<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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<PAGE> 2
PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1999 - $2,326,647; 1998 - $2,504,599) $ 2,265,731 $ 2,543,097
Equity securities, at estimated fair value
(cost: 1999 - $206,630; 1998 - $162,710) 192,732 158,591
Trading account securities, at estimated fair value 17,882 17,280
Real estate held-for-sale 20,072 25,960
Policy loans on insurance contracts 1,149,277 1,139,456
------------- -------------
Total Investments 3,645,694 3,884,384
CASH AND CASH EQUIVALENTS 181,840 95,377
ACCRUED INVESTMENT INCOME 76,965 73,459
DEFERRED POLICY ACQUISITION COSTS 453,079 405,640
FEDERAL INCOME TAXES - DEFERRED 32,108 9,403
REINSURANCE RECEIVABLES 2,976 2,893
AFFILIATED RECEIVABLES - NET 260 -
RECEIVABLES FROM SECURITIES SOLD 1,789 14,938
OTHER ASSETS 43,559 46,512
SEPARATE ACCOUNTS ASSETS 11,247,038 10,571,489
------------- -------------
TOTAL ASSETS $ 15,685,308 $ 15,104,095
============= =============
</TABLE>
See notes to finanical statements. (continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Continued) (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,655,426 $ 3,816,744
Claims and claims settlement expenses 81,658 63,925
------------- -------------
Total policyholder liabilities and accruals 3,737,084 3,880,669
OTHER POLICYHOLDER FUNDS 18,950 20,802
LIABILITY FOR GUARANTY FUND ASSESSMENTS 15,083 13,864
FEDERAL INCOME TAXES - CURRENT 14,311 15,840
AFFILIATED PAYABLES - NET - 822
PAYABLE FOR SECURITIES PURCHASED 21,555 10,541
UNEARNED POLICY CHARGE REVENUE 72,410 55,235
OTHER LIABILITIES 14,664 24,273
SEPARATE ACCOUNTS LIABILITIES 11,238,326 10,559,459
------------- -------------
Total Liabilities 15,132,383 14,581,505
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 250,000 shares
authorized, issued and outstanding 2,500 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 240,496 173,496
Accumulated other comprehensive loss (37,395) (230)
------------- -------------
Total Stockholder's Equity 552,925 522,590
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,685,308 $ 15,104,095
============= =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 192,173 $ 205,466
Net realized investment gains 5,310 10,694
Policy charge revenue 168,541 152,655
------------- -------------
Total Revenues 366,024 368,815
------------- -------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 131,977 148,885
Market value adjustment expense 2,077 4,381
Policy benefits (net of reinsurance recoveries: 1999 - $10,613
1998 - $7,706) 24,334 23,326
Reinsurance premium ceded 16,118 14,957
Amortization of deferred policy acquisition costs 47,741 54,046
Insurance expenses and taxes 39,931 38,648
------------- -------------
Total Benefits and Expenses 262,178 284,243
------------- -------------
Earnings Before Federal Income Tax Provision 103,846 84,572
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 39,039 27,695
Deferred (2,693) (1,713)
------------- -------------
Total Federal Income Tax Provision 36,346 25,982
------------- -------------
NET EARNINGS $ 67,500 $ 58,590
============= =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 62,011 $ 66,057
Net realized investment gains (losses) 171 (2,606)
Policy charge revenue 58,713 51,994
------------- -------------
Total Revenues 120,895 115,445
------------- -------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 43,126 48,568
Market value adjustment expense 385 1,462
Policy benefits (net of reinsurance recoveries: 1999 - $3,203
1998 - $2,647) 8,254 7,888
Reinsurance premium ceded 5,383 5,102
Amortization of deferred policy acquisition costs 16,508 18,831
Insurance expenses and taxes 14,063 13,838
------------- -------------
Total Benefits and Expenses 87,719 95,689
------------- -------------
Earnings Before Federal Income Tax Provision 33,176 19,756
FEDERAL INCOME TAX PROVISION:
Current 11,310 4,711
Deferred 301 2,048
------------- -------------
Total Federal Income Tax Provision 11,611 6,759
------------- -------------
NET EARNINGS $ 21,565 $ 12,997
============= =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
NET EARNINGS $ 67,500 $ 58,590
OTHER COMPREHENSIVE LOSS:
Net unrealized losses on investment securities:
Net unrealized holding losses arising during the period (103,706) (722)
Reclassification adjustment for gains included in net earnings (5,481) (11,297)
------------- -------------
Net unrealized losses on investment securities (109,187) (12,019)
Adjustments for:
Policyholder liabilities 23,049 (2,684)
Deferred policy acquisition costs 28,962 (2,109)
Deferred federal income taxes 20,011 5,884
------------- -------------
Total other comprehensive loss (37,165) (10,928)
------------- -------------
COMPREHENSIVE INCOME $ 30,335 $ 47,662
============= =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
NET EARNINGS $ 21,565 $ 12,997
OTHER COMPREHENSIVE LOSS:
Net unrealized gains (losses) on investment securities:
Net unrealized holding losses arising during the period (28,887) (565)
Reclassification adjustment for (gains) losses included in net (144) 1,911
earnings ------------- -------------
Net unrealized gains (losses) on investment securities (29,031) 1,346
Adjustments for:
Policyholder liabilities (1,064) (7,607)
Deferred policy acquisition costs 9,542 (1,701)
Deferred federal income taxes 7,193 2,787
------------- -------------
Total other comprehensive loss (13,360) (5,175)
------------- -------------
COMPREHENSIVE INCOME $ 8,205 $ 7,822
============= =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive Stockholder's
stock capital earnings income (loss) equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 2,000 $ 347,324 $ 80,735 $ 17,995 $ 448,054
Net earnings 92,761 92,761
Other comprehensive loss, net of tax (18,225) (18,225)
----------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1998 2,000 347,324 173,496 (230) 522,590
Net earnings 67,500 67,500
Stock dividend paid to parent 500 (500) -
Other comprehensive loss, net of tax (37,165) (37,165)
----------- ----------- ----------- ------------- -------------
BALANCE, SEPTEMBER 30, 1999 $ 2,500 $ 347,324 $ 240,496 $ (37,395) $ 552,925
=========== =========== =========== ============= =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 67,500 $ 58,590
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 47,741 54,046
Capitalization of policy acquisition costs (66,218) (59,342)
Amortization (accretion) of investments (1,277) (5,576)
Interest credited to policyholders' account balances 131,977 148,885
Benefit for deferred Federal income tax (2,693) (1,713)
(Increase) decrease in operating assets:
Trading account securities (286) (240)
Accrued investment income (3,506) (1,806)
Affiliated receivables (260) 166
Other 2,865 4,431
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 17,733 14,627
Other policyholder funds (1,852) (7,672)
Liability for guaranty fund assessments 1,219 (1,017)
Federal income taxes - current (1,529) (16,727)
Affiliated payables (822) 2,352
Unearned policy charge revenue 17,175 11,547
Other (9,609) 8,997
Other operating activities:
Net realized investment gains (excluding gains on cash and
cash equivalents) (5,327) (10,694)
Policy loans on insurance contracts (9,821) (9,021)
------------- -------------
Net cash and cash equivalents provided by operating activities 183,010 189,833
------------- -------------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 509,012 692,002
Maturities of available-for-sale securities 306,155 358,204
Purchases of available-for-sale securities (658,442) (796,682)
Sales of real estate held-for-sale 13,282 10,862
Recapture of investments in separate accounts 9,018 -
Investment in separate accounts (5,326) (12,000)
------------- -------------
Net cash and cash equivalents provided by investing activities $ 173,699 $ 252,386
------------- -------------
</TABLE>
See notes to financial statements. (continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits $ 873,698 $ 812,094
Policyholder withdrawals (including transfers to/from separate (1,143,944) (1,257,651)
accounts) ------------- -------------
Net cash and cash equivalents used by financing activities (270,246) (445,557)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 86,463 (3,338)
CASH AND CASH EQUIVALENTS:
Beginning of year 95,377 86,388
------------- -------------
End of period $ 181,840 $ 83,050
============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 40,569 $ 44,422
Intercompany interest 455 705
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The interim financial statements for the three and nine month
periods are unaudited. In the opinion of management, these
unaudited financial statements include all adjustments
(consisting only of normal recurring accruals) necessary for a
fair presentation of the financial position and the results of
operations in accordance with generally accepted acounting
principles. These unaudited financial statements should be read
in conjunction with the audited financial statements included in
the Company's Annual Report on Form 10-K ("1998 10K")
for the year ended December 31, 1998. The nature of the
Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year.
Certain reclassifications have also been made to prior period
financial statements, where appropriate, to conform to the
current period presentation.
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners. Statutory
capital and surplus at September 30, 1999 and December 31, 1998
was $372 million and $299 million, respectively. For the nine
month periods ended September 30, 1999 and 1998, statutory net
income was $70 million and $35 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as either available-for-sale or trading and are
recorded at fair value. Unrealized gains and losses on available-
for-sale securities are included in accumulated other
comprehensive loss. Unrealized gains and losses on trading
account securities are included in net realized investment gains.
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 had actually been realized, with
corresponding credits or charges included in accumulated other
comprehensive loss, net of taxes. The following reconciles net
unrealized investment gains (losses) on available-for-sale
investments:
September 30, December 31,
1999 1998
------------- ------------
Assets:
Fixed maturity securities $ (60,916) $ 38,498
Equity securities (13,898) (4,119)
Cash and cash equivalents (5) -
Deferred policy acquisition costs 28,639 (323)
Federal income taxes - deferred 20,135 124
Separate Accounts assets 41 30
------------- ------------
(26,004) 34,210
------------- ------------
Liabilities:
Policyholders' account balances 11,391 34,440
------------- ------------
Stockholder's equity:
Accumlated other comprehensive loss $ (37,395) $ (230)
============= ============
The following summarizes the net impact of available-for-sale
securities, trading account securities and real estate held-for-
sale on net realized investment gains:
September 30, September 30,
1999 1998
------------- -------------
Available-for-sale securities:
Net realized investment gains (losses) $ (2,401) $ 4,250
Trading account securities:
Net realized investment gains 790 300
Net unrealized holding losses (473) (947)
Real estate held-for-sale:
Net realized investment gains 7,394 7,091
------------- -------------
Total net realized investment gains $ 5,310 $ 10,694
============= =============
NOTE 4. ACCOUNTING PRONOUNCEMENTS:
In June 1999, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 defers the effective date of
SFAS No. 133 for one year to fiscal years beginning after June
15, 2000. The adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of
operations.
NOTE 5. SEGMENT INFORMATION
In reporting to management, the Company's operating results are
categorized into two business segments: Life Insurance and
Annuities. The Company's Life Insurance segment consists of
variable life insurance products and interest-sensitive life
products. The Company's Annuity segment consists of variable
annuities and interest sensitive annuities.
The Company's organization is structured in accordance with its
two business segments. Each segment has its own administrative
service center that provides product support to the Company and
customer service support to the Company's policyholders.
Additionally, marketing and sales management functions, within
MLIG, are organized according to these two business segments.
The accounting policies of the business segments are the same as
those for the Company's financial statements included herein.
All revenue and expense transactions are recorded at the product
level and accumulated at the business segment level for review by
management.
The "Other" category, presented in the following segment
financial information, represents earnings from a specific
investment portfolio that does not support policyholder
liabilities.
The following table summarizes each business segment's
contribution to consolidated net revenues and net earnings for
the three and nine month periods ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net Revenues (a):
Life Insurance $ 33,303 $ 31,431 $ 96,169 $ 93,678
Annuities 41,516 35,199 128,675 120,455
Other 2,950 247 9,203 5,797
--------- --------- --------- ---------
Total Net Revenues $ 77,769 $ 66,877 $234,047 $219,930
========= ========= ========= =========
Net Earnings:
Life Insurance $ 8,882 $ 5,819 $ 25,441 $ 20,744
Annuities 10,765 7,018 36,077 34,078
Other 1,918 160 5,982 3,768
--------- --------- --------- ---------
Total Net Earnings $ 21,565 $ 12,997 $ 67,500 $ 58,590
========= ========= ========= =========
(a) Management considers investment income net of interest
credited to policyholders' account balances in evaluating
results.
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
addresses changes in revenues and expenses for the three month
and nine month periods ended September 30, 1999 and 1998. This
discussion should be read in conjunction with the accompanying
unaudited financial statements and notes thereto, in addition to
the 1998 Financial Statements and Notes to Financial Statements
and the Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the 1998 10K.
Business Overview
The Company's gross earnings are principally derived from two
sources:
the net earnings from investment of fixed rate life insurance
and annuity contract owner deposits less interest credited to
contract owners, commonly known as interest spread, and
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 the Company anticipates
holding those funds. In addition, the Company incurs expenses
associated with the maintenance of in-force contracts.
Life insurance premiums and annuity deposits increased $18
million (or 5%) to $340 million and $19 million (or 2%) to $933
million in the third quarter and nine month periods ended
September 30, 1999, respectively, as compared to the same periods
in 1998. Excluding internal tax-free exchanges, life insurance
premiums and annuity deposits increased $27 million and $62
million during the current three and nine month periods,
respectively. Variable annuity deposits continue to dominate the
Company's overall sales by comprising 86% and 87% of total sales
for the three and nine month periods ended September 30, 1999,
respectively. Life insurance premiums and annuity deposits by
product were as follows:
<TABLE>
<CAPTION>
Premiums Collected Change
-------------------------- --------------------------
Three Months Nine Months Three Months Nine Months
1999 1999 1999-1998 1999-1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
($ In Millions) ($ In Millions)
Variable Annuities $ 293 $ 810 $ 7 $ 14
Modified Guaranteed Annuites 13 21 11 12
Variable Life Insurance:
Estate Planning 18 53 3 9
Single Premium 15 45 (3) (16)
------------ ----------- ------------ -----------
33 98 - (7)
Other 1 4 - -
------------ ----------- ------------ -----------
Total Premiums Recorded 340 933 18 19
Internal tax-free exchanges (20) (59) 9 43
------------ ----------- ------------ -----------
Total Premiums Collected $ 320 $ 874 $ 27 $ 62
============ =========== ============ ===========
</TABLE>
Management attributes the continued strength in variable annuity
deposits to the combined effects of:
an increase in the number of annuity specialists supporting the
Company's sales force
ongoing enhancements to the Company's variable annuity product
a generally favorable economic environment
During 1997, the Company changed its distribution structure.
Previously, specialists supporting the sales force were
responsible for both life and annuity products. Beginning in
1997 and culminating during the second quarter 1998, the Company
created two specialist positions within each district where it
was geographically feasible. One specialized in estate planning
life insurance products while the other specialized in annuity
and single premium life products. This increase in the number of
product specialists has resulted in a greater and more focused
coverage of the Company's sales force. In management's view, the
Company is beginning to realize the benefits resulting from the
implementation of this distribution structure.
The Company has continually expanded the number of investment
options to certain of its variable annuity products to include a
selection of mutual funds with complementary investment
objectives to its existing portfolio. During the past three
years, the Company has added new funds from affiliated investment
advisors - Merrill Lynch Asset Management, LP, Merrill Lynch
Mercury Asset Management, and Hotchkis & Wiley - as well as new
funds from three unaffiliated investment advisors.
Management believes that variable annuity sales have been
positively impacted by the extended strength of the equity
markets, despite increased volatility during the third quarter
1999. However, future variable annuity sales could be negatively
impacted due to continued volatility in the equity markets.
During the first nine months of 1999, separate account assets
increased $676 million (or 6%) to $11.2 billion, primarily due to
strong investment performance during the first half of 1999. The
following table compares the changes in separate account assets
during the first three quarters of 1999:
<TABLE>
<CAPTION>
Year-
(In Millions) 1st Qtr 2nd Qtr 3rd Qtr to-date
- ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Variable product investment performance $ 272 $ 614 ($ 307) $ 579
Variable product net cash inflow 24 46 30 100
Seed money investment (4) 4 (3) (3)
------- ------- ------- -------
Total increase (decrease) in separate account assets $ 292 $ 664 ($ 280) $ 676
Percentage increase decrease 2.8% 6.1% (2.4%) 6.0%
</TABLE>
During the first nine months of 1999, the approximately 104 basis
point increase in medium term interest rates, combined with
increased credit exposure on certain domestic security holdings
resulted in a net decline in fair value of the Company's
investments of $109.2 million. After adjusting policyholder
liabilities, deferred policy acquisition costs and deferred
federal income taxes for the impact of portfolio market value
losses, other comprehensive losses were $37.2 million during the
current nine month period.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 30,
1999, the Company's assets included $2.1 billion of cash, short-
term investments and investment grade publicly traded available-
for-sale securities that could be liquidated if funds were
required.
As of September 30, 1999, approximately $88 million (or 3.9%) of
the Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured debt obligations that do not have a rating equivalent
to Standard and Poor's BBB- or higher (or similar rating agency).
Non-investment grade securities are speculative and are subject
to significantly greater risks related to the creditworthiness of
the issuers and the liquidity of the market for such securities.
The Company carefully selects, and closely monitors, such
investments.
The Company has exposure to selected emerging markets that
include securities issued by sovereigns or corporations of Asia
(excluding Japan), Latin America and Mexico. At September 30,
1999, the Company held $97.1 million in emerging market
securities with an approximate unrealized loss of $8.9 million.
During the second quarter 1999, the Company sold one real estate
property with a carrying value of $5.9 million for a realized
gain of $7.4 million.
On September 29, 1999, the Company issued a $0.5 million stock
dividend to its parent.
Year 2000 Compliance
As the Year 2000 approaches, the Company has undertaken
initiatives to address the Year 2000 problem (the "Y2K problem")
in conjunction with the Merrill Lynch & Co. Year 2000 Compliance
Initiative. Refer to the 1998 10K for a full description. The
failure of the Company's technology systems relating to a Y2K
problem would likely have a material adverse effect on the
company's business, results of operations, and financial
condition. This effect could include disruption of normal
business transactions, such as the processing of policyholder
transactions, the valuation of policyholder liabilities, and the
recording and valuation of assets. The Y2K problem could also
increase the Company's exposure to risk and legal liability and
its need for liquidity.
The renovation and production testing phases of the Company's
Year 2000 efforts, as described in the 1998 10K, were completed
as of June 30, 1999.
In light of the interdependency of the parties in or serving the
financial markets, there can be no assurance that all Y2K
problems will be identified and remedied on a timely basis or
that all remediation will be successful. Public uncertainty
regarding successful remediation of the Y2K problem may cause a
reduction in activity in the financial markets. This could
result in reduced liquidity as well as increased volatility.
Disruption or suspension of activity in the world's financial
markets is also possible. Management is unable at this point to
ascertain whether all significant third parties will successfully
address the Y2K problem. The Company will continue to monitor
third parties' Year 2000 readiness to determine if additional or
alternative measures are necessary. The failure of exchanges,
clearing organizations, vendors, service providers, clients and
counterparties, regulators, or others to resolve their own
processing issues in a timely manner could have a material
adverse effect on the Company's business, results of operations,
and financial condition.
The Company continues to develop and review its contingency plans
in order to meet three objectives: minimize disruptions of
services to the Company and its customers, provide an effective
mechanism for resumption of operations in a timely manner, and
minimize potential earnings and capital losses. In connection
with information technology and non-information technology
products and services, contingency plans may include selection of
alternate vendors or service providers and changing business
practices so that a particular system is not needed. In addition,
all technology systems have been fully documented, those
individuals responsible for responding to a failure have been
identified, and a Year 2000 command center is in the process of
being established.
The primary costs associated with the Year 2000 Compliance
Initiative are incurred by Merrill Lynch & Co. and are not
directly allocated to the various business units. As of
September 30, 1999, Merrill Lynch & Co.'s total estimated
expenditures of existing and incremental resources for the Year
2000 Compliance Initiative were approximately $520 million. This
estimate includes $104 million of occupancy, communications, and
other related overhead expenditures, as Merrill Lynch & Co. is
applying a fully costed pricing methodology for this project. Of
the total estimated expenditures, approximately $40 million,
related to continued testing, contingency planning, risk
management and the wind down of the efforts, has not yet been
spent. Included in the overall Merrill Lynch & Co. expenditures
were estimated total Year 2000 expenditures for Information
Systems personnel responsible for the ongoing maintenance and
support of the Company's information technology of approximately
$2.9 million, of which less than $0.1 million was remaining.
There can be no assurance that the costs associated with such
efforts will not exceed those currently anticipated, or that the
possible failure of such efforts will not have a material adverse
effect on the Company's business, results of operations, or
financial condition.
Results of Operations
For the nine month periods ended September 30, 1999 and 1998, the
Company reported net earnings of $68 million and $59 million,
respectively. For the three month periods ended September 30,
1999 and 1998, the Company reported net earnings of $22 million
and $13 million, respectively.
Net earnings derived from interest spread increased $1.4 million
and $3.6 million for the three and nine month periods ended
September 30, 1999, respectively, compared to the same periods in
1998. The increase in interest spread is primarily due to a $2.1
million increase in real estate income, the majority of which was
earned during the first quarter 1999. Overall, net investment
income and interest credited to policyholders' account balances
continue to decline due to the reduction in fixed rate contracts
in-force.
Net realized investment gains increased $2.8 million and
decreased $5.4 million for the three month and nine month periods
ended September 30, 1999, respectively, compared to the
equivalent periods in 1998. The changes in net realized
investment gains are attributable to the levels of credit-related
losses incurred during each respective period. During the
current three month period, credit-related losses decreased $3.1
million as compared to the same period in 1998. Included in
third quarter 1998 activity were increased losses on emerging
market securities impacted by the global financial crises, which
intensified during that period. During the current nine month
period, credit-related losses increased $5.6 million as compared
to the same period in 1998. This increase was primarily due to
the sale and book value writedown of several domestic securities.
Policy charge revenue increased $6.7 million (or 13%) and $15.9
million (or 10%) during the third quarter and nine month periods
ended September 30, 1999, respectively, compared to the same
periods in 1998. The increase in policy charge revenue is
attributable to the increase in policyholders' variable
account balances. Average variable account balances increased
$1.3 billion (or 14%) during the current nine month period as
compared to the same period in 1998. Asset based policy charges
increased $14.1 million (or 14%), consistent with the growth in
average variable account balances. Non-asset based charges
increased a moderate $1.8 million (or 3%) during the same time
period.
The market value adjustment expense is attributable to the
Company's modified guaranteed annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts that are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense decreased $1.1 million (or 74%)
and $2.3 million (or 53%) during the current three month and nine
month periods, respectively, consistent with a decrease in
surrender activity resulting from the rising interest rate
enviroment during 1999.
Reinsurance premium ceded increased $0.3 million (or 6%) and $1.2
million (or 8%) for the three month and nine month periods ended
September 30, 1999, respectively, compared to the same periods in
1998. This increase is attributable to the combined effect of
the increasing age of policyholders and increased insurance in-
force.
Amortization of deferred policy acquisition costs decreased $2.3
million (or 12%) and $6.3 million (or 12%) for the three month
and nine month periods ended September 30, 1999, as compared to
the same periods in 1998. The three month and nine month period
decreases are primarily attributable to increased mortality in
certain variable life products as compared to the same periods in
1998. The decreases are partially offset by increased
amortization on variable annuity products resulting from higher
policy fee income during 1999 as compared to 1998.
The Company's effective federal income tax rate increased to 35%
for 1999 from 31% for 1998 principally as a result of year to
year differences in certain permanent adjustments.
Segment Information
The products that comprise the Life Insurance and Annuity
segments generally possess similar economic characteristics. As
such, the financial condition and results of operations of each
business segment are generally consistent with the Company's
consolidated financial condition and results of operations
presented herein.
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE, JR.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 12, 1999
<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 2,265,731
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 192,732
<MORTGAGE> 0
<REAL-ESTATE> 20,072
<TOTAL-INVEST> 3,645,694
<CASH> 181,840
<RECOVER-REINSURE> 2,976
<DEFERRED-ACQUISITION> 453,079
<TOTAL-ASSETS> 15,685,308
<POLICY-LOSSES> 81,658
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 18,950
<POLICY-HOLDER-FUNDS> 3,655,426
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 550,425
<TOTAL-LIABILITY-AND-EQUITY> 15,685,308
0
<INVESTMENT-INCOME> 192,173
<INVESTMENT-GAINS> 5,310
<OTHER-INCOME> 168,541
<BENEFITS> 24,334
<UNDERWRITING-AMORTIZATION> 47,741
<UNDERWRITING-OTHER> 39,931
<INCOME-PRETAX> 103,846
<INCOME-TAX> 36,346
<INCOME-CONTINUING> 67,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,500
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
