reduce or eliminate the tax
advantages of certain of these products, resulting in either their reduced
marketability or their obsolescence.
Summary
Merrill Lynch Life sells variable and interest-sensitive life insurance and
annuity products through Merrill Lynch's retail network of Financial
Consultants. Merrill Lynch Life competes for Merrill Lynch's clients' life
insurance and annuity business with non-affiliated insurers whose products are
also sold through Merrill Lynch's retail network ("non-proprietary products"),
and with insurers who solicit this business directly. 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
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<PAGE> 27
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 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, 1997:
<TABLE>
<CAPTION>
PREMIUMS COLLECTED % CHANGE
-------------------- -------------------------
1997 1996 1995 1997 - 1996 1996 - 1995
---- ---- ---- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Variable Annuities:
New Premium.................................. $ 948 $407 $359 133% 13%
Internal Tax Free Exchange................... 92 105 137 (12)% (23)%
------ ---- ---- --- ---
1,040 512 496 103% 3%
------ ---- ---- --- ---
Modified Guaranteed Annuities:
New Premium.................................. 21 30 114 (30)% (74)%
Internal Tax Free Exchange................... 11 27 140 (59)% (81)%
------ ---- ---- --- ---
32 57 254 (43)% (78)%
------ ---- ---- --- ---
Variable Life Insurance:
Cash Value Accumulation...................... 74 54 47 37% 15%
Estate Planning.............................. 45 30 22 50% 36%
------ ---- ---- --- ---
119 84 69 42% 22%
------ ---- ---- --- ---
Other............................................. 15 21 25 (29)% (15)%
------ ---- ---- --- ---
Total Premiums.......................... $1,206 $674 $844 79% (20)%
====== ==== ==== === ===
New Premium....................................... $1,103 $542 $567 104% (4)%
Internal Tax Free Exchange........................ 103 132 277 (22)% (52)%
------ ---- ---- --- ---
Total Premiums.......................... $1,206 $674 $844 79% (20)%
====== ==== ==== === ===
</TABLE>
During 1997, Merrill Lynch Life's total sales volume increased significantly.
New premiums for all products increased by 104% as compared to a 4% decline
during 1996. The 1997 increase was attributable to sales of variable life and
annuity products, partially offset by a reduction in new modified guaranteed
annuity premium and the anticipated reduction in internal tax free exchanges of
fixed rate annuity contracts.
Variable annuity sales increased by 133% during 1997 as compared to 1996. This
compares to a 13% increase in variable annuity sales during 1996 as compared to
1995. Management attributes the increase in variable annuity sales to enhanced
sales efforts related to the December 1996 introduction of five new investment
options managed by three unaffiliated investment advisors. A number of these
mutual fund portfolios generally have aggressive growth investment objectives
and complement the underlying portfolios managed by Merrill
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<PAGE> 28
Lynch Asset Management, L.P. ("MLAM"), an indirect subsidiary of Merrill Lynch.
To further complement the existing investment options, Merrill Lynch Life also
introduced an index fund managed by MLAM.
In addition to the new investment options, management believes that the
generally favorable equity markets over the past three years has also
contributed to the increase in sales of the variable annuity products. During
1997, 1996 and 1995, the Standard & Poor's 500 Composite Stock Price Index has
risen 31%, 20% and 34%, respectively.
During 1996, Merrill Lynch began offering to Merrill Lynch Life variable annuity
contract owners an asset allocation service. An investment advisor 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.
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 Merrill Lynch Life received the 1997 DALBAR Annuity Service Award for
its Retirement Plus variable annuity.
During 1997, Merrill Lynch continued offering for sale several non-proprietary
variable annuity products. Merrill Lynch Life's market share of variable annuity
sales within the Merrill Lynch distribution system was 48%, 38% and 53% for
1997, 1996 and 1995, respectively.
Variable life sales as measured by premiums increased 42% during 1997 as
compared to 1996 and 22% during 1996 as compared to 1995. Management attributes
this increase to three factors. The first factor is Merrill Lynch's
planning-based financial management program for individual investors.
Approximately 64% 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. The second factor is the generally
favorable equity markets over the past three years. The third factor is the
addition of the new investment options, described above, which were made
available to variable life contracts during 1997.
Modified guaranteed annuity sales decreased 30% during 1997 as compared to 1996
and 74% during 1996 as compared to 1995. Sales volume of the modified guaranteed
annuity product is reflective of the current interest rate environment and will
generally 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, 1997, were concentrated during the first half of 1995, generally
reflecting higher interest rates during this period.
During the third quarter 1997, Merrill Lynch Life entered into an indemnity
reinsurance agreement with an unaffiliated insurer whereby Merrill Lynch Life
coinsures, on a modified coinsurance basis, 50% of the unaffiliated insurer's
variable annuity premiums sold through the Merrill Lynch distribution system.
The agreement was effective January 1, 1997. Merrill Lynch Life's quota share of
variable annuity premiums related to this agreement was $35 million.
During 1997, Merrill Lynch Life adopted SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 defines comprehensive income as all
non-owner changes in equity during a period. Comprehensive income is reported in
the Statements of Comprehensive Income and is comprised of net earnings, as
reported in the Statement of Net Earnings, and other comprehensive income. Other
comprehensive income is all other non-owner changes in equity excluding net
earnings. Specifically, this includes the period to period change in net
unrealized gains (losses) on investment securities and the related adjustments
to deferred policy acquisition costs, policyholders' liabilities and deferred
income taxes. An explanation of the changes in other comprehensive income for
the years ended 1997 and 1996 is included herein, following the discussion of
Merrill Lynch Life's results of operations.
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<PAGE> 29
Financial Condition
At December 31, 1997, Merrill Lynch Life's assets were $14.1 billion, or $1.4
billion higher than the $12.7 billion in assets at December 31, 1996. The
increase in assets is attributable to increases in separate account assets.
During 1997, separate account assets increased $1.5 billion (or 20%) to $9.1
billion. The increase is attributable to two factors. First, the separate
accounts benefited from strong underlying fund performance associated with the
generally rising equity markets. During 1997, the separate accounts increased
$1.1 billion due to price appreciation in the underlying funds supporting the
variable products. Second, net cash inflow to the variable products contributed
$478 million to the growth in separate account assets. Partially offsetting
these increases was a $10 million repayment of the general account's seed money
investment in the separate account.
General account assets decreased $218 million primarily due to the declining
number of fixed-rate contracts in-force and the $135 million dividend payment to
MLIG.
As a result of significantly increased sales volume during 1997, Merrill Lynch
Life experienced deposits that exceeded contract owner withdrawals. Deposits for
1997 were $1.1 billion compared to withdrawals of $953 million, resulting in a
net cash inflow from contract owner activity of $149 million.
During 1997, Merrill Lynch Life continued to concentrate its marketing emphasis
on the sale of variable products, resulting in the migration of assets from the
general account to the separate accounts. As of December 31, 1997 and 1996,
Merrill Lynch Life's percentage of separate accounts assets to total assets was
65% and 60%, 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 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.................. 67%
Policy Loans................................................ 26%
Non-Investment Grade Fixed Maturity Securities.............. 4%
Equity Securities........................................... 2%
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 $351 million as
of December 31, 1997. At December 31, 1997, approximately 70% 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, 1997
approximately $52 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. CMO
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 CMO and MBS securities will exceed
the yields that can be obtained from similarly rated corporate securities.
During 1997, Merrill Lynch Life foreclosed on one mortgage loan with an
outstanding principal balance of $19 million and a carrying value of $8 million.
The carrying value approximates the fair value of this property. All other
mortgage loans were repaid during 1997. Merrill Lynch Life recorded $6.3 million
of realized investment gains due to the release of all remaining investment
reserves on mortgage loans.
During 1997, Merrill Lynch Life sold two real estate properties with a carrying
value of $4.3 million for a realized loss of $0.6 million. Additionally, the
carrying value of real estate was reduced by $3.6 million to approximate the
fair value of the properties.
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<PAGE> 30
As of December 31, 1997, Merrill Lynch Life had 58,117 life insurance and
annuity contracts in-force with interest rate guarantees. The estimated average
rate of interest credited on behalf of contract owners was 5.06% during 1997.
The liabilities related to insurance contracts with interest rate guarantees
were supported by invested assets with an estimated effective yield of 7.03%
during 1997.
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, 1997 and 1996, Merrill Lynch Life had accrued an
estimated liability for future guaranty fund assessments of $15 million and $19
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, 1997, Merrill Lynch Life's assets included $2.6 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, 1997 and 1996, 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 $135 million, $175 million and $100 million during 1997,
1996 and 1995, 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.
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 Merrill
Lynch Life's financial position in future periods. However, the failure of
Merrill Lynch Life's service providers to resolve their own processing issues in
a timely manner could result in a material financial risk. Merrill Lynch Life is
in the process of confirming that its service providers are adequately
addressing Year 2000 issues. It is not anticipated at this time that contract
owners will experience negative effects on their investment, or on the services
provided in connection therewith, as a result of Year
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<PAGE> 31
2000 transition implementation. However, there cannot be complete assurance of
success, or that interaction with other service providers will not impair
Merrill Lynch Life's services at that time.
Comprehensive Income
Merrill Lynch Life recorded comprehensive income of $93 million and $68 million
for 1997 and 1996, respectively. A discussion of the results of operations and
changes in other comprehensive income follows:
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 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.
1997 compared to 1996
Merrill Lynch Life recorded net earnings of $81 million and $79 million for 1997
and 1996, respectively.
Net investment income and interest credited to policyholders' account balances
for 1997 as compared to 1996 have declined by approximately $28 million and $26
million, respectively, resulting in a $2 million reduction in interest spread.
The reduction in net investment income is 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.
Additionally, during 1997, certain policyholder reserves were determined to be
in excess of amounts required, resulting in a $9 million reduction to interest
credited.
Merrill Lynch Life experienced net realized investment gains of $13 million and
$9 million during 1997 and 1996, respectively. Realized gains on mortgage loans
increased $5.7 million partially offset by a $4.1 million increase in realized
losses on real estate. Also, during 1997, Merrill Lynch Life recognized a $1.0
million gain on the disposition of its seed money investment in the separate
account and $.7 million of gains on trading account securities.
Policy charge revenue increased $20 million (or 13%) during 1997 as compared to
1996. The increase in policy charge revenue is primarily attributable to the
increase in policyholders' variable account balances. Asset based charges
increased $20 million (or 22%) consistent with the growth in the separate
account assets. Non-asset based charges were flat during 1997 as compared to
1996.
Policy benefits increased approximately $6 million during 1997 to $27 million.
This increase was primarily attributable to mortality costs associated with
Merrill Lynch Life's variable life products.
Reinsurance premium ceded increased $2 million to $18 million during 1997. This
increase is attributable to the combined effect of the increasing age of
policyholders and increased insurance in-force resulting from the strong equity
markets.
Amortization of deferred policy acquisition costs increased $10 million during
1997 as compared to 1996. This increase is primarily attributable to revised
future gross profit assumptions associated with management's decision to pay
trail commissions on certain in-force life insurance contracts during the first
quarter 1997.
Insurance expenses and taxes increased $2 million during 1997 as compared to
1996. This is primarily attributable to an increase in non-capitalizable
commission expense paid on in-force life and annuity contracts.
Merrill Lynch Life's effective federal income tax rate increased to 33% for 1997
from 32% for 1996 principally as a result of year to year differences in certain
permanent adjustments.
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<PAGE> 32
Other Comprehensive Income
Merrill Lynch Life recorded other comprehensive income of $12 million during
1997 as compared to an $11 million loss during 1996.
Other comprehensive income is impacted by the change in net unrealized holding
gains (losses) on investment securities and the related adjustments to deferred
policy acquisition costs, policyholders' liabilities and deferred income taxes.
Generally, the most significant factor that impacts net unrealized holding gains
(losses) on investment securities is changes in interest rates. At December 31,
1997, interest rates had decreased by approximately 56 basis points from
December 31, 1996. This compares to the approximately 79 basis point increase in
interest rates from December 31, 1995 to December 31, 1996. Net unrealized
holding gains (losses) have an inverse relationship to changes in interest
rates.
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 1996 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 1996 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 is attributable to the combined effect of the increasing age of
policyholders and increased insurance in-force resulting from the strong equity
markets.
Amortization of deferred policy acquisition costs increased $3 million during
1996 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.
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<PAGE> 33
Other Comprehensive Income
Merrill Lynch Life recorded an $11 million decrease in other comprehensive
income during 1996 as compared to a $61 million increase during 1995.
Other comprehensive income is impacted by the change in net unrealized holding
gains (losses) on investment securities and the related adjustments to deferred
policy acquisition costs, policyholder liabilities and deferred income taxes.
Generally, the most significant factor that impacts net unrealized holding gains
(losses) on investment securities is changes in interest rates. At December 31,
1996, interest rates had increased by approximately 79 basis points from
December 31, 1995. This compares to the approximately 200 basis point decrease
in interest rates from December 31, 1994 to December 31, 1995. Net unrealized
holding gains (losses) have an inverse relationship to changes in interest
rates.
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 1997.
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.
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, 1997, invested assets
supporting Contract guarantees consisted of $3,009 million of fixed maturity
securities, $1,118 million of policy loans, $16 million of trading account
securities, $74 million of equity securities, and $32 million of real estate.
At December 31, 1997, Merrill Lynch Life's assets included $2,584 million of
cash, short-term investments, and investment grade publicly traded fixed
maturity securities supporting Contract guarantees.
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<PAGE> 34
At December 31, 1997, approximately $1,080 million (approximately 36% 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, 1997, approximately $163 million (5.4%) 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 $1.9 million, $2.3 million,
and $2.6 million during the years ended December 31, 1997, 1996, and 1995,
respectively, to MLAM for such services.
Service Agreement
Merrill Lynch Life and MLIG are parties to a service agreement pursuant to which
MLIG has agreed to provide certain data processing, legal, actuarial,
management, advertising and other services to Merrill Lynch Life. Expenses
incurred by MLIG in relation to this service agreement are reimbursed by Merrill
Lynch Life on an allocated cost basis. Charges billed to Merrill Lynch Life by
MLIG pursuant to the agreement were $43.0 million, $44.5 million, and $43.0
million for the years ended December 31, 1997, 1996, and 1995, 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 $72.7 million, $42.6 million, and $44.0 million during the years
ended December 31, 1997, 1996, and 1995, respectively. (See "Distribution of the
Contracts" on page 16.)
I. EMPLOYEES
Merrill Lynch Life has two employees 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.
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<PAGE> 35
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.
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.
34
<PAGE> 36
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 (56)................................ Chairman of the Board, President, and Chief Executive
Officer
Joseph E. Crowne, Jr. (51)........................... Director, Senior Vice President, Chief Financial
Officer, Chief Actuary, and Treasurer
Barry G. Skolnick (46)............................... Director, Senior Vice President, General Counsel, and
Secretary
David M. Dunford (49)................................ Director, Senior Vice President, and Chief Investment
Officer
Gail R. Farkas (46).................................. Director and Senior Vice President
Robert J. Boucher (52)............................... 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.
Mr. Crowne joined Merrill Lynch Life in June 1991.
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.
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.
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.
35
<PAGE> 37
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
ANNUAL COMPENSATION AWARDS(1)
------------------------------ -----------------------
RESTRICTED
STOCK SECURITIES
AWARDS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) (2)(3)(4) OPTIONS COMPENSATION(5)
--------------------------- -------- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 1997 $116,120 $577,546 $149,734 8,710 $21,098
Chairman of the Board, President and Chief 1996 99,165 411,012 113,257 5,535 13,962
Executive Officer 1995 65,184 293,220 65,160 5,079 8,458
Joseph E. Crowne 1997 110,295 202,208 35,846 699 6,622
Senior Vice President, Chief Actuary and 1996 114,480 202,248 34,344 561 3,504
Chief Financial Officer 1995 113,100 165,503 28,275 735 5,468
David M. Dunford 1997 161,525 251,056 63,687 1,237 9,697
Senior Vice President, Chief Investment 1996 161,875 211,825 50,436 823 7,758
Officer 1995 163,275 167,940 38,486 998 6,301
Robert J. Boucher 1997 70,950 164,604 38,313 744 7,667
Senior Vice President, Variable Life 1996 118,625 266,669 60,997 992 7,959
Administration 1995 117,750 211,850 42,390 1,102 6,361
Barry G. Skolnick 1997 115,889 169,970 57,944 1,124 10,436
Senior Vice President, General Counsel 1996 91,414 137,122 44,075 718 6,976
1995 88,270 115,430 45,832 1,188 5,775
</TABLE>
- ---------------
(1) Awards were made in January or February of the succeeding fiscal year for
performance in the year indicated.
(2) Awards were split equally between Restricted Shares and Restricted Units.
All awards have been valued for this table using closing prices of Common
Stock of Merrill Lynch on the Consolidated Transaction Reporting System on
the dates of grant of such awards; the closing price on the last trading
day prior to February 1, 1998, the effective date of the grant for
performance in 1997, was $63.25. All Restricted Shares and Restricted Units
vest three years following grant and the Restricted Shares are restricted
from transferability for an additional two years after vesting. Restricted
Shares are shares of Merrill Lynch Common Stock that convey to the holder
all the rights of a stockholder except that they are restricted from being
sold, transferred, or assigned for a period of time after they are granted.
Restricted Units are similar to Restricted Shares but are payable in cash
at the end of the three year vesting period and do not convey voting
rights.
(3) During the applicable vesting and/or 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 26, 1997 are as
follows: Mr. Vespa (4,016 shares and 4,015 units--$544,092); Mr. Crowne
(1,907 shares and 1,905 units--$258,275); Mr. Dunford (2,345 shares and
2,343 units--$317,668); Mr. Boucher (2,710 shares and 2,708
units--$367,090); and Mr. Skolnick (2,984 shares and 2,982
units--$404,200). These amounts do not include Restricted Shares and
Restricted Units awarded in 1998 for performance in fiscal year 1997.
(5) Amounts shown for 1997 consist of the following: (i) contributions made in
1997 by Merrill Lynch Life to accounts of employees under the Merrill Lynch
401(k) Savings and Investment Plan (including, where applicable, cash
payments made because of limitations imposed by the Internal Revenue
Code)--Mr. Vespa ($917), Mr. Dunford ($1,385), Mr. Boucher ($851) and Mr.
Skolnick ($1,159); and (ii) allocations made in 1997 by Merrill Lynch Life
to accounts of employees under the defined
36
<PAGE> 38
contribution retirement program--Mr. Vespa ($20,181), Mr. Crowne ($6,622),
Mr. Dunford ($8,313), Mr. Boucher ($6,816) and Mr. Skolnick ($9,277).
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
FISCAL OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME YEAR(1) GRANTED FISCAL YEAR ($ PER SHARE) DATE(2) VALUE(3)
---- ------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa............... 1997 8,710 .08% $62.00 1/26/2008 $174,378
Joseph E. Crowne............... 1997 699 .01% 62.00 1/26/2008 13,994
David M. Dunford............... 1997 1,237 .01% 62.00 1/26/2008 24,765
Robert J. Boucher.............. 1997 744 .01% 62.00 1/26/2008 14,895
Barry G. Skolnick.............. 1997 1,124 .01% 62.00 1/26/2008 22,503
</TABLE>
- ---------------
(1) Includes awards made in January 1998 for performance in 1997. Awards made in
January 1997 for performance in 1996 are excluded, which awards were
reflected in Merrill Lynch Life's Prospectus for the Contracts dated May 1,
1997.
(2) All Stock 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 Stock Option ($62.00) 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 26, 1998, the date of grant. The
assumptions used for the variables in the model were: 28.03% volatility
(which is the volatility of the Merrill Lynch Common Stock for the 36 months
preceding grant); a 5.81% 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 2008, as quoted in The Wall Street Journal); a 1.29% 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 stock options. The actual gain that executives
will realize on their Stock 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.
37
<PAGE> 39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------ -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa.......... 0 $ 0 7,477 24,640 $355,315 $902,556
Joseph E. Crowne.......... 0 0 2,326 4,052 113,058 164,640
David M. Dunford.......... 16,905 908,768 3,606 5,180 171,795 204,720
Robert J. Boucher......... 2,703 108,873 0 5,855 0 229,368
Barry G. Skolnick......... 0 0 12,029 6,206 604,293 257,577
</TABLE>
- ---------------
(1) This valuation represents the difference between $67.75, the closing price
on December 26, 1997 on the Consolidated Transaction Reporting System of a
share of Merrill Lynch Common Stock, and the exercise price of these Stock
Options.
(2) This valuation represents the difference between the average of the high and
low price on the Consolidated Transaction Reporting System on the date of
exercise of a share of Merrill Lynch Common Stock, and the exercise prices
of the Stock 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 LLP 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, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 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.
38
<PAGE> 40
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, 1997 and 1996, and the related statements of
earnings, comprehensive income, stockholder's equity, and cash
flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted
accounting principles.
February 23, 1998
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1997 - $2,927,562; 1996 - $3,232,643) $ 3,008,608 $ 3,301,588
Equity securities, at estimated fair value
(cost: 1997 - $72,599; 1996 - $32,988) 73,612 35,977
Trading account securities, at estimated fair value 15,625 -
Mortgage loans - 70,503
Real estate held-for-sale 31,805 28,851
Policy loans on insurance contracts 1,118,139 1,092,071
-------------- --------------
Total Investments 4,247,789 4,528,990
-------------- --------------
CASH AND CASH EQUIVALENTS 86,388 94,991
ACCRUED INVESTMENT INCOME 78,224 86,186
DEFERRED POLICY ACQUISITION COSTS 365,105 366,461
REINSURANCE RECEIVABLES 1,617 2,642
AFFILIATED RECEIVABLES - NET 166 -
RECEIVABLES FROM SECURITIES SOLD 75,820 -
OTHER ASSETS 49,353 42,861
SEPARATE ACCOUNTS ASSETS 9,149,119 7,615,362
-------------- --------------
TOTAL ASSETS $ 14,053,581 $ 12,737,493
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,188,110 $ 4,480,048
Claims and claims settlement expenses 50,574 39,666
-------------- --------------
Total policy liabilities and accruals 4,238,684 4,519,714
OTHER POLICYHOLDER FUNDS 27,160 19,420
LIABILITY FOR GUARANTY FUND ASSESSMENTS 15,374 18,773
FEDERAL INCOME TAXES - DEFERRED 1,183 6,714
FEDERAL INCOME TAXES - CURRENT 24,438 20,968
AFFILIATED PAYABLES - NET - 6,164
PAYABLES FOR SECURITIES PURCHASED 95,135 13,483
OTHER LIABILITIES 54,434 37,243
SEPARATE ACCOUNTS LIABILITIES 9,149,119 7,605,194
-------------- --------------
Total Liabilities 13,605,527 12,247,673
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 402,937
Retained earnings 80,735 79,387
Accumulated other comprehensive income 17,995 5,496
-------------- --------------
Total Stockholder's Equity 448,054 489,820
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,053,581 $ 12,737,493
============== ==============
</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, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 308,702 $ 336,661 $ 376,166
Net realized investment gains 13,289 8,862 4,525
Policy charge revenue 178,933 158,829 141,722
-------------- -------------- --------------
Total Revenues 500,924 504,352 522,413
-------------- -------------- --------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 209,542 235,255 261,760
Market value adjustment expense 4,079 6,071 5,805
Policy benefits (net of reinsurance recoveries: 1997 - $10,439;
1996 - $8,317; 1995 - $6,482) 27,029 21,052 19,374
Reinsurance premium ceded 17,879 15,582 13,896
Amortization of deferred policy acquisition costs 72,111 62,036 58,669
Insurance expenses and taxes 49,105 47,077 44,124
------------- -------------- --------------
Total Benefits and Expenses 379,745 387,073 403,628
------------- -------------- --------------
Earnings Before Federal Income Tax Provision 121,179 117,279 118,785
------------- -------------- --------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 52,705 22,814 38,335
Deferred (12,261) 15,078 3,968
-------------- -------------- --------------
Total Federal Income Tax Provision 40,444 37,892 42,303
-------------- -------------- --------------
NET EARNINGS $ 80,735 $ 79,387 $ 76,482
============== ============== ==============
</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
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NET EARNINGS $ 80,735 $ 79,387 $ 76,482
-------------- -------------- --------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period 22,347 (79,749) 310,981
Reclassification adjustment for gains included in net earnings (12,390) (8,622) (4,351)
-------------- -------------- --------------
Net unrealized gains (losses) on investment securities 9,957 (88,371) 306,630
Adjustments for:
Policyholder liabilities 10,094 58,415 (123,856)
Deferred policy acquisition costs (822) 12,411 (89,261)
Income tax (expense) benefit related to items of
other comprehensive income (6,730) 6,141 (32,729)
-------------- -------------- --------------
Other comprehensive income, net of tax 12,499 (11,404) 60,784
-------------- -------------- --------------
COMPREHENSIVE INCOME $ 93,234 $ 67,983 $ 137,266
============== ============== ==============
</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, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common paid-in Retained Comprehensive stockholder's
stock capital earnings Income equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 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
Other comprehensive income, net of tax 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
Other comprehensive income, net of tax (11,404) (11,404)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 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
============= ============= ============= ============= =============
</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, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 80,735 $ 79,387 $ 76,482
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 72,111 62,036 58,669
Capitalization of policy acquisition costs (71,577) (43,668) (54,014)
Amortization, (accretion) and depreciation of investments (4,672) (4,836) (6,763)
Net realized investment gains (13,289) (8,862) (4,525)
Interest credited to policyholders' account balances 209,542 235,255 261,760
Provision (benefit) for deferred Federal income tax (12,261) 15,078 3,968
Changes in operating assets and liabilities:
Accrued investment income 7,962 5,756 3,191
Claims and claims settlement expenses 10,908 9,854 3,635
Federal income taxes - current 3,470 13,935 4,759
Other policyholder funds 7,740 5,813 (7,614)
Liability for guaranty fund assessments (3,399) (2,371) (3,630)
Affiliated payables (6,330) 3,735 5,542
Policy loans on insurance contracts (26,068) (52,804) (54,054)
Trading account securities (14,928) - -
Other, net 11,721 (2,393) (12,280)
-------------- -------------- --------------
Net cash and cash equivalents provided
by operating activities 251,665 315,915 275,126
-------------- -------------- ---------------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 846,041 847,091 620,853
Maturities of available-for-sale securities 595,745 536,449 570,923
Purchases of available-for-sale securities (1,156,222) (956,840) (816,564)
Mortgage loans principal payments received 68,864 22,789 30,767
Purchases of mortgage loans (5,375) - (3,608)
Sales of real estate held-for-sale 6,060 5,407 9,710
Improvements to real estate held-for-sale - - (683)
Recapture of investment in Separate Accounts 11,026 8,829 6,559
Investment in Separate Accounts (21) (10,063) (377)
-------------- -------------- ---------------
Net cash and cash equivalents provided
by investing activities 366,118 453,662 417,580
-------------- -------------- ---------------
</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
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Concluded) (Dollars In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ (135,000) $ (175,000) $ (100,000)
Policyholders' account balances:
Deposits 1,101,934 542,062 567,430
Withdrawals (including transfers to/from Separate Accounts) (1,593,320) (1,090,572) (1,250,299)
-------------- -------------- --------------
Net cash and cash equivalents used
by financing activities (626,386) (723,510) (782,869)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (8,603) 46,067 (90,163)
CASH AND CASH EQUIVALENTS
Beginning of year 94,991 48,924 139,087
-------------- ------------- -------------
End of year $ 86,388 $ 94,991 $ 48,924
============== ============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal Federal iincome taxes $ 49,235 $ 8,880 $ 33,576
Interest 842 988 1,310
</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 variable life
insurance, variable annuities, market value adjusted annuities,
and immediate 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
broker-dealer 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% - 5.70%
Interest-sensitive deferred annuities 3.55% - 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
as of the valuation date.
Reinsurance: In the normal course of business, the Company seeks
to limit its exposure to loss on any single insured life and to
recover a portion of benefits paid by ceding reinsurance to
other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
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 $635 that can be drawn upon for
delinquent reinsurance recoverables.
As of December 31, 1997, the Company had life insurance inforce
that was ceded to other life insurance companies of $2,879,306.
The Company entered into an indemnity reinsurance agreement with
an unaffiliated insurer whereby the Company coinsures, on a
modified coinsurance basis, 50% of the unaffiliated insurer's
variable annuity premiums sold through the Merrill Lynch & Co.
distribution system. At December 31, 1997, the Company's quota
share of variable annuity premiums related to this agreement was
$35 million.
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 are 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:
1997 1996 1995
------------ ------------ ------------
Beginning balance $ 112,249 $ 124,833 $ 133,388
Capitalized amounts 5,077 5,077 13,708
Interest accrued 9,653 10,669 11,620
Amortization (24,727) (28,330) (33,883)
------------ ------------ ------------
Ending balance $ 102,252 $ 112,249 $ 124,833
============ ============ ============
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.
1998 11,030
1999 9,927
2000 8,935
2001 8,041
2002 7,237
Investments: The Company's investments in debt and equity securities
are classified as either available-for-sale or trading and are
reported at estimated fair value. Unrealized gains and losses on
available-for-sale securities are included in stockholder's equity,
net of tax. Unrealized gains and losses on trading account
securities are included in net realized investment gains. 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 as net realized
investment gains (losses).
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 specific identification.
Certain fixed maturity securities are considered non-investment
grade. The Company defines non-investment grade fixed maturity
securities as unsecured debt obligations that do not have a
rating equivalent to Standard and Poor's (or similar rating
agency) BBB- or higher.
During the first quarter 1997, the Company terminated its
interest rate swap contracts that were carried at estimated fair
value and recorded as a component of fixed maturity securities.
Interest income and realized and unrealized gains and losses
were recorded on the same basis as fixed maturity securities
available-for-sale.
As of December 31, 1997, the Company had no mortgage loans
outstanding. Mortgage loans were stated at unpaid principal
balances, net of valuation allowances. Such valuation allowances
were 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 considered, among
other things, the estimated fair value of the underlying collateral.
The Company recognized 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 recognized a realized
gain at the date of the satisfaction of the loan at contractual
terms for loans where there was a difference between the cash
payment interest rate and the accrual interest rate. For all
loans the Company stopped accruing income when an interest
payment default either occurred or was probable. Impairments of
mortgage loans were established as valuation allowances and
recorded to net realized investment gains or losses.
Real estate held-for-sale, is stated at estimated fair value
less estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Investments in limited partnerships are carried at cost.
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 Comprehensive Income: During 1997, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 defines comprehensive income as all non-
owner changes in equity during a period. Comprehensive
income is reported in the Statements of Comprehensive Income
included in the financial statements for the years ended
December 31, 1997, 1996 and 1995.
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 fair value. The carrying value of financial
instruments as of December 31 were:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities:
Securities (1) $ 3,008,608 $ 3,301,858
Interest rate swaps (2) - (270)
-------------- -------------
Total fixed maturity securities 3,008,608 3,301,588
-------------- -------------
Equity securities (1) 73,612 35,977
Trading account securities (1) 15,625 -
Mortgage loans (3) - 70,503
Policy loans on insurance contracts (4) 1,118,139 1,092,071
Cash and cash equivalents (5) 86,388 94,991
Separate Accounts assets (6) 9,149,119 7,615,362
-------------- --------------
Total financial instruments recorded as assets $ 13,451,491 $ 12,210,492
============== ==============
</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, 1997 and 1996, securities without a readily
ascertainable market value, having an amortized cost of
$389,728 and $338,515, had an estimated fair value of
$396,253 and $348,066, 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.
(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 (excluding
trading account securities) as of December 31 were:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,412,171 $ 73,318 $ 6,963 $ 2,478,526
Mortgage-backed securities 339,015 12,320 224 351,111
U.S. Government and agencies 119,107 2,767 111 121,763
Foreign governments 36,585 198 1,125 35,658
Municipals 20,684 866 - 21,550
------------- ------------- ------------- -------------
Total fixed maturity securities $ 2,927,562 $ 89,469 $ 8,423 $ 3,008,608
============= ============= ============= =============
Equity securities:
Non-redeemable preferred stocks $ 67,845 $ 1,187 $ 185 $ 68,847
Common stocks 4,754 11 - 4,765
------------- ------------- ------------- -------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============= ============= ============= =============
1996
-------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
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
============= ============= ============= =============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------- --------------
Fixed maturity securities:
Due in one year or less $ 224,663 $ 225,887
Due after one year through five years 1,343,383 1,380,248
Due after five years through ten years 740,784 764,272
Due after ten years 279,717 287,090
------------- --------------
2,588,547 2,657,497
Mortgage-backed securities 339,015 351,111
------------- --------------
Total fixed maturity securities $ 2,927,562 $ 3,008,608
============= ==============
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, 1997 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------- -------------
AAA $ 623,503 $ 642,188
AA 169,805 172,454
A 926,398 950,610
BBB 1,046,614 1,080,036
Non-investment grade 161,242 163,320
------------- -------------
Total fixed maturity securities $ 2,927,562 $ 3,008,608
============= =============
<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>
1997 1996
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities $ 81,046 $ 68,945
Equity securities 1,013 2,989
Deferred policy acquisition costs (5,452) (4,630)
Separate Accounts assets - 168
-------------- --------------
76,607 67,472
-------------- --------------
Liabilities:
Policyholders' account balances 48,923 59,017
Federal income taxes - deferred 9,689 2,959
-------------- --------------
58,612 61,976
-------------- --------------
Stockholder's equity:
Net unrealized investment gain on investment securities $ 17,995 $ 5,496
============== ==============
</TABLE>
During the third quarter 1997, the Company provided $15,000
initial funding for a trading portfolio, composed of
convertible debt and equity securities. The net unrealized
holdings gains on trading account securities earned as of
December 31, 1997, and included in net realized investment gains
are $520.
During the first quarter 1997, the Company terminated its
interest rate swap contracts which it held 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 was
approximately $9,000. The swaps were transacted with
investment grade counterparties. As of December 31, 1996, the
Company's interest rate swap contracts were in a $270
unrealized loss position. During 1997, 1996
and 1995, there were no realized investment gains or losses
recorded.
<PAGE>
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1997 1996 1995
----------- ----------- -----------
Proceeds $ 846,041 $ 847,091 $ 620,853
Gross realized investment gains 16,783 19,078 14,196
Gross realized investment losses 7,193 10,749 10,813
The Company had investment securities with a carrying value
of $26,508 and $27,726 that were deposited with insurance
regulatory authorities at December 31, 1997 and 1996,
respectively.
During 1997, the Company realized a $1,005 gain on the sale of
its remaining investment in the Separate Accounts. At December
31, 1996, the Company had invested $10,168 in Separate Accounts,
including $168 of unrealized gains. 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.
At December 31, 1997, the Company held no mortgage loans on real
estate. The carrying value and established valuation allowances
of impaired mortgage loans on real estate as of December 31,
1996 were $44,239 and $17,652, respectively.
Additional information on impaired loans for the years ended
December 31 follows:
1997 1996 1995
----------- ----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668 $ 124,089
Interest income recognized (cash-basis) 2,830 4,848 5,482
For the years ended December 31, 1997, 1996 and 1995, $7,891,
$28,555 and $1,300, 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>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity securities $ 236,325 $ 266,916 $ 305,648
Equity securities 3,020 1,876 1,329
Mortgage loans 4,627 9,764 12,250
Real estate held-for-sale 1,939 563 153
Policy loans on insurance contracts 57,998 56,512 53,576
Cash and cash equivalents 9,570 6,710 8,463
Other 709 899 1,753
------------ ------------ ------------
Gross investment income 314,188 343,240 383,172
Less investment expenses (5,486) (6,579) (7,006)
------------ ------------ ------------
Net investment income $ 308,702 $ 336,661 $ 376,166
============ ============ ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity securities $ 6,149 $ 4,690 $ 1,908
Equity securities 3,441 3,639 1,475
Trading account securities 697 - -
Investment in Separate Accounts 1,005 106 (369)
Mortgage loans 6,252 599 334
Real estate held-for-sale (4,252) (171) 1,177
Cash and cash equivalents (3) (1) -
------------ ------------ ------------
Net realized investment gains $ 13,289 $ 8,862 $ 4,525
============ ============ ============
</TABLE>
<PAGE>
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
for the years ended December 31:
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ------------ ----------- -----------
Mortgage loans:
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
1995 40,070 - 4,189 35,881
The Company held no investments at December 31, 1997 which have
been non-income producing for the preceding twelve months.
The Company has committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1997, $4,744 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 42,413 $ 41,048 $ 41,575
Increase (decrease) in income taxes resulting
from:
Dividend received deduction (1,969) (3,135) (532)
Release of policyholders' surplus - - 1,991
Tax deductible interest - - (718)
Other - (21) (13)
---------- ---------- ----------
Federal income tax provision $ 40,444 $ 37,892 $ 42,303
========== ========== ==========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1997 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>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (2,422) $ (5,770) $ (2,179)
Policyholders' account balances (16,099) 15,004 66
Liability for guaranty fund assessments 1,190 760 249
Investment adjustments 5,070 5,122 5,563
Other - (38) 269
-------------- -------------- --------------
Deferred Federal income tax
provision (benefit) $ (12,261) $ 15,078 $ 3,968
============== ============== ==============
</TABLE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 95,182 $ 79,083
Investment adjustments 601 5,671
Liability for guaranty fund assessments 5,381 6,571
-------------- --------------
Total deferred tax assets 101,164 91,325
-------------- --------------
Deferred tax liabilities:
Deferred policy acquisition costs 88,670 91,092
Net unrealized investment gain on investment securities 9,689 2,959
Other 3,988 3,988
-------------- --------------
Total deferred tax liabilities 102,347 98,039
-------------- --------------
Net deferred tax liability $ 1,183 $ 6,714
================ ==============
</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 $43,028, $43,515 and $41,729 for the years
ended December 31, 1997, 1996 and 1995, 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 $842, $988 and $1,310 for 1997,
1996 and 1995, 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
$1,913, $2,279 and $2,635 for 1997, 1996 and 1995,
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 $19,057, $16,514 and $13,293 during 1997, 1996 and
1995, 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 $72,729, $42,639 and $43,984 for
1997, 1996 and 1995, 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.
During the first quarter 1997, the Company terminated its
interest rate swap contracts which it entered into with Merrill
Lynch Capital Services, Inc. ("MLCS") with a guarantee from
Merrill Lynch & Co. At December 31, 1996, the notional amount
of such interest rate swap contracts outstanding was $9,000.
Net interest received from these interest rate swap contracts
was $4, ($117), and $256 for 1997, 1996 and 1995, respectively.
Affiliated agreements generally contain reciprocal indemnity
provisions pertaining to each party's representations and
contractual obligations thereunder.
During 1997, the Company sold its investment in 2141 E.
Camelback, Corp. to Merrill Lynch Mortgage Capital, Inc. The
investment was sold at its carrying value of $5,375.
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1997, 1996, and 1995 the Company paid dividends of
$135,000, $175,000, and $100,000, respectively, to MLIG. Of
these stockholder's dividends, $110,030, $175,000 and $73,757,
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, 1997 and 1996, approximately $24,304 and
$24,970, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1997 and 1996, was $245,042 and $251,697,
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 1997, 1996 and 1995 was
$81,963, $93,532 and $121,451, 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, 1997 and 1996, based on the
RBC formula, the Company's total adjusted capital level was
394% and 403%, 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,
1997 and 1996, the Company has established an estimated
liability for future guaranty fund assessments of $15,374 and
$18,773, respectively. The Company regularly monitors public
information regarding insurer insolvencies and 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>
<PAGE> 41
NOTE 8. LIFE INSURANCE IN FORCE
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance in force................ 10,568,021 2,879,306 1,843,104 9,531,819 19%
</TABLE>
G-22
<PAGE> 42
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 5.3%. 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 3.3%, 5.3% and 7.3% 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
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------
3.30% 5.30% 7.30%
- -----------------------------------------------------------------------------------------------------------------------------------
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 10,530 1,923 321 12,132 0 272 10,258 (1,604) 230 8,695
2 11,088 1,783 332 12,539 0 286 10,802 (1,515) 247 9,326
3 11,676 1,628 343 12,960 0 301 11,374 (1,408) 265 10,003
4 12,295 1,456 355 13,395 0 317 11,977 (1,282) 284 10,728
5 12,946 1,266 367 13,845 0 334 12,612 (1,135) 305 11,506
6 13,632 1,057 379 14,310 0 352 13,280 (965) 327 12,341
7 14,355 827 392 14,790 0 371 13,984 (769) 351 13,236
8 15,116 575 405 15,286 0 390 14,725 (544) 376 14,195
9 15,917 300 419 15,798 0 411 15,506 (289) 403 15,224
10 16,760 0 0 16,760 0 0 16,760 0 0 16,760
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------
3.00% 5.00% 7.00%
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET NET MARKET NET MARKET NET
END OF SUB- VALUE WITH- SUB- VALUE WITH- SUB- VALUE WITH- SUB-
CERTIFICATE ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT
YEAR VALUE MENT CHARGE VALUE MENT CHARGE VALUE MENT CHARGE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 818 276 11,041 -0- 256 10,244 (746) 238 9,516
2 11,025 638 284 11,378 -0- 269 10,756 (593) 254 10,178
3 11,576 442 293 11,726 -0- 282 11,294 (419) 272 10,885
4 12,155 230 302 12,083 -0- 296 11,859 (222) 291 11,642
5 12,763 -0- -0- 12,763 -0- -0- 12,763 -0- -0- 12,763
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 43
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 n/365
(1) Net Subaccount Value = ( ------------------------ ) + ( ---------------------------- )
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 n/365
(3) Market Value Adjustment = Net Subaccount Value X [ 1 - ( ----------------------------- ) ]
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> 44
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
<PAGE> 45
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> 46
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> 47
<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> 48
<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
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 2 to Form S-1 Registration No. 33-58303, Filed
March 27, 1997.)
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> 49
<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> 50
<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 LLP
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.)
</TABLE>
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
None.
</TABLE>
II-6
<PAGE> 51
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> 52
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 30th day of March, 1998.
<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 30th day of March, 1998.
<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 Treasurer
Joseph E. Crowne, Jr.
* 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
------------------------------------------------ Attorney-in-Fact
Barry G. Skolnick
</TABLE>
II-8
<PAGE> 53
EXHIBIT INDEX
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
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 LLP ........
23(b) Written Consent of Deloitte & Touche LLP, independent
auditors....................................................
</TABLE>
<PAGE> 1
EXHIBIT 5
March 30, 1998
Board of Directors
Merrill Lynch Life Insurance Company
320 West Capitol Avenue
Little Rock, Arkansas 72201
Ladies and Gentlemen:
In my capacity as General Counsel of Merrill Lynch Life Insurance Company
("Company"), I have supervised the preparation of Post-Effective Amendment No. 3
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; and
(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 LLP
CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading "Legal Matters" in the
prospectus included in Post-Effective Amendment No. 3 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 LLP
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, D.C.
March 30, 1998
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 3 to Registration
Statement No. 33-58303 of Merrill Lynch Life Insurance Company on Form S-1 of
our report dated February 23, 1998 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 30, 1998
