<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1999
REGISTRATION NO. 33-58303
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
POST EFFECTIVE AMENDMENT NO. 4
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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<PAGE> 2
PROSPECTUS
MAY 1, 1999
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
This prospectus describes a GROUP MODIFIED GUARANTEED ANNUITY contract issued by
Merrill Lynch Life Insurance Company.
An ANNUITY contract provides for a series of payments that are
made in regular intervals beginning on a specified date. A
MODIFIED GUARANTEED ANNUITY contract additionally provides that
fixed rates of interest will be credited to the contract for
specified periods of time (called guarantee periods). If you
make a withdrawal prior to the end of those periods, we will
adjust the value of the contract to reflect the difference
between the guaranteed interest rates and the interest rates
being offered at that time.
To purchase a Certificate, you must complete an application and pay a single
premium. You must then allocate your premium among one or more subaccounts that
grow at a specified guaranteed rate of interest for the guarantee period.
PURCHASING THIS CERTIFICATE INVOLVES CERTAIN RISKS. WE WILL APPLY A WITHDRAWAL
CHARGE AND A MARKET VALUE ADJUSTMENT IF YOU MAKE A WITHDRAWAL OR ANNUITIZE
BEFORE THE END OF A GUARANTEE PERIOD. THE MARKET VALUE ADJUSTMENT MAY BE EITHER
POSITIVE OR NEGATIVE. ACCORDINGLY, THE VALUE OF YOUR CERTIFICATE COULD EITHER
INCREASE OR DECREASE AND YOU COULD LOSE A SUBSTANTIAL PORTION OF THE PREMIUM YOU
INVESTED. YOU SHOULD CAREFULLY CONSIDER YOUR INCOME NEEDS BEFORE PURCHASING A
CERTIFICATE.
WHEN YOU TAKE WITHDRAWALS FROM A SUBACCOUNT, A FEDERAL INCOME TAX IS IMPOSED ON
THE ENTIRE GAIN IN YOUR CERTIFICATE AND NOT JUST THE GAIN FROM THAT SUBACCOUNT.
WITHDRAWALS BEFORE AGE 59 1/2 MAY ALSO INCUR A 10% FEDERAL PENALTY TAX.
CAREFULLY DISCUSS YOUR PERSONAL TAX SITUATION WITH YOUR ADVISORS BEFORE YOU
PURCHASE A CERTIFICATE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAS APPROVED
OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPSULE SUMMARY............................................. 3
DESCRIPTION OF THE CONTRACT................................. 5
THE GROUP CONTRACT/CERTIFICATE......................... 5
APPLICATION AND PREMIUMS............................... 5
SUBACCOUNTS AND SUBACCOUNT VALUES...................... 5
Choices at the End of the Subaccount Guarantee
Period (the Renewal Date)......................... 6
How We Determine the Guaranteed Interest Rates for
Subaccounts....................................... 6
WITHDRAWALS............................................ 7
CHARGES................................................ 7
Market Value Adjustment ("MVA")................... 8
Withdrawal Charge................................. 10
Premium Taxes..................................... 11
DEATH BENEFIT PAYMENTS AND BENEFICIARIES............... 12
Beneficiaries..................................... 12
Death Before to the Annuity Date.................. 12
Death After the Annuity Date...................... 13
ANNUITY PROVISIONS (ANNUITIZATION)..................... 14
OTHER PROVISIONS....................................... 16
Assignment........................................ 16
Notices and Elections............................. 16
Amendment of Group Contract and Certificate....... 16
Free Look Right................................... 16
Guarantee of Group Contract and Certificate....... 17
DISTRIBUTION OF THE CONTRACTS............................... 17
FEDERAL INCOME TAXES........................................ 17
MORE INFORMATION ABOUT MERRILL LYNCH LIFE INSURANCE
COMPANY................................................... 21
HISTORY AND BUSINESS................................... 21
SELECTED FINANCIAL DATA................................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 22
REINSURANCE............................................ 33
CONTRACT OWNER ACCOUNT BALANCES........................ 33
INVESTMENTS............................................ 33
COMPETITION............................................ 34
CERTAIN AGREEMENTS..................................... 34
EMPLOYEES.............................................. 34
PROPERTIES............................................. 35
STATE REGULATION....................................... 35
DIRECTORS AND EXECUTIVE OFFICERS............................ 36
EXECUTIVE COMPENSATION...................................... 36
LEGAL PROCEEDINGS........................................... 39
LEGAL MATTERS............................................... 39
EXPERTS..................................................... 39
REGISTRATION STATEMENT...................................... 39
</TABLE>
2
<PAGE> 4
CAPSULE SUMMARY
THE GROUP CONTRACT AND CERTIFICATE
This prospectus describes a group modified guaranteed annuity contract issued by
Merrill Lynch Life Insurance Company ("we" or "us"). We issue group contracts to
certain groups such as employers. However, we maintain specific accounts for
each individual in the group. A Certificate of Participation summarizes your
rights and benefits under the group contract. Merrill Lynch, Pierce, Fenner &
Smith Incorporated qualifies as a group in most states. Therefore, you can
purchase Certificates in those states through Merrill Lynch, Pierce, Fenner &
Smith, Incorporated.
APPLICATION
To purchase a Certificate, you must complete and return an application to our
Service Center. We have the right to reject any application.
PREMIUMS
We issue one Certificate for each single premium payment you make. Your single
premium must be at least $5,000.
SUBACCOUNTS
We maintain one or more subaccounts for the value of your Certificate. Each
subaccount grows at a specified interest rate. We guarantee that we will credit
that interest rate for a specified period, called a Guarantee Period, that
corresponds to the subaccount. Currently, we offer Guarantee Periods of one to
ten years. You must tell us how much of your premium payment you want us to put
in each subaccount. You must allocate at least $5,000 to each subaccount you
choose. At the end of the Guarantee Period (on the Renewal Date), you may
transfer the value of that subaccount to one or more subaccounts at the interest
rates then in effect.
CHARGES
WITHDRAWAL CHARGE
If you take a withdrawal from a subaccount before the end of the
Guarantee Period, we will deduct a withdrawal charge generally equal to
six months of interest on the amount withdrawn at the guaranteed interest
rate. We do not deduct a withdrawal charge when the annuitant dies or you
die. We also currently do not deduct a withdrawal charge when we begin to
make annuity payments.
MARKET VALUE ADJUSTMENT ("MVA")
If you take a withdrawal from a subaccount before the end of the
Guarantee Period, we will apply an MVA. We will also apply an MVA at the
time we begin to make annuity payments if any subaccount has not reached
the end of its Guarantee Period. The MVA may be positive or negative and
can affect the value of your Certificate. Generally, if the interest
rates for a new Certificate are higher than the guaranteed rates of your
Certificate, the MVA will be negative. If the interest rates for a new
Certificate are lower than the guaranteed rates of your Certificate, the
MVA will be positive. For death benefit payments, we only credit a
positive MVA; we do not deduct any negative MVA.
PREMIUM TAXES
We deduct any applicable premium taxes when you annuitize. Premium tax
rates vary from jurisdiction to jurisdiction and currently range from 0%
to 5%. 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, we will also deduct a
charge for these taxes on any withdrawal, surrender, or death benefit
payment.
3
<PAGE> 5
ANNUITY PAYMENTS
You choose the date that you want us to begin to make annuity payments (the
annuity date). You also choose the method under which we make these payments
(the annuity option). You may change the annuity date or annuity option any time
before we begin to make annuity payments. You cannot make withdrawals after we
begin to make annuity payments.
PAYMENT ON DEATH ("DEATH BENEFIT")
BEFORE THE ANNUITY DATE
If you or the annuitant dies prior to the annuity date, we will pay the
designated beneficiary the value of the Certificate plus any positive
MVA.
AFTER THE ANNUITY DATE
If you die after we begin making annuity payments, we will continue to
make annuity payments to your beneficiary. If the annuitant dies after we
begin to make annuity payments, the annuitant's designated beneficiary
may request that we either continue to make any remaining guaranteed
annuity payments or pay the present value of those payments in a lump
sum.
WITHDRAWALS
You may take withdrawals any time before we begin to make annuity payments or
before the annuitant's death, whichever is earlier. Withdrawals are subject to
tax and if taken prior to age 59 1/2 may also be subject to a penalty tax.
Certain CHARGES and minimums apply to withdrawals.
FREE LOOK
When you receive your Certificate, you should review it carefully to make sure
it is what you intended to purchase. You may return the Certificate for a
premium refund within ten days after you receive it. Some states allow a longer
period to return the Certificate. To receive a premium refund, you must return
the Certificate to our Service Center or to your Merrill Lynch Financial
Consultant.
MERRILL LYNCH LIFE INSURANCE COMPANY
We issue the Certificates. Our home office is in Little Rock, Arkansas. Our
Service Center's address and phone number are P.O. Box 44222, Jacksonville,
Florida 32231-4222, (800) 535-5549.
You should address all communications concerning your Certificate to our Service
Center.
4
<PAGE> 6
DESCRIPTION OF THE CONTRACT
THE GROUP CONTRACT/CERTIFICATE
We issue group modified guaranteed annuity contracts to certain groups such as
employers. A member of the group may purchase a Certificate. Merrill Lynch,
Pierce, Fenner & Smith Incorporated qualifies as a group in most states.
Therefore, if you are a client of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, you can purchase a Certificate in those states. In states that
recognize clients of Merrill Lynch, Pierce, Fenner & Smith Incorporated as a
group, we issue group contracts either directly to Merrill Lynch, Pierce, Fenner
& Smith Incorporated or to Asset Group Trust (Sussex Trust Company, Georgetown,
Delaware, Trustee).
The Certificate describes your rights and benefits under the group contract. You
can exercise these rights and benefits at any time. However, the owner of the
group contract can modify these rights and benefits. We reserve the right to
terminate a Certificate if you are no longer a member of a group.
We will issue Certificates in connection with non-qualified retirement plans or
plans qualifying for special tax treatment such as "H.R. 10" plans, Individual
Retirement Annuities or Accounts, corporate pension and profit-sharing plans,
Tax-Sheltered Annuities or Section 457 deferred compensation plans.
APPLICATION AND PREMIUM
You can purchase a Certificate by completing an application and paying a
premium. The minimum premium you can pay is $5,000. The maximum premium you can
pay without our consent is $500,000. You must send the application and premium
to our Service Center.
We issue a separate Certificate for each premium you pay. You must complete a
new application for each premium payment. You can only purchase one Certificate
a day. We can reject any application.
SUBACCOUNTS AND SUBACCOUNT VALUES
Your Certificate consists of one or more subaccounts. You must tell us how to
distribute your single premium among these subaccounts. The minimum amount you
can put in a subaccount is $5,000.
Each subaccount grows at a specified guaranteed rate of interest. The initial
rates that will apply to your subaccounts are those in effect on the day we
receive your premium. We guarantee that we will credit a particular interest
rate to the subaccount for the designated number of years you select called the
Guarantee Period. Currently, we offer ten Guarantee Periods ranging from one to
ten years. We can change the number of the Guarantee Periods we offer. The end
of the Guarantee Period for a subaccount is its Renewal Date. You cannot change
the Guarantee Period or make a transfer to a different subaccount prior to the
Renewal Date.
We credit the guaranteed interest rate for a subaccount daily (except on
February 29th). The Subaccount Value initially equals the amount of premium that
you allocate to or the amount you reinvest in a subaccount. The Subaccount Value
fluctuates depending on the interest credited to that subaccount, any Market
Value Adjustment (see MVA) and any withdrawals and Withdrawal Charges (see
Withdrawals). The total of all the Subaccount Values is your Certificate Value.
We will compound interest on each Certificate anniversary.
The following is an example of how you can allocate a $15,000 single premium on
May 1, 1999 among three subaccounts, and shows subaccount values as of the
Renewal Date assuming no withdrawals.
<TABLE>
<CAPTION>
SUBACCOUNT SUBACCOUNT VALUE
AMOUNT ALLOCATED INTEREST RATE GUARANTEE PERIOD RENEWAL DATE AS OF RENEWAL DATE
<S> <C> <C> <C> <C>
$5,000 3.80% One Year May 1, 2000 $5,190.00
$5,000 4.25% Two Years May 1, 2001 $5,434.03
$5,000 4.90% Six Years May 1, 2005 $6,662.28
</TABLE>
5
<PAGE> 7
CHOICES AT THE END OF THE SUBACCOUNT GUARANTEE PERIOD (THE RENEWAL DATE)
We will send you a notice 30 days before a subaccount's Renewal Date. You
may currently notify us no later than five business days after the
Renewal Date that you wish to transfer the Subaccount Value to one or
more new subaccounts. You can choose any of the Guarantee Periods offered
on the Renewal Date. The minimum amount you can transfer to a subaccount
is $5,000 unless the total Subaccount Value is less than $5,000. The
transfer will be effective as of the Renewal Date. The interest rate(s)
for the Guarantee Period(s) you choose will be those in effect for a new
Certificate on the Renewal Date.
If your Certificate's annuity date is less than one year from the Renewal
Date, we will transfer the Subaccount Value to a new subaccount with a
one-year Guarantee Period. You may change your annuity date so that the
Guarantee Period of the new subaccount will end on or prior to the
annuity date. See CHANGE OF ANNUITY DATE, ANNUITANT OR ANNUITY OPTION for
more information.
If we do not receive timely transfer instructions, we will transfer the
Subaccount Value to a subaccount with a one-year Guarantee Period. If,
however, you have chosen the Maximum Guarantee Period Option and we do
not receive timely transfer instructions, we will transfer the Subaccount
Value to the subaccount with the longest Guarantee Period that we offer
at that time that:
1. is available on the Renewal Date;
2. is not longer than your longest Guarantee Period immediately
before transfer; and
3. ends on or before the annuity date.
For example, you allocate your premium as of May 1, 1999 among
three subaccounts with Renewal Dates of May 1, 2000; May 1,
2001; and May 1, 2005. If you do not select the Maximum
Guarantee Period Option and we do not receive timely transfer
instructions on or within five business days of the first
Renewal Date (May 1, 2000), we will transfer the Subaccount
Value to the one-year subaccount. If you have selected the
Maximum Guarantee Period Option, we will transfer the
Subaccount Value to the subaccount with the May 1, 2006
Renewal Date.
HOW WE DETERMINE THE GUARANTEED INTEREST RATES FOR SUBACCOUNTS
We have no specific formula for setting the guaranteed interest rates.
Rates will be influenced by, but not necessarily correspond to, interest
rates available on fixed income investments that we may acquire with the
amounts we receive as premiums. You will have no direct or indirect
interest in the investments we make with the premiums. We will invest
these amounts primarily in investment-grade fixed income securities
including:
- securities issued by the United States Government or its
agencies or instrumentalities, which 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;
6
<PAGE> 8
- other debt instruments;
- commercial paper; and
- cash or cash equivalents.
We will also consider other factors in determining the guaranteed rates,
including regulatory and tax requirements, sales commissions and
administrative expenses that we must pay, general economic trends and
competitive factors. WE WILL MAKE THE FINAL DETERMINATION OF THE
GUARANTEED RATES WE DECLARE. WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF
FUTURE INTEREST RATES.
WITHDRAWALS
You may make a withdrawal of all or part of Net Certificate Value or Net
Subaccount Value any time before the earliest of:
Net Subaccount Value equals the Subaccount Value after adjustment for any MVA
and withdrawal charge which we would apply 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.
1. the annuity date;
2. your death; or
3. the annuitant's death.
Withdrawals must meet the following requirements:
1. We must receive a written request from you at our Service Center.
2. You must return your Certificate to us if you want to make a full
withdrawal.
3. You must specify the subaccounts from which you want to make the
withdrawal. If you have two or more subaccounts with the same
Guarantee Period, we will first take the withdrawal from the
subaccount with the shortest period of time remaining in its
Guarantee Period to the maximum extent possible.
4. The minimum partial withdrawal you can make is $500 and any remaining
Net Subaccount Value must be at least $1,000.
5. You can withdraw any Subaccount Value that is less than $500 but you
cannot leave any remaining amount in that subaccount.
6. The remaining Certificate Value after a partial withdrawal must be at
least $5,000.
WITHDRAWALS ARE SUBJECT TO INCOME TAXES. IF THE WITHDRAWAL IS MADE PRIOR TO AGE
59 1/2, YOU MAY ALSO HAVE TO PAY A FEDERAL PENALTY TAX OF 10% OR MORE.
Net Certificate Value equals the sum of all Net Subaccount Values.
We reserve the right to defer payments of withdrawals for up to six months. If
you take a partial withdrawal, we will pay you the amount you request. We then
deduct any Withdrawal Charge directly from and apply any MVA to the subaccount
from which a partial withdrawal is made (see Withdrawal Charge and MVA for more
details regarding how charges are applied to withdrawals). If you withdraw an
entire Subaccount Value, we adjust the amount withdrawn for any applicable
withdrawal charge or MVA. This may reduce the amount you receive.
Under qualified plans, withdrawals may be permitted only under the 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 under a salary reduction agreement may be
made only after the participant reaches age 59 1/2 and in other limited
circumstances.
CHARGES
We impose two types of charges: a Market Value Adjustment and a Withdrawal
Charge. We may also deduct any applicable Premium Taxes.
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<PAGE> 9
MARKET VALUE ADJUSTMENT ("MVA")
We impose an MVA in three circumstances:
1. WITHDRAWALS TAKEN FROM A SUBACCOUNT BEFORE THE END OF ITS GUARANTEE
PERIOD: We will not apply an MVA if we receive your withdrawal
instructions by the fifth business day after the Renewal Date. In
this case, we consider the withdrawal to be effective as of the
Renewal Date.
2. ANNUITIZATION: If the annuity date (the date we begin making annuity
payments) precedes the end of a Guarantee Period, we apply an MVA on
the annuity date. We may also deduct any applicable premium taxes. We
apply the MVA before any annuity payments are calculated.
For Certificates issued prior to January 9, 1995, and
for Certificates issued on or after that date but
before state approval, we will not apply an MVA on the
annuity date if:
(i) the combined MVAs of all affected
subaccounts would reduce your
Certificate Value; and
(ii) annuity payments will be made for at
least ten years or you have chosen a
life contingency or life expectancy
annuity option.
You should refer to your Certificate to determine if
this applies to you.
3. DEATH BENEFIT PAYMENTS: We apply any net positive MVA to payments
made at the time of your death or the annuitant's death prior to the
annuity date. If the net MVA is negative, we will not deduct it.
NET MVA refers to the sum of the MVAs on all subaccounts, some of which may be
positive and some of which may be negative. If the sum is positive, it is
referred to as a NET POSITIVE MVA.
The MVA reflects the relationship on a given day between interest rates offered
to new Certificates and the guaranteed interest rates of your Certificate. The
greater the difference in interests rates, the greater the effect the MVA will
have on your subaccount value. The amount of time remaining in a Guarantee
Period also affects the MVA. The MVA can be positive or negative and can
substantially impact the values in your Certificate. If the guaranteed interest
rate for your subaccount is lower than the interest rate offered to new
Certificates for a period equal to the remaining time in your subaccount, the
MVA will decrease your subaccount value. If the guaranteed interest rate for
your subaccount is higher than the interest rates offered to new Certificates
for a period equal to the remaining time in your subaccount, the MVA will
increase your subaccount value. If the adjustment is positive, we will credit
the additional amount to the subaccount; if negative, we will deduct the amount
from the subaccount value. You directly bear any investment risk of the MVA.
We determine the MVA based on the following formula:
n/365
1 + B
A X [ 1- (-------) ]
1 + C
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<PAGE> 10
Where:
A = i. the amount withdrawn in the case of partial withdrawals, or
ii. net subaccount value, in the case of full withdrawals,
annuitizations, or payments due to your death or the
annuitant's death prior to the annuity date;
NET SUBACCOUNT VALUE =
Subaccount Value
---------------------------------------------------------------------------
n/365
Guaranteed Interest Rate 1 + Current Interest Rate
( ------------------------ ) ( ---------------------------- )
2 + 1 + Guaranteed Interest Rate
Where "n" is the number of days remaining in the Guarantee
Period of the subaccount, but not less than 365.
n = the number of days remaining in the Guarantee Period of the
subaccount(s) we are adjusting;
B = the current guaranteed interest rate offered to Guarantee Periods in
years equal to "n"/365;
C = the guaranteed interest rate for your subaccount.
If the remaining period of time in the Guarantee Period is not a whole
number of years, we base the current interest rate for "B" on the
guaranteed interest rates currently offered for the Guarantee Periods
nearest the remaining period of time. We make this determination by
straight-line interpolation, except where the remaining period of time is
less than one year, in which case we use the current guaranteed rate for
a Guarantee Period of one year.
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<PAGE> 11
The following example illustrates calculation of the MVA.
ASSUMPTIONS.
- a withdrawal of $20,000 is made;
- from a subaccount with 4.75 years (1,734 days) remaining in the
Guarantee Period; and
- a guaranteed interest rate of 4.5%.
Assume also that the guaranteed interest rates currently offered are:
- 4.6% for a Guarantee Period of 4 years; and
- 4.8% for a Guarantee Period of 5 years.
DETERMINING THE VALUE OF "B". Because the remaining period of time in
the Guarantee Period is not a whole number of years, we base the
current interest rate for "B" on straight-line interpolation. The
interpolated guaranteed interest rate equals the sum of one-fourth of
the four year rate and three-fourths of the five year rate. Since the
four year rate is 4.6% and the five year rate is 4.8%, the interpolated
rate for "B" equals 4.75% (4.6% times 0.25 plus 4.8% times 0.75).
CALCULATING THE MVA. To calculate the MVA, we divide the sum of 1 and
"B", 1.0475, by the sum of 1 and the guaranteed interest rate for the
affected subaccount, 1.045. The resulting figure, 1.0023923, is then
taken to the "n"/365 power, or 4.75 (1,734/365), which is 1.0114147. We
subtract 1.0114147 from 1 and multiply the resulting figure, -.0114147,
by the amount of the withdrawal, $20,000, to give -$228.29. Because
this figure is a negative number, we subtract it from the remaining
subaccount value together with any applicable Withdrawal Charge.
If "B" had been 4.25%, instead of 4.75%, the MVA would have been
+226.26, which we would have added to the remaining subaccount value.
Greater differences in interest rates result in larger MVAs. If in the
above example "B" had been 6%, 7%, and 8%, the Market Value Adjustment
would have been -$1,400.82, -$2,376.93 and -$3,387.86, 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 -$119.83 or
-$71.81, respectively.
THE APPENDIX CONTAINS TABLES THAT SHOW THE APPLICATION OF THE MVA IN THE
CONTEXT OF FULL WITHDRAWALS FROM A HYPOTHETICAL SUBACCOUNT.
WITHDRAWAL CHARGE
We will deduct a Withdrawal Charge if you make a full or partial
withdrawal from a subaccount prior to the end of its Guarantee Period. We
will not deduct a Withdrawal Charge for withdrawals made at the end of
the Guarantee Period (on the Renewal Date). To avoid the Withdrawal
Charge, we must receive your written instructions to take a withdrawal
from a subaccount(s) no later than five business days after the Renewal
Date of the subaccount. You can send your written instructions to our
Service Center. If we receive your written instructions within this time
period, we will process the withdrawal effective on the Renewal Date and
we will not impose a Withdrawal Charge.
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<PAGE> 12
The charge equals six months of interest on the amount withdrawn (in the case
of partial withdrawals) or the net subaccount value (in the case of full
withdrawals). Specifically, we calculate the Withdrawal Charge by multiplying
the withdrawn amount by 1/2 of the guaranteed interest rate for the subaccount
from which the withdrawal is made.
For example, if you make a withdrawal from a subaccount with a guaranteed
interest rate of 5%, we will apply a withdrawal charge of 2.5% 1/2 of 5%) to the
amount you withdraw from that subaccount if you make a partial withdrawal or to
the net subaccount value if you make a full withdrawal.
For full withdrawals, we deduct the
Withdrawal Charge from the proceeds
of the withdrawal. Withdrawal
Charge =
Net Subaccount Value X Guaranteed Interest Rate
------------------------
2
For partial withdrawals, we deduct a Withdrawal Charge
directly from the subaccount.
Withdrawal Charge =
Amount Withdrawn X Guaranteed Interest Rate
------------------------
2
The following example illustrates how the MVA and Withdrawal Charge are
applied to a withdrawal:
Your contract has two subaccounts:
- - a five-year guarantee period with a guaranteed interest rate of 4.8% and
- - a three-year guarantee period with a guaranteed interest rate of 4.5%.
Each subaccount has a value of $5,000.
You withdraw $7,000 and instruct us to take this withdrawal from the five-year
subaccount to the maximum extent possible and the rest from the three-year
subaccount. The maximum amount you can withdraw from the five-year subaccount is
$4,550 ($5,000 less $340.80 MVA and $109.20 Withdrawal Charge (4.8% / 2 X
$4,550)). The remaining $2,450 is deducted from the three-year subaccount
leaving $2,431.17 in the three-year subaccount ($5,000 minus $2,450 withdrawal
minus $63.70 MVA minus $55.13 Withdrawal Charge (4.5% / 2 X $2,450)).
Currently, we do not deduct a Withdrawal Charge at annuitization.
However, we reserve the right to do so on any subaccount with a Guarantee
Period that extends beyond the annuity date. We also do not deduct a
Withdrawal Charge from death benefit payments or annuity payments.
PREMIUM TAXES
We deduct any applicable premium taxes when you annuitize. If a
jurisdiction does not allow us to reduce our current taxable premium
income by the amount of withdrawals, surrenders or death benefit
payments, we also deduct a charge for premium taxes when we make those
payments.
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DEATH BENEFIT PAYMENTS AND BENEFICIARIES
We will pay a death benefit to the designated beneficiary after we receive proof
of your death or the death of the annuitant. Acceptable proof may include a
certified copy of a death certificate, beneficiary claim statement, and any
other documents we may require. We will pay the death benefit in a lump sum
unless the beneficiary chooses an annuity option within 60 days from our receipt
of the proof of death.
BENEFICIARIES
When you complete the application, you must select a beneficiary to
receive the death benefit in the event you die. You also must select a
beneficiary to receive the death benefit in the event the annuitant dies.
If you are also the annuitant, the beneficiaries must be the same.
You can designate a beneficiary as revocable or irrevocable. If you name
a revocable beneficiary, you can change that beneficiary at any time
prior to your death. If you designate an irrevocable beneficiary, that
beneficiary must approve any beneficiary change in writing.
If no beneficiary survives the annuitant, payment will be made to you, if
living, or to your estate. If your beneficiary dies before you, the death
benefit payable at your death will be paid to your estate.
The estate or heirs of the annuitant's beneficiary or your beneficiary
have no rights under the Certificate if the beneficiary dies before the
annuitant or you, respectively.
DEATH BEFORE THE ANNUITY DATE
Your Death
If you die before the annuity date, we will pay the death benefit
to your beneficiary. The death benefit equals the Certificate
Value plus any net positive MVA as of the date of payment. Your
beneficiary may, select a payment option under which payments
begin within one year of your death and do not extend beyond the
beneficiary's life expectancy. If no payment is selected, we will
pay this death benefit in a lump sum within five years of your
death.
If there is more than one participant under the same Certificate,
we pay the death benefit to the designated beneficiary when the
first such participant dies. If a surviving spouse is also the
beneficiary, he or she can choose to become the new participant
and continue the Certificate with the same rights and benefits as
the deceased participant had before death. Thereafter, the
surviving spouse will be the participant and the annuitant. If the
surviving spouse chooses to become the new participant and
continue the Certificate, no death benefit will be paid until he
or she dies.
Death of the Annuitant
If the annuitant (other than you) dies before the annuity date
(unless you have selected a contingent annuitant as described
below), we will pay the designated beneficiary the Certificate
Value plus any net positive MVA as of the date of payment. We will
pay this death benefit in a lump sum unless the beneficiary
selects an annuity option.
If you are not the annuitant, you can irrevocably select a
contingent annuitant. You must make this selection before the
annuity date and the death of the annuitant. If you elect this
option, we will not pay a death benefit when the primary annuitant
dies. The contingent annuitant will become the annuitant upon the
death of the original annuitant before the annuity date. This
option is only available when you and any other participants under
the same Certificate are "natural persons" or with certain
qualified plans entitled to special tax treatment under Sections
401 or 408 of the Internal Revenue Code ("IRC"). If any owner of a
non-qualified Certificate is not an individual, we treat the death
of any annuitant as the death of an owner and we pay the death
benefit.
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DEATH AFTER THE ANNUITY DATE
Your Death
If you or any other participant under the same Certificate dies
after the annuity date, we will continue to make annuity payments
to your beneficiary in the same manner as before death.
Death of the Annuitant
If the annuitant dies after the annuity date, the annuitant's
beneficiary can request that we continue to make the annuity
payments for the period of time required under the chosen annuity
option or until the amount guaranteed has been paid (see Annuity
Provisions). Alternatively, the designated beneficiary can request
that we pay the remaining guaranteed payments in a lump sum based
on the present value. This payment will be less than the sum of
the remaining guaranteed payments. We determine this payment based
on the interest rate used in determining the annuity payments.
If the annuitant's beneficiary dies while guaranteed amounts
remain unpaid, we will pay the present value of the remaining
guaranteed payments to the estate of the annuitant's beneficiary
in a lump sum.
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ANNUITY PROVISIONS (ANNUITIZATION)
We make annuity payments to you commencing on the annuity date designated in
your Certificate. In calculating annuity payments, we apply an MVA to any
subaccount that has a Guarantee Period that extends beyond the annuity date. We
also deduct any applicable premium taxes. For this section, we will refer to the
Certificate Value plus or minus the MVA and minus premium taxes as the Net
Certificate Value.
Net Certificate Value = Certificate Value P MVA - premium taxes
We calculate annuity payments by applying the Net Certificate Value to the
annuity option you choose using our annuity rates in effect at that time. These
rates are guaranteed not to be lower than the minimum guaranteed annuity rates
shown in the applicable annuity table in your Certificate.
The tables in your Certificate show the minimum guaranteed amount of each
monthly annuity payment for each $1,000 applied according to the age and
sex of the annuitant on the annuity date. We based these tables on the 1983
Table "a" projected forward to 1995 for Individual Annuity Valuation with
current mortality adjustments. When required by state law, we will not
differentiate by sex. The Certificate contains a formula for adjusting the
age of the annuitant based on the annuity date in order to determine
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 we are using are the minimum rates shown in the
annuity tables in the Certificate, you may want to select an annuity date
that immediately precedes the date on which an age adjustment would occur.
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.
We will send your annuity payments monthly unless you choose to have payments
made less frequently or choose the Qualified Plan Option. Each annuity payment
must be at least $50 or we can change the frequency of the annuity payments so
that they are at least $50. If your Net Certificate Value is less than $5,000
($3,500 for certain qualified Certificates) on the annuity date, we can pay such
amount to you in a lump sum.
For Certificates issued prior to January 9, 1995, and for Certificates
issued on or after that date but before state approval, we will not apply
an MVA at the annuity date if:
(i) the combined MVAs of all affected subaccounts would reduce the
value of your Certificate; and
(ii) annuity payments will be made for at least ten years or you
chose a life contingency or life expectancy annuity option.
You should refer to your Certificate to determine if this applies to you.
You select the Annuity Date, Annuitant, and Annuity Option at the time of the
application.
ANNUITY DATE
We will make payments to you beginning on the annuity date. The annuity
date can be any day of a calendar month. However, it cannot be later than
the first day of the month after the annuitant's
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85th birthday. If you do not select an annuity date at the time of
application, the annuity date will be the first day of the month after
the annuitant's 75th birthday.
For qualified Certificates other than IRAs, the annuity date generally
may not be later than April 1 of the calendar year after the later of the
calendar year in which the annuitant attains age 70 1/2 or retires. For
IRAs, 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.
ANNUITANT
You can select one or two annuitants. If co-annuitants are selected, we
consider the annuitant's death to occur at the last surviving annuitant's
death. Annuity payments are based on the annuitant's age and sex. We may
require proof of age, sex or survival from the annuitant. If you give us
incorrect information, we will adjust the amount of the annuity payments
to reflect the correct age and sex. If previous payments were overpaid,
we will deduct the overpaid amount from the next payments due. If
previous payments were underpaid, we will add the underpaid amount to the
next payment.
ANNUITY OPTIONS
You can select any one of the following annuity options. We can offer
additional annuity options. If you do not select an annuity option, we
will choose a life annuity with payments guaranteed for 10 years.
1. Payments of a Fixed Amount: You can choose the amount of each
annuity payment. We will make equal payments of the amount chosen
until the Net Certificate Value is gone. The Net Certificate Value
must be sufficient so that we can make payments for at least five
years.
2. Payments for a Fixed Period: You can choose a time period during
which you wish to receive annuity payments. We will pay the Net
Certificate Value in equal payments over this time period. The period
for these payments cannot be less than five years.
3. *Life Annuity: We will make payments as long as the annuitant lives.
Payments will stop at the last payment due before the death of the
annuitant. The Net Certificate Value will be applied to determine the
amount of the annuity payments based on the annuitant's age, sex and
life expectancy.
4. Life Annuity with Payments Guaranteed for 10 or 20 Years: We will
make payments for the guaranteed period chosen (10 or 20 years) and
as long thereafter as the annuitant lives.
5. Life Annuity with Guaranteed Return of Net Certificate Value: We
will make annuity payments until the total of the annuity payments
equals the Net Certificate Value applied to this option, and as long
thereafter as the annuitant lives.
6. *Joint and Survivor Life Annuity: Payments will be made for as long
as the annuitant and co-annuitant live. We will not make any payments
after the death of the last surviving annuitant. We apply the Net
Certificate Value based on the annuitant's and co-annuitant's ages,
sex and life expectancy to determine the amount of the annuity
payments.
7. 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 equals the Net
Certificate Value on the first day of the calendar year divided by
applicable current life expectancy based on Internal Revenue Service
regulations. We make each subsequent payment on the anniversary of the
annuity date. We credit interest at our then current rate for this
option. The rate will not be
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less than the rate shown in the Contract. On the death of the
measuring life or lives, we will pay any unpaid Certificate Value to
the beneficiary in a lump sum.
*CAUTION: THESE OPTIONS ARE "PURE" LIFE ANNUITIES. THEREFORE, IT IS
POSSIBLE FOR THE PAYEE TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
PERSON (OR PERSONS) ON WHOSE LIFE (LIVES) PAYMENT IS BASED DIES AFTER
ONLY ONE PAYMENT OR TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF THAT
PERSON (THOSE PERSONS) DIES AFTER ONLY TWO PAYMENTS, ETC. CAREFULLY
CONSIDER YOUR NEEDS BEFORE YOU CHOOSE THIS OPTION.
CHANGE OF ANNUITY DATE, ANNUITANT OR ANNUITY OPTION
In order to change the annuity date, the annuitant, and/or the annuity
option, we must receive your written instructions no later than 30
days before the existing annuity date. You can send your written
instructions to our Service Center. You can also make annuity date and
annuity option changes via telephone if you have submitted a proper
telephone authorization form. Please contact our Service Center for
more information.
Changes of the annuity date are subject to federal tax restrictions.
OTHER PROVISIONS
ASSIGNMENT
You may assign your rights under a Certificate to a creditor as security for a
debt. Any irrevocable beneficiary must consent to such an assignment. This does
not change the ownership of your Certificate. The rights of the creditor take
precedence over the rights of a beneficiary.
If the Certificate is issued pursuant to a qualified plan, your rights under the
Certificate may not be assigned, pledged or transferred, unless permitted by
law. We assume no responsibility for the validity of any assignment or for any
actions we take prior to receipt of written notice of an assignment. An
assignment of the Certificate may have federal income tax consequences.
NOTICES AND ELECTIONS
You must send any changes, notices, and/or choices for your Certificate to our
Service Center. These requests must be in writing and signed unless you have
submitted a telephone authorization form. We will effect any request regarding
beneficiary changes or choices as of the date you sign the request, unless we
already acted in reliance on your prior status before receiving your notice. If
you have submitted an authorization form, you may make the following choices via
telephone:
1. Subaccount selections at the end of a Guarantee Period, including
election of the Maximum Guarantee Period Option
2. Subaccounts from which you wish to make partial withdrawals
3. Annuity Date Changes
4. Annuity Option Changes
We will use reasonable procedures to confirm that a telephone request is proper.
These procedures may include possible tape recording of telephone calls and
obtaining appropriate identification before effecting any telephone
transactions. We do not have any liability if we act on a request that we
reasonably believe is proper.
AMENDMENT OF GROUP CONTRACT AND CERTIFICATE
We may amend any group contract or Certificate at any time if required to comply
with applicable law, regulation or ruling issued by a governmental agency.
FREE LOOK RIGHT
You should carefully review your Certificate when you receive it to make sure it
is what you intended to purchase. You may return the Certificate for a refund of
premium within ten days after you receive it.
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Some states allow a longer time to return the Certificate. You must return the
Certificate to either our Service Center or your Merrill Lynch Financial
Consultant within this time period in order to receive a refund of your premium.
We will them deem your Certificate void from the beginning. If you cancel your
Certificate under this provision, you cannot submit another application for a
Certificate for at least 90 days.
GUARANTEE OF GROUP CONTRACT AND CERTIFICATE
Neither the federal government nor its instrumentalities guarantee the group
contract or your Certificate. We stand behind the guarantees in the Certificate.
DISTRIBUTION OF THE CONTRACTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the principal
underwriter of the Group Contract. MLPF&S 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"). The principal business address for MLPF&S is
World Financial Center, 250 Vesey Street, New York, New York 10281.
Registered representatives (Financial Consultants) of MLPF&S sell these
certificates. These Financial Consultants are also licensed through various
Merrill Lynch Life Agencies ("MLLA") as our insurance agents. We have entered
into a distribution agreement with MLPF&S and companion sales agreements with
MLLA. These agreements allow Financial Consultants to sell Certificates and
receive compensation. The maximum commission MLLA pays to the Financial
Consultant is 2.3% of each premium. In addition, the maximum compensation MLLA
pays to the Financial Consultant for each reinvestment is 2.1% of Certificate
Value reinvested.
The maximum commission we 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 we will pay to the applicable insurance
agency to be used to pay compensation to Financial Consultants for reinvestment
is 3.2% of Certificate Value reinvested.
MLPF&S may arrange for sales of the group contract or Certificate by other
broker-dealers who are registered under the Securities Exchange Act of 1934 and
are members of the NASD.
FEDERAL INCOME TAXES
The following summary discussion is based on our understanding of current
federal income tax law as the Internal Revenue Service (IRS) now interprets it.
We can't guarantee that the law or the IRS's interpretation won't change. It
does not purport to be complete or to cover all tax situations. This discussion
is not intended as tax advice. Counsel or other tax advisors should be consulted
for further information.
We haven't considered any applicable federal gift, estate or any state or other
tax laws. Of course, your own tax status or that of your beneficiary can affect
the tax consequences of ownership or receipt of distributions.
When you invest in an annuity contract, you usually do not pay taxes on your
investment gains until you withdraw the money--generally for retirement
purposes. If you invest in an annuity as part of a pension plan or
employer-sponsored retirement program, your contract is called a Qualified
Contract. If your annuity is independent of any formal retirement or pension
plan, it is termed a Non-Qualified Contract. The tax rules applicable to
Qualified Contracts vary according to the type of retirement plan and the terms
and conditions of the plan. The ultimate effect of federal income taxes on the
amounts held under an annuity 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 our tax
status.
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TAX STATUS OF THE CONTRACTS
REQUIRED DISTRIBUTIONS
In order to be treated as an annuity contract for Federal income tax
purposes, Section 72(s) of the IRC requires any Non-Qualified Contract to
contain certain provisions specifying how your interest in the
Certificate will be distributed in the event of the death of a
participant under a Certificate. Specifically, section 72(s) requires
that (a) if any participant dies on or after the annuity starting date,
but prior to the time the entire interest in the contract has been
distributed, the entire interest in the contract will be distributed at
least as rapidly as under the method of distribution being used as of the
date of such participant's death; and (b) if any participant dies prior
to the annuity starting date, the entire interest in the contract will be
distributed within five years after the date of such participant's death.
These requirements will be considered satisfied as to any portion of a
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 the participant's death. The designated beneficiary
refers to a natural person designated by the participant as a beneficiary
and to whom ownership of the contract passes by reason of death. However,
if the designated beneficiary is the surviving spouse of the deceased
participant, the contract may be continued with the surviving spouse as
the new participant.
The Non-Qualified Contracts contain provisions that are intended to
comply with these requirements, although no regulations interpreting
these requirements have yet been issued. We intend to review such
provisions and modify them if necessary to assure that they comply with
the applicable requirements when such requirements are clarified by
regulation or otherwise.
Other required distribution rules may apply to Qualified Contracts.
TAXATION OF ANNUITIES
IN GENERAL
IRC Section 72 governs annuity taxation generally. We believe that a
participant who is a natural person usually won't be taxed on increases
in the value of a contract until there is a distribution (i.e., the
participant withdraws all or part of the accumulation or takes annuity
payments). Assigning, pledging, or agreeing to assign or pledge any part
of the accumulation usually will be considered a distribution.
Withdrawals of accumulated investment earnings are taxable as ordinary
income. Generally under the IRC, withdrawals are first allocated to
investment earnings.
A participant of any annuity contract who is not a natural person
generally must include in income any increase in the excess of the
accumulation 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 them with a
competent tax advisor.
The following discussion applies generally to contracts owned by a
natural person.
PARTIAL WITHDRAWALS AND SURRENDERS
When a withdrawal from a Non-Qualified Contract occurs, the amount
received generally will be treated as ordinary income subject to tax up
to an amount equal to the excess (if any) of the Certificate Value
immediately before the distribution over the investment in the contract
(generally, the premiums or other consideration paid for the Certificate,
reduced by any amount previously distributed from the Certificate that
was not subject to tax) at that time. The Certificate Value immediately
before a withdrawal may have to be increased by any positive Market Value
Adjustments which result from a withdrawal. There is, however, no
definitive guidance on the proper tax treatment of Market Value
Adjustments, and you may want to discuss the potential tax consequences
of a Market Value Adjustment with your tax adviser. Other rules apply to
withdrawals from Qualified Contracts.
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You should note that this is an integrated annuity contract for IRC
purposes. Therefore, when we determine the extent to which a withdrawal
from one subaccount is taxable, we will use the Certificate Value and
"investment in the contract" for the entire Certificate and not just of
the subaccount from which the withdrawal is made.
If you withdraw your entire accumulation under a Certificate, you will be
taxed only on the part that exceeds your investment in the contact.
ANNUITY PAYMENTS
Although tax consequences may vary depending on the payout option elected
under an annuity contract, a portion of each annuity payment is generally
not taxed and the remainder is taxed as ordinary income. The non-taxable
portion of an annuity payment is generally determined in a manner that is
designed to allow you to recover your investment in the contract ratably
on a tax-free basis over the expected stream of annuity payments, as
determined when annuity payments start. Once your investment in the
contract has been fully recovered, however, the full amount of each
annuity payment is subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be paid from a contract because a participant, the annuitant
or the co-annuitant has died. If the payments are made in a single sum,
they're taxed the same way a full withdrawal from the contract is taxed.
If they are distributed as annuity payments, they're taxed as annuity
payments.
PENALTY TAX ON SOME WITHDRAWALS
You may have to pay a penalty tax (10 percent of the amount treated as taxable
income) on some withdrawals. However, there is usually no penalty on
distributions:
(1) on or after you reach age 59 1/2;
(2) after you die (or after the annuitant dies, if the owner isn't an
individual);
(3) after you become disabled; or
(4) that are part of a series of substantially equal periodic (at least
annual) payments for your life (or life expectancy) or the joint
lives (or life expectancies) of you and your beneficiary.
Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. Also,
additional exceptions apply to distributions from a Qualified Contract. You
should consult a tax adviser with regard to exceptions from the penalty tax.
TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF A CONTRACT
Transferring or assigning ownership of the contract, designating an annuitant,
payee or other beneficiary who is not also the participant, or exchanging a
contract can have other tax consequences that we don't discuss here. If you're
thinking about any of those transactions, contact a tax advisor.
WITHHOLDING
Annuity distributions usually are subject to withholding for the recipient's
federal income tax liability at rates that vary according to the type of
distribution and the recipient's tax status. However, recipients can usually
choose not to have tax withheld from distributions.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts that we (or our affiliates) issue
to the same owner during any calendar year are treated as one annuity contract
for purposes of determining the amount includible in such owner's income when a
taxable distribution occurs. This could affect when income is taxable and how
much is subject to the ten percent penalty tax discussed above.
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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. 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.
TAXATION OF QUALIFIED CONTRACTS
The tax rules applicable to Qualified Contracts vary according to the type of
retirement plan and the terms and conditions of the plan. Your rights under a
Qualified Contract may be subject to the terms of the retirement plan itself,
regardless of the terms of the Qualified Contract. Adverse tax consequences may
result if you do not ensure that contributions, distributions and other
transactions with respect to the contract comply with the law.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)
Individual Retirement Accounts (IRAs), as defined in Section 408 of the
IRC, permit individuals to make annual contributions of up to the lesser
of $2,000 or 100% of adjusted gross income. The contributions may be
deductible in whole or in part, depending on the individual's income.
Distributions from certain pension plans may be "rolled over" into an IRA
on a tax-deferred basis without regard to these limits. Amounts in the
IRA (other than nondeductible contributions) are taxed when distributed
from the IRA. A 10% penalty tax generally applies to distributions made
before age 59 1/2, unless certain exceptions apply.
SIMPLE IRAs
SIMPLE IRAs permit certain small employers to establish SIMPLE plans as
provided by Section 408(p) of the IRC, 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.
SIMPLIFIED EMPLOYEE PENSION (SEP) IRAs
Simplified Employee Pension (SEP) IRAs may be established by employers
under section 408(k) of the IRC to provide IRA contributions on behalf of
their employees. In addition to all of the general rules of the IRC
governing IRAs, such plans are subject to certain requirements regarding
participation and amounts of contributions.
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. Roth IRAs, as described in section
408A of the IRC, permit certain eligible individuals to contribute to
make non-deductible contributions to a Roth IRA 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 is generally subject to tax and other
special rules apply. You may wish to 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
any Roth IRA. A 10% penalty tax may apply to amounts attributable to a
conversion from an
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IRA if they are distributed during the five taxable years beginning with
the year in which the conversion was made.
CORPORATE PENSION AND PROFIT-SHARING PLANS
Corporate pension and profit-sharing plans under Section 401(a) of the
IRC allow corporate employers to establish various types of retirement
plans for employees, and self-employed individuals to establish qualified
plans for themselves and their employees. Adverse tax consequences to the
retirement plan, the participant or both may result if the Contract is
transferred to any individual as a means to provide benefit payments,
unless the plan complies with all the requirements applicable to such
benefits prior to transferring the Contract.
TAX SHELTERED ANNUITIES
Tax Sheltered Annuities under section 403(b) of the IRC allow employees
of certain Section 501(c)(3) organizations and public schools to exclude
from their gross income the premium payments made, within certain limits,
on a contract that will provide an annuity for the employee's retirement.
These premium payments may be subject to FICA (social security) tax.
Distributions of (1) salary reduction contributions made in years
beginning after December 31, 1988; (2) earnings on those contributions;
and (3) earnings on amounts held as of the last year beginning before
January 1, 1989, are not allowed prior to age 59 1/2, separation from
service, death or disability. Salary reduction contributions may also be
distributed upon hardship, but would generally be subject to penalties.
SECTION 457 PLANS
Section 457 Plans, while not actually providing for a qualified plan as
that term is normally used, provides for certain deferred compensation
plans with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and certain
affiliates of such entities, and tax exempt organizations. The Contract
can be used with such plans. Under such plans a participant may specify
the form of investment in which his or her participation will be made.
All such investments, however, are owned by and are subject to, the
claims of the general creditors of the sponsoring employer. In general,
all amounts received under a section 457 plan are taxable and are subject
to federal income tax withholding as wages.
OTHER TAX ISSUES
Qualified Contracts have minimum distribution rules that govern the
timing and amount of distributions. You should refer to your retirement
plan, adoption agreement, or consult a tax advisor for more information
about these distribution rules.
Distributions from Qualified Contracts 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 be provided the
opportunity to elect not have tax withheld from distributions.
"Eligible rollover distributions" from section 401(a) plans 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 IRC 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 IRA.
MORE INFORMATION ABOUT
MERRILL LYNCH LIFE INSURANCE COMPANY
HISTORY AND BUSINESS:
We sell life insurance and annuity products. We were incorporated under the laws
of the State of Washington on January 27, 1986 and redomesticated to the State
of Arkansas on August 31, 1991. We are
21
<PAGE> 23
currently subject to primary regulation by the Arkansas Insurance Department. We
are a direct wholly owned subsidiary of Merrill Lynch Insurance Group ("MLIG").
MLIG is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch & Co."), which is a publicly owned company.
Information about contract owner deposits, contract owner account balances, and
capital contributions can be found in our financial statements which are
contained herein.
We are currently licensed in 49 states, the District of Columbia, the Virgin
Islands, and Guam. During 1998, life insurance and annuity sales were made in
all states in which we were licensed in, with the largest concentration in
Florida, 15%, Texas, 12%, and California, 8%, as measured by total contract
owner deposits.
We sell insurance products primarily through licensed agents affiliated with
MLLA. Career life insurance agents whose sole responsibility is the sale and
servicing of insurance and Financial Consultants of MLPF&S who are also licensed
as insurance agents make all our insurance sales. At December 31, 1998,
approximately 11,670 agents affiliated with MLLA were authorized to act for us.
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with the
financial statements and notes thereto included in this prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
FOR THE PERIODS ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Investment Income................. $ 272,038 $ 308,702 $ 336,661 $ 376,166 $ 433,536
Earnings Before Federal Income Tax.... $ 132,523 $ 121,179 $ 117,279 $ 118,785 $ 89,883
Net Earnings.......................... $ 92,761 $ 80,735 $ 79,387 $ 76,482 $ 66,005
Total Assets.......................... $15,104,095 $14,053,581 $12,737,493 $12,402,003 $11,604,074
Stockholder's Equity.................. $ 522,590 $ 448,054 $ 489,820 $ 596,837 $ 559,571
</TABLE>
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
We conduct our 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. Significant mergers
within the financial services industry, as well as legislative and
judicial processes, are challenging the legal barriers that have
historically segregated many of its markets. The distribution channels
for life insurance and annuity products continue to diversify and now
include banks, full service and discount securities brokers, financial
planners and the Internet.
Tax legislation, enacted during the third quarter 1997, increased the
competitiveness of non-insurance products in the individual retirement
market by reducing the long-term capital gains tax rate and creating new
non-deductible Individual Retirement Accounts (i.e., Roth IRAs).
Additionally, current tax legislative proposals, which are in various
stages of the political process, may have a material impact on the life
insurance industry by reducing or eliminating the tax advantages on
certain products.
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.
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<PAGE> 24
ECONOMIC ENVIRONMENT
During 1998, the propagation of economic instability among certain Asian,
Eastern European and Latin American economies, and its influence on
investors worldwide, contributed to the emergence of three important
economic factors in the U.S:
- lower interest rates
- widening credit spreads
- equity market volatility
Investors' flight to quality resulted in an 83 basis point decrease on
the interest rate of the 30 year U.S. Treasury Bond, dropping its yield
to 5.09% at December 31, 1998. Similarly, rates on medium term U.S
Treasury securities, defined as 1 to 10 year terms, decreased 108 basis
points to yield, on average, 4.56%.
In the corporate bond market, the combined effects of record levels of
debt issuance, investor concern regarding corporate earnings and the
disappearance of liquidity in certain markets resulted in a significant
widening of interest rate spreads as compared to U.S. Treasury
securities. The spread between the 5-year U.S Treasury Bond Index and the
5-year Corporate Financial Bond Index increased from approximately 58
basis points at December 1997 to approximately 168 basis points at
December 1998.
Equity market volatility was prevalent primarily during the second half
of 1998. After increasing approximately 17% through mid-year, the
Standard & Poor's 500 Composite Stock Price Index ("S&P Index") dipped
10% during the third quarter before rebounding 21% during the fourth
quarter.
SUMMARY
We sell variable and interest-sensitive life insurance and annuity
products through Merrill Lynch & Co.'s retail network of Financial
Consultants. We compete for Merrill Lynch & Co.'s clients' life insurance
and annuity business with non-affiliated insurers whose products are also
sold through Merrill Lynch & Co.'s retail network ("non-proprietary
products"), and with insurers who solicit this business directly. The
product lines that we offer are focused in the highly competitive market
segments of retirement and estate planning. We compete in these market
segments by integrating our products into Merrill Lynch & Co.'s
planning-based financial management program.
Our financial management is based on prudent investment and liability
management and regular monitoring of our risk profile. We also seek to
provide superior customer service and financial management to promote the
competitiveness of our products. Our customer service centers have
established standards of performance that are monitored on a regular
basis. Managers and employees in the customer service centers are
periodically evaluated based on their performance in meeting these
standards.
We have strategically placed our 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 & Co.'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. We offer two primary types of
variable life insurance. Both types allow the policyholder to allocate
the cash value of the policy to underlying 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
23
<PAGE> 25
insurance product adopts a universal life design and is primarily
utilized in clients' estate planning strategies. The following table
summarizes our sales activity for the three years ending December 31,
1998:
<TABLE>
<CAPTION>
PREMIUMS COLLECTED % CHANGE
------------------------ -------------------------
1998 1997 1996 1998 - 1997 1997 - 1996
---- ---- ---- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Variable Annuities....................... $1,002 $1,040 $512 (4)% 103%
Modified Guaranteed...................... 14 32 57 (56)% (43)%
Variable Life Insurance:
Cash Value Accumulation............. 80 74 54 8% 37%
Estate Planning..................... 60 45 30 33% 50%
------ ------ ---- --- ---
140 119 84 18% 42%
------ ------ ---- --- ---
Other.................................... 9 15 21 (40)% (29)%
------ ------ ---- --- ---
Total Premiums................. $1,165 $1,206 $674 (3)% 79%
====== ====== ==== === ===
</TABLE>
During 1998, our total sales decreased 3%, but remained strong overall,
exceeding the $1 billion level for the second consecutive year. Variable
annuity products continued to dominate overall sales by comprising 86%,
86% and 76% of total sales volume for the years ended 1998, 1997 and
1996, respectively. Variable life insurance sales continued to produce
solid growth by increasing for the sixth consecutive year -- since their
introduction in the fourth quarter 1992. Partially offsetting the
strength of variable product sales was the continued reduction in
modified guaranteed annuity sales. Sales of this product are 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. A more detailed analysis of variable product sales
follows.
During 1997, we changed our 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, we created two specialist positions within each sales
district where it was geographically feasible. One specializes in estate
planning life insurance products while the other specializes in annuity
and single premium life products. The new distribution structure has
resulted in a greater and more focused coverage of our sales force and
has, in management's view, contributed to the continued strength in
variable product sales.
New variable annuity sales decreased 4% during 1998 as compared to record
sales levels in 1997. During 1997, variable annuity sales increased 103%
as compared to 1996. The decrease in 1998 sales occurred primarily during
the second half of the year amid increased volatility in the equity
markets. Overall, variable annuity sales have remained strong over the
last two years. Management attributes the strong variable annuity sales
to enhanced sales efforts related to the addition of new investment
options. Since December 1996, we have added ten new investment options to
certain of our variable annuity products, some of which are managed by
unaffiliated investment advisors. A number of these mutual fund
portfolios generally have aggressive growth investment objectives that
complement the underlying portfolios managed by Merrill Lynch Asset
Management, LP ("MLAM"), an indirect subsidiary of Merrill Lynch & Co.
Additionally, management believes that the generally favorable equity
markets over the past three years has also contributed to the strength of
variable annuity sales. During 1998, 1997 and 1996, the S&P Index has
risen 27%, 31% and 20%, respectively. Future variable annuity sales could
be negatively impacted by continued volatility in the equity markets.
Merrill Lynch & Co. offers an asset allocation service to our variable
annuity contract owners. 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
24
<PAGE> 26
tolerance. We do not receive any financial remuneration from Merrill
Lynch & Co. for this service; however, management believes that its
availability has had a positive effect on variable annuity sales volume.
As previously stated, one of our core goals is to provide superior
customer service to our clients. As evidence of progression towards this
goal we received the DALBAR Annuity Service Award for our Retirement Plus
variable annuity during both 1998 and 1997.
Merrill Lynch & Co. offers for sale numerous non-proprietary variable
annuity products. Our market share of variable annuity sales within the
Merrill Lynch & Co. distribution system was 41%, 48% and 38% for 1998,
1997 and 1996, respectively.
Variable life sales increased 18% during 1998 as compared to 1997 and 42%
during 1997 as compared to 1996. Management attributes this increase to
the implementation of a marketing focus program for our Estate Planning
and Business Insurance Specialists. This program, implemented during the
first half of 1998, was designed to promote awareness of new product
enhancements. Additionally, variable life sales were favorably impacted
by Merrill Lynch & Co.'s planning-based financial management program for
individual investors. Approximately 68% 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
sales.
During 1998, policy and contract surrenders increased $124 million (or
16%) to $879 million as compared to 1997. During 1998, variable annuity
surrenders increased $80 million (or 42%) to $270 million primarily due
to growth of that block of business. During the same period, modified
guaranteed annuity surrenders increased $86 million (or 48%) to $266
million due to the lower interest rate environment during 1998 as
compared to 1997. During periods of lower interest rates, modified
guaranteed annuity contractholders are more inclined to surrender their
contracts for two reasons. First, contractholders can lock-in gains
resulting from the market value adjustment, which is applied to
withdrawals made prior to the expiration of the stated guarantee period.
The market value adjustment has an inverse relationship to changes in
interest rates. Second, interest-crediting rates offered upon renewal are
generally lower than the rates that had been credited prior to the
renewal date.
FINANCIAL CONDITION
At December 31, 1998, our assets were $15.1 billion, or $1.0 billion
higher than the $14.1 billion in assets at December 31, 1997. The
increase in assets is attributable to increases in separate account
assets. During 1998, separate account assets increased $1.4 billion (or
15%) to $10.6 billion. The increase is attributable to two factors.
First, the separate accounts benefited from strong investment performance
associated with the generally rising equity markets. During 1998, the
separate accounts increased $1.1 billion due to price appreciation in the
underlying mutual funds supporting the variable products. Second, net
cash inflow to the variable products contributed $326 million to the
growth in separate account assets.
General account assets decreased $373 million primarily due to the
declining number of fixed-rate contracts in-force. During 1998, credit
spreads widened to historically unprecedented levels, given the current
level of U.S. Treasury rates. This contributed to a $48 million decrease
in market value on general account assets. After adjustments to deferred
policy acquisition costs and deferred federal income taxes, total general
account assets decreased $33 million as a result of the interest rate
environment.
As a result of increased policy and contract surrenders during 1998, we
experienced contract owner withdrawals that exceeded deposits. Deposits
for 1998 were $1.0 billion compared to withdrawals of $1.1 billion,
resulting in a net cash outflow from contract owner activity of $29
million.
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<PAGE> 27
We maintain a conservative general account investment portfolio. Our
investment in non-investment grade fixed maturity securities and real
estate are below the industry average. The following schedule identifies
our general account invested assets by type:
<TABLE>
<S> <C>
Investment Grade Fixed Maturity Securities.................. 63%
Policy Loans................................................ 29%
Equity Securities........................................... 4%
Non-Investment Grade Fixed Maturity Securities.............. 3%
Real Estate................................................. 1%
---
100%
===
</TABLE>
Our investment in collateralized mortgage obligations ("CMO") and
mortgage backed securities ("MBS") had a carrying value of $237 million
as of December 31, 1998. At December 31, 1998, approximately 71% of our
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. At December 31, 1998, we held
approximately $66 million of CMO and MBS securities that had relatively
higher projected cash flow volatility in changing interest rate
environments as compared to our 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.
We had exposure to selected emerging markets that include securities
issued by sovereigns or corporations of Asia (excluding Japan), Eastern
Europe, Latin America and Mexico. At December 31, 1998, we held $113
million in emerging market securities with an approximate unrealized loss
of $9 million.
During 1998, we sold two real estate properties with a carrying value of
$5.6 million for a realized gain of $8.3 million.
As of December 31, 1998, we had 49,668 life insurance and annuity
contracts in-force with interest rate guarantees. The estimated average
rate of interest credited on behalf of contract owners was 5.22% during
1998. Invested assets with an estimated effective yield of 6.69%
supported the liabilities related to insurance contracts with interest
rate guarantees during 1998.
We have utilized public information to estimate our future assessments we
will incur as a result of life insurance company insolvencies. At
December 31, 1998 and 1997, we have accrued an estimated liability for
future guaranty fund assessments of $13.9 million and $15.4 million,
respectively. We regularly monitor public information regarding insurer
insolvencies and adjust our estimated liability as appropriate.
MARKET RISK
Market risk is the potential change in a financial instrument's value
caused by fluctuations in certain underlying risk factors. We are
primarily subject to market risk resulting from fluctuations in interest
rates and credit spreads.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in
interest rates will affect the value of investments, primarily
fixed maturity securities and preferred equity securities, as well
as interest sensitive liabilities. Changes in interest rates have
an inverse relationship to the value of investments and interest
sensitive liabilities. We manage interest rate risk as part of our
asset/liability management strategy. For each portfolio,
management
26
<PAGE> 28
monitors the expected changes in assets and liabilities, as
produced by our model, resulting from various interest rate
scenarios. Based on these results, management closely matches the
duration and convexity of insurance liabilities to the duration
and convexity of assets supporting those liabilities.
The following table presents the estimated net impact on the fair
value of non-trading investments and interest sensitive
liabilities resulting from various hypothetical interest rate
scenarios, based on assumptions contained in our model:
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES CHANGE IN FAIR VALUE
------------------------ --------------------
<S> <C>
+ 100 basis points........................... $(24.0)
+ 50 basis points............................ $(12.3)
- 50 basis points............................ $ 13.5
- 100 basis points........................... $ 29.0
</TABLE>
Our model is based on existing business inforce as of year-end
1998 without considering the impact of new life insurance and
annuity sales on assets or liabilities. The model incorporates our
fixed maturity securities and preferred equity investments
excluding variable rate securities with rate resettings in less
than ninety days, securities with a maturity of less than ninety
days, and securities that are in or near default. The changes in
interest rate scenarios, noted above, assume parallel shifts in
the yield curve occurring uniformly throughout the year.
Additionally, certain products have features that mitigate the
impact of interest rate risk. Examples include surrender charges,
market value adjustments, and resetting of interest credited rates
(subject to certain guaranteed minimum crediting rates). For
interest sensitive life products the guaranteed minimum rate is
4%. For interest sensitive annuity products, excluding modified
guaranteed annuities, the guaranteed minimum rates range from 4%
to 5%, with the greatest concentration at 4%. Modified guaranteed
annuity products do not have minimum rate guarantees.
Credit Spread Risk
Credit spread risk arises from the possibility that changes in
credit spreads will affect the value of investments. Credit
spreads represent the credit risk premiums required by market
participants for a given credit quality, i.e., the additional
yield that a debt instrument issued by a AA-rated entity must
produce over a risk-free alternative (e.g., U.S. Treasury
instrument).
The following table presents the estimated net impact on the fair
value of non-trading investments resulting from various
hypothetical fluctuations in credit spreads, based on assumptions
contained in our model:
<TABLE>
<CAPTION>
CHANGE IN CREDIT SPREADS CHANGE IN FAIR VALUE
------------------------ --------------------
<S> <C>
+ 50 basis points............................ $(40.3)
+ 10 basis points............................ $ (8.1)
- 10 basis points............................ $ 8.3
- 50 basis points............................ $ 41.5
</TABLE>
Our model is based on existing business inforce as of year-end
1998 without considering the impact of new life insurance and
annuity sales on assets. The model incorporates our fixed maturity
securities and preferred equity investments excluding securities
with a maturity of less than ninety days and securities that are
in or near default. The changes in credit spreads, noted above,
assume a uniform occurrence throughout the year.
27
<PAGE> 29
Liability valuations for modified guaranteed annuities mitigate
our exposure to credit spread risk. Contractholder surrender
values reflect changes in spread between corporate bonds and U.S.
Treasury securities since the market value adjusted account value
is based on current crediting rates for new and renewal contracts.
These crediting rates are adjusted weekly and reflect current
market conditions.
Credit Risk
Credit risk represents the loss that we would incur if an issuer
fails to perform its contractual obligations and the value of the
security held has been permanently impaired or is deemed
worthless. We manage our credit risk by setting investment policy
guidelines that assure diversification with respect to investment,
issuer, geographic location and credit quality. Management
regularly monitors compliance of each investment portfolio's
status with the investment policy guidelines, including timely
updates of credit-related securities.
A number of assumptions must be made to obtain the expected fair
value changes noted above. There is no reason to believe that
historically simulated interest rate and credit spread movements
have any predictive power for future fair value changes. The
unprecedented volatility experienced during the third quarter 1998
demonstrates the limitations of these models.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements include the payment of sales commissions and
other underwriting expenses and the funding of our contractual
obligations for the life insurance and annuity contracts we have
in-force. We have developed and utilize a cash flow projection system and
regularly perform asset / liability duration matching in the management
of our asset and liability portfolios. We anticipate funding all our cash
requirements utilizing cash from operations, normal investment maturities
and anticipated calls and repayments, consistent with prior years. As of
December 31, 1998, our assets include $2.3 billion of cash, short-term
investments and investment grade publicly traded available-for-sale
securities that could be liquidated if funds were required.
In order to continue to market life insurance and annuity products, we
must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which we conduct 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, 1998 and 1997,
based on the RBC formula, our total adjusted capital level was well in
excess of the minimum amount of capital required to avoid regulatory
action.
We have received claims paying ability ratings from the major insurance
rating agencies as follows: Standard and Poor's -- "AA-", Fitch Investor
Services -- "AA" and Moody's -- "Aa3". Additionally, during 1998, our
A.M. Best rating was upgraded from "A" to "A+".
We have developed a comprehensive capital management plan that will
continue to provide appropriate levels of capital for the risks we
assume, but will allow us to reduce our absolute level
28
<PAGE> 30
of surplus. In implementing this plan, we paid dividends to MLIG of $135
million and $175 million during 1997 and 1996, respectively. No dividends
were paid during 1998.
We believe that we 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, we may have to look to our parent and
other affiliated companies to provide the capital or borrowings necessary
to support our current marketing efforts. Our future marketing efforts
could be hampered should our parent and/or affiliates be unwilling to
commit additional funding.
YEAR 2000 COMPLIANCE
As the millennium approaches, we have undertaken initiatives to address
the Year 2000 problem (the "Y2K problem") in conjunction with the Merrill
Lynch & Co. Year 2000 Compliance Initiative. The Y2K problem is the
result of a widespread programming technique that causes computer systems
to identify a date based on the last two numbers of a year, with the
assumption that the first two numbers of the year are "19." As a result,
the year 2000 would be stored as "00," causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the Y2K problem may cause
information technology systems (e.g., computer databases) and non-
information technology systems (e.g., elevators) to produce incorrect
data or cease operating completely.
We believe that we have identified and evaluated our internal Y2K problem
and are devoting sufficient resources to renovating technology systems
that are not already Year 2000 compliant. The resource-intensive
renovation phase (as discussed further) of our Year 2000 efforts was
approximately 92% completed as of year-end 1998. We will focus primarily
on completing our renovation efforts and testing and on integration of
the Year 2000 programs during the remainder of 1999. In order to focus
attention on the Y2K problem, management has deferred certain other
technology projects; however this deferral is not expected to have a
material adverse effect on our business, results of operations, or
financial condition.
The failure of our technology systems relating to a Y2K problem would
likely have a material adverse effect on our business, results of
operations, or financial condition. This effect could include disruption
of normal business transactions, such as the processing of contractholder
transactions, the valuation of contractholder liabilities and the
recording and valuation of assets. The Y2K problem could also increase
our exposure to risk and our need for liquidity.
In 1995, Merrill Lynch & Co. established the Year 2000 Compliance
Initiative, which is an enterprisewide effort to address the risks
associated with the Y2K problem, both internal and external. The Year
2000 Compliance Initiative's efforts to address the risks associated with
the Y2K problem have been organized into six segments or phases:
planning, pre-renovation, renovation, production testing, certification,
and integration testing.
The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and
determining the level of expert knowledge available within Merrill Lynch
& Co. regarding particular systems or applications. The pre-renovation
phase involved developing a detailed enterprisewide inventory of
applications and systems, identifying the scope of necessary renovations
to each application or system, and establishing a conversion schedule.
During the renovation phase, source codes are actually converted, date
fields are expanded or windowed (windowing is used on an exception basis
only), test data is prepared, and each system or application is tested
using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the
existing production version, that renovation has not introduced defects,
and that expanded or windowed date fields continue to handle current
dates properly. The certification phase validates that a system can run
successfully in a Year 2000 environment. The integration testing phase,
which will occur throughout 1999,
29
<PAGE> 31
validates that a system can successfully interface with both internal and
external systems. Finally, as we continue to implement new systems, they
are also being tested for Year 2000 readiness.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All plans
for both mission-critical and non-mission-critical systems are tracked
and monitored. The work associated with the Year 2000 Compliance
Initiative has been accomplished by Merrill Lynch & Co. employees, with
the assistance of consultants where necessary.
As part of the production testing and certification phases, we have
performed, and will continue to perform, both internal and external Year
2000 testing intended to address the risks from the Y2K problem. As of
year-end 1998, production testing was approximately 92% completed.
We continue to survey and communicate with third parties whose Y2K
readiness is important to the company. Information technology and
non-information technology vendors and service providers are contacted in
order to obtain their Y2K compliance plans. Based on the nature of the
response and the importance of the product or service involved, we
determine if additional testing is needed. The results of these efforts
are maintained in a database that is accessible throughout Merrill Lynch
& Co. Third parties that have been contacted include vendors and service
providers; a process to access and rate their responses has been
developed. We will use this information to manage risk resulting from the
Y2K problem. Management is unable at this point to ascertain whether all
significant third parties will successfully address the Y2K problem. We
will continue to monitor third parties' Year 2000 readiness to determine
if additional or alternative measures are necessary. 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 light of the interdependency of the parties in
or serving the financial markets, however, there can be no assurance that
all Y2K problems will be identified and remediated on a timely basis or
that all remediation will be successful. The failure of exchanges,
clearing organizations, vendors, service providers, counterparties,
regulators, or others to resolve their own processing issues in a timely
manner could have a material adverse effect on our business, results of
operations, and financial condition.
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. These costs include planning and oversight of the
Year 2000 Compliance Initiative, as well as certain Information Systems
personnel costs involved in implementation and testing. All other costs
incurred by us, primarily non-Information Systems personnel costs,
systems upgrades and replacement of desk-top software, have not been
material to our results of operations or financial condition. However,
there can be no assurance that the costs associated with remediation
efforts or the possible failure of remediation efforts would not have a
material adverse effect on our business, results of operations, and
financial condition.
RESULTS OF OPERATIONS
Our 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 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 we anticipate holding those funds. In addition,
we incur expenses associated with the maintenance of in-force contracts.
30
<PAGE> 32
1998 compared to 1997
We recorded net earnings of $93 million and $81 million for 1998
and 1997, respectively.
Net earnings derived from interest spread decreased $22.8 million
during 1998 as compared to 1997. During 1997, we determined that
certain policyholder reserves exceeded amounts required resulting
in reductions to those reserves. Excluding these reductions,
interest spread decreased $13.0 million during 1998 as compared to
1997. The reduction in interest spread is primarily a result of
our $135 million dividend payment to MLIG during the fourth
quarter 1997 and the declining number of fixed rate contracts
in-force.
We experienced net realized investment gains of $12.5 million and
$13.3 million during 1998 and 1997, respectively. During 1998, we
recorded $8.3 million in realized gains due to the sale of two
real estate properties. Conversely, during 1997, we incurred $4.3
million in realized losses, including valuation adjustments, on
real estate investment sales. Realized investment gains on real
estate were offset by increased credit-related losses, during
1998, primarily from the sale of emerging market securities.
Realized losses from the sale of emerging market securities
increased $6.1 million during 1998 as compared to 1997.
Additionally, during 1997, we realized a $6.3 million gain on the
repayment of our remaining mortgage loan investments and a $1.0
million gain on the redemption of our investment in the separate
accounts.
The market value adjustment expense is attributable to our
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. During 1998, the market
value adjustment expense increased $1.4 million (or 36%) as
compared to 1997 consistent with the increase in surrender
activity resulting from the lower interest rate environment in
1998.
Policy charge revenue increased $18.7 million (or 10%) during 1998
as compared to 1997. The increase in policy charge revenue is
primarily attributable to the increase in policyholders' variable
account balances. During 1998, average variable account balances
increased $1.3 billion (or 16%) as compared to 1997. During the
same time period, asset based policy charges increased $19.5
million (or 17%) consistent with the growth in the separate
account assets. Non-asset based charges decreased $0.8 million (or
1%) during 1998 as compared to 1997.
Policy benefits increased $4.9 million during the current year to
$31.9 million. This increase was primarily attributable to
increased mortality for variable life insurance products, as well
as normal reserve increases for the mortality component of
variable annuity products.
Reinsurance premium ceded increased $2.1 million to $20.0 million
during 1998. This increase is attributable to the combined effect
of the increasing age of policyholders and increased insurance
in-force.
Amortization of deferred policy acquisition costs decreased $27.3
million during 1998 as compared to 1997. Approximately $26.4
million of the decrease is attributable to the retrospective
adjustment of deferred policy acquisition costs as a result of
revising estimated future gross profits assumptions for certain
life insurance and annuity products.
Insurance expenses and taxes increased $2.6 million during 1998 as
compared to 1997. This is primarily attributable to an increase in
non-capitalizable asset-based commissions paid on in-force life
and annuity contracts.
Our effective federal income tax rate decreased to 30% for 1998
from 33% for 1997 principally due to adjustments for foreign tax
credits recorded during 1998.
31
<PAGE> 33
1997 compared to 1996
We 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.
We 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, we recognized a $1.0 million gain on the disposition of our
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 the
current year 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 the
current year to $27 million. This increase was primarily
attributable to mortality costs associated with our variable life
product.
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 the current year 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.
Our 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.
Segment Information
Our operating results are categorized into two business segments:
Life Insurance and Annuities. Our Insurance segment consists of
variable life insurance products and interest-sensitive life
products. Our Annuity segment consists of variable annuities and
32
<PAGE> 34
interest-sensitive annuities. All other earnings represent
earnings on assets that do not support contractholder liabilities.
Net earnings by segment were as follows:
<TABLE>
<CAPTION>
SEGMENT 1998 1997 1996
------- ---- ---- ----
<S> <C> <C> <C>
Life Insurance.............................................. $35 $26 $29
Annuities................................................... $52 $45 $39
Other....................................................... $ 6 $10 $11
</TABLE>
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 our consolidated financial
condition and results of operations presented herein.
We are not dependent upon any single customer, and no single
customer accounted for more than 10% of our revenues during 1998.
Inflation
Our operations have not been materially impacted by inflation and
changing prices during the preceding three years.
REINSURANCE
We reinsure portions of our life insurance risks with other companies. In this
regard, we have reinsurance agreements with a number of other insurance
companies for individual life insurance. The maximum retention on any one life
is approximately $750,000.
CONTRACT OWNER ACCOUNT BALANCES
We record on our books liabilities for life insurance and annuity products equal
to the full Certificate Value of such contracts plus a mortality provision for
certain of its products, which will be sufficient to meet our contract
obligations at their maturities or in the event of a participant's death.
INVESTMENTS
Our 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 our assets, except
for separate account assets supporting variable products, are available to meet
our obligations under the Contracts.
We make investments in accordance with investment guidelines that take into
account investment quality, liquidity and diversification. Based on these
guidelines, we invest our 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,
1998, invested assets supporting Contract guarantees consisted of $2,543 million
of fixed maturity securities, $1,139 million of policy loans, $17 million of
trading account securities, $159 million of equity securities, and $26 million
of real estate.
At December 31, 1998, our assets supporting Contract guarantees included $2,336
million of cash, short-term investments, investment grade publicly traded fixed
maturity securities, and investment grade publicly traded preferred stock.
At December 31, 1998, approximately $1,006 million (approximately 40% of our
general account portfolio of fixed maturity securities) was invested in
securities rated BBB by Standard and Poor's (or similar rating
33
<PAGE> 35
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, 1998, approximately $119 million (4.7%) of our fixed maturity
securities invested in securities considered non-investment grade. We define
non-investment grade as unsecured corporate debt obligations that do not have a
rating equivalent to Standard and Poor's (or similar rating agency) BBB or
higher and are not guaranteed by an agency of the federal government.
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. We carefully select, and closely monitor,
such investments.
COMPETITION
We are 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 us.
CERTAIN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT
We have entered into an investment management agreement with MLAM, a
subsidiary of Merrill Lynch & Co., pursuant to which MLAM provides
investment management and related accounting services with respect to our
investments. We pay a fee to MLAM for these services. We paid
reimbursements of $1.9 million, $1.9 million, and $2.3 million, during
the years ended December 31, 1998, 1997, and 1996, respectively, to MLAM
for such services.
SERVICE AGREEMENT
We have entered into a service agreement with MLIG pursuant to which MLIG
has agreed to provide us with certain accounting, data processing, legal,
actuarial, management, advertising and other services. We reimburse MLIG
for expenses incurred in relation to this service agreement on an
allocated cost basis. Charges billed to us by MLIG pursuant to the
agreement were $43.2 million, $43.0 million, and $44.5 million for the
years ended December 31, 1998, 1997, and 1996, respectively.
GENERAL AGENCY AGREEMENT
We have entered into a general agency agreement with MLLA pursuant to
which registered representatives of MLPF&S who are also our licensed
insurance agents solicit applications for contracts we issue. We pay MLLA
commissions for the contracts sold by such agents. We paid MLLA
commissions under the general agency agreement of $79.1 million, $72.7
million, and $42.6 million during the years ended December 31, 1998,
1997, and 1996, respectively. (See "Distribution of the Contracts".)
EMPLOYEES
We have two employees in Little Rock, Arkansas, and we incur the cost of their
services. Under our 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 us.
Certain of our officers also perform services for our affiliates, and their
salaries are allocated among such affiliates and us. (See "Directors and
Executive Officers".)
34
<PAGE> 36
PROPERTIES
Our home office is located in Little Rock, Arkansas. In addition, personnel
performing services for us pursuant to our 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 & Co. We pay an allocable share of the cost of each of
these premises through the service agreement with MLIG.
STATE REGULATION
We are subject to the laws of the State of Arkansas governing insurance
companies and to the regulations of the Arkansas Insurance Department (the
"Insurance Department"). We file a detailed financial statement in the
prescribed form (the "Annual Statement") with the Insurance Department each year
covering our operations for the preceding year and our 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. Our books and accounts are
subject to review by the Insurance Department at all times. A full examination
of our operations is conducted periodically by the Insurance Department and
under the auspices of the NAIC.
In addition, we are subject to regulation under the insurance laws of all
jurisdictions in which we operate. 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. We are required to file the Annual Statement with
supervisory agencies in each of the jurisdictions in which we do business, and
our 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 us. For additional information about the Risk-Based
Capital adequacy monitoring system, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
In addition, many states regulate affiliated groups of insurers, such as our
affiliates and us, 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 our estimated
liability for future guaranty fund assessments, see Note 8 of Notes to Financial
Statements.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain of our insurance products are subject to various
federal securities laws and regulations. In addition, current and proposed
federal measures that 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
35
<PAGE> 37
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
Our directors and executive officers and their positions with us are as follows:
<TABLE>
<CAPTION>
NAME (AGE) POSITION(S) WITH MERRILL LYNCH LIFE INSURANCE COMPANY
---------- -----------------------------------------------------
<S> <C>
Anthony J. Vespa (57)................................ Chairman of the Board, President, and Chief Executive
Officer
Joseph E. Crowne, Jr. (52)........................... Director, Senior Vice President, Chief Financial
Officer, Chief Actuary, and Treasurer
Barry G. Skolnick (47)............................... Director, Senior Vice President, General Counsel, and
Secretary
David M. Dunford (50)................................ Director, Senior Vice President, and Chief Investment
Officer
Gail R. Farkas (47).................................. Director and Senior Vice President
Robert J. Boucher (53)............................... 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 our indirect parent, Merrill Lynch & Co. The principal positions
of our directors and executive officers for the past five years are listed
below:
Mr. Vespa joined Merrill Lynch Life Insurance Company in January 1994.
Since February 1994, he has held the position of Senior Vice President of
MLPF&S.
Mr. Crowne joined Merrill Lynch Life Insurance Company in June 1991.
Mr. Skolnick joined Merrill Lynch Life Insurance Company in November
1990. Since May 1992, he has held the position of Assistant General
Counsel of Merrill Lynch & Co. and First Vice President of MLPF&S.
Mr. Dunford joined Merrill Lynch Life Insurance Company in July 1990.
Ms. Farkas joined Merrill Lynch Life Insurance Company 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 Insurance Company in May 1992.
None of our shares are owned by any of our directors or executive
officers, as we are a wholly owned subsidiary of MLIG. Our directors and
executive officers, both individually and as a group, own less than one
percent of the outstanding shares of common stock of Merrill Lynch & Co.
EXECUTIVE COMPENSATION
Certain of our executive officers and directors also perform services for our
affiliates, and the salaries of all such individuals are allocated among us and
such affiliates.
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<PAGE> 38
COMPENSATION TABLES AND OTHER INFORMATION
The following tables set forth information with respect to our Chief Executive
Officer and our four other most highly compensated executive officers.
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 (2)(3)(4) OPTIONS COMPENSATION(5)
--------------------------- -------- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 1998 $117,800 $585,900 $129,982 15,348 $12,834
Chairman of the Board, President and Chief 1997 116,120 577,546 149,734 8,710 21,098
Executive Officer 1996 99,165 411,012 113,257 5,535 13,962
Joseph E. Crowne 1998 $114,000 $197,600 $ 23,765 3,032 $ 3,648
Senior Vice President, Chief Actuary and 1997 110,295 202,208 35,846 699 6,622
Chief Financial Officer 1996 114,480 202,248 34,344 561 3,504
David M. Dunford 1998 $161,000 $237,728 $ 43,763 4,760 $ 5,796
Senior Vice President, Chief Investment 1997 161,525 251,056 63,687 1,237 9,697
Officer 1996 161,875 211,825 50,436 823 7,758
Robert J. Boucher 1998 $ 77,188 $170,121 $ 28,600 2,852 $ 4,878
Senior Vice President, Variable Life 1997 70,950 164,604 38,313 744 7,667
Administration 1996 118,625 266,669 60,997 992 7,959
Barry G. Skolnick 1998 $126,960 $186,208 $ 47,628 4,142 $ 6,687
Senior Vice President, General Counsel 1997 115,889 169,970 57,944 1,124 10,436
1996 91,414 137,122 44,075 718 6,976
</TABLE>
- ---------------
(1) Awards were made in January or February of the succeeding fiscal year for
performance in the year indicated.
(2) All awards have been valued for this table using closing prices of Common
Stock of Merrill Lynch & Co. on the Consolidated Transaction Reporting
System on the grant dates of such awards. The closing price on February 1,
1999, the effective date of the grants for performance in 1998, was $73.75.
All Restricted Shares and Restricted Units vest three years following grant
and all Restricted Shares and those Restricted Units granted in 1999 may not
be transferred for an additional two years after vesting. Restricted Shares
are shares of Merrill Lynch & Co. 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 do not convey voting
rights. Awards in 1999 consisted of Restricted Units, payable in cash or
shares of Common Stock at the end of five years. Prior to 1999, awards were
split equally between Restricted Shares and Restricted Units payable in cash
at the end of a three-year vesting period.
(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 & Co. Common Stock.
(4) The number and value of Restricted Shares and Restricted Units held by
executive officers named in the table as of December 25, 1998 are as
follows: Mr. Vespa (3,743 shares and 3,743 units--$537,541); Mr. Crowne
(1,236 shares and 1,236 units--$177,577); Mr. Dunford (1,831 shares and
1,831 units--$263,032); Mr. Boucher (1,852 shares and 1,852
units--$265,948); and Mr. Skolnick (1,854 shares and 1,854 units--$266,277).
These amounts do not include Restricted Shares and Restricted Units awarded
in 1999 for performance in fiscal year 1998.
(5) Amounts shown for 1998 consist of the following: (i) contributions we made
in 1998 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 ($930), Mr.
Dunford ($1,380), Mr. Boucher ($926) and Mr. Skolnick ($1,270); and (ii)
allocations we made in 1998 to accounts of employees under the defined
contribution retirement program--Mr. Vespa ($11,904), Mr. Crowne ($3,648),
Mr. Dunford ($4,416), Mr. Boucher ($3,952) and Mr. Skolnick ($5,417).
37
<PAGE> 39
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
FISCAL OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME YEAR(1) GRANTED FISCAL YEAR ($ PER SHARE) DATE(2) VALUE(3)
---- ------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa............... 1998 15,348 0.05% $72.34375 1/25/2009 $385,936
Joseph E. Crowne............... 1998 3,032 0.01 72.34375 1/25/2009 76,233
David M. Dunford............... 1998 4,760 0.02 72.34375 1/25/2009 119,696
Robert J. Boucher.............. 1998 2,852 0.01 72.34375 1/25/2009 71,721
Barry G. Skolnick.............. 1998 4,142 0.01 72.34375 1/25/2009 104,161
</TABLE>
- ---------------
(1) Includes awards made in January 1999 for performance in 1998. Awards made in
January 1998 for performance in 1997 are excluded, which awards were
reflected in our prospectus for the Contracts dated May 1, 1998.
(2) Awards made in January 1999 included two different classes of Stock Option
grants that are the same in all respects with the exception of when the
Stock Options are exercisable. The first class of Stock Option grants 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. The number of
securities underlying options granted for this class of Stock Option grants
awarded to executive officers named in the table are as follows: Mr. Vespa
(7,050); Mr. Crowne (859); Mr. Dunford (1,582); Mr. Boucher (1,031); and Mr.
Skolnick (1,722).
The second class of Stock Option grants become 100% exercisable on January
25, 2008, but may become exerciseable earlier in whole or in part, as of
any anniversary date of the award at a rate of 1% for each full increment
of $20 million of cumulative Economic Profit (net earnings available to
common stockholders ("Net Earnings") in excess of Net Earnings required to
produce a 15% return on equity) earned by Merrill Lynch & Co. in a fiscal
year beginning in 1999. The Stock Options expire on the tenth anniversary
of the award date. The number of securities underlying options granted for
this class of Stock Option grants awarded to executive officers named in
the table are as follows: Mr. Vespa (8,298); Mr. Crowne (2,173); Mr.
Dunford (3,178); Mr. Boucher (1,821); and Mr. Skolnick (2,420).
(3) Valued using a modified Black-Scholes option pricing model. The exercise
price of each Stock Option ($72.34375) is equal to the average of the high
and low prices on the Consolidated Transaction Reporting System of a share
of Merrill Lynch & Co. Common Stock on January 25, 1999, the date of grant.
The assumptions used for the variables in the model were: 35.49% volatility
(which is the volatility of the Merrill Lynch & Co. Common Stock for the 120
months preceding grant); a 5.05% 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 2009, as quoted in The Wall Street Journal); a 1.33%
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 & Co. Common Stock and cannot be
accurately forecast by application of an option pricing model.
38
<PAGE> 40
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS
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 14,444 26,383 $692,879 $780,936
Joseph E. Crowne.......... 3,976 227,280 0 3,097 0 107,870
David M. Dunford.......... 4,492 278,938 1,128 4,402 45,845 141,863
Robert J. Boucher......... 2,189 131,603 0 4,410 0 156,762
Barry G. Skolnick......... 865 68,444 13,758 4,737 731,098 166,618
</TABLE>
- ---------------
(1) This valuation represents the difference between $71.81250, the closing
price on December 24, 1998 on the Consolidated Transaction Reporting System
of a share of Merrill Lynch & Co. 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 & Co. Common Stock, and the exercise
prices of the Stock Options exercised.
Our directors receive no compensation in addition to their compensation as
officers.
LEGAL PROCEEDINGS
We are not aware of any material pending litigation against us or involving our
property. We are also not aware of any legal proceedings contemplated by any
governmental authorities against us.
LEGAL MATTERS
Barry G. Skolnick, our Senior Vice President and General Counsel, has approved
our organization, our authority to issue the group contracts and Certificates,
and the validity of the group contract form and Certificate form. Sutherland
Asbill & Brennan LLP of Washington, D.C., provided advice on certain matters
relating to federal securities laws.
EXPERTS
Deloitte & Touche LLP, independent auditors, audited our financial statements as
of December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998 included in this prospectus, as stated in their report.
We have included our financial statements 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
We have filed registration statements with the Securities and Exchange
Commission under the Securities Act of 1933 that relate to the group contract
and the Certificate. This prospectus does not contain all of the information in
the registration statements as permitted by Securities and Exchange Commission
regulations. You can obtain the omitted information from the Securities and
Exchange Commission's principal office in Washington, D.C., upon payment of a
prescribed fee.
39
<PAGE> 41
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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted
accounting principles.
February 22, 1999
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------- ------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,504,599; 1997 - $2,927,562) $ 2,543,097 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $162,710; 1997 - $72,599) 158,591 73,612
Trading account securities, at estimated fair value 17,280 15,625
Real estate held-for-sale 25,960 31,805
Policy loans on insurance contracts 1,139,456 1,118,139
------------- -------------
Total Investments 3,884,384 4,247,789
CASH AND CASH EQUIVALENTS 95,377 86,388
ACCRUED INVESTMENT INCOME 73,459 78,224
DEFERRED POLICY ACQUISITION COSTS 405,640 365,105
FEDERAL INCOME TAXES - DEFERRED 9,403 -
REINSURANCE RECEIVABLES 2,893 1,617
AFFILIATED RECEIVABLES - NET - 166
RECEIVABLES FROM SECURITIES SOLD 14,938 75,820
OTHER ASSETS 46,512 49,353
SEPARATE ACCOUNTS ASSETS 10,571,489 9,149,119
------------- -------------
TOTAL ASSETS $ 15,104,095 $ 14,053,581
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------ ------------- -------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,816,744 $ 4,188,110
Claims and claims settlement expenses 63,925 50,574
------------- -------------
Total policy liabilities and accruals 3,880,669 4,238,684
OTHER POLICYHOLDER FUNDS 20,802 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 13,864 15,374
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 15,840 24,438
AFFILIATED PAYABLES - NET 822 -
PAYABLES FOR SECURITIES PURCHASED 10,541 95,135
UNEARNED POLICY CHARGE REVENUE 55,235 32,102
OTHER LIABILITIES 24,273 22,332
SEPARATE ACCOUNTS LIABILITIES 10,559,459 9,149,119
------------- -------------
Total Liabilities 14,581,505 13,605,527
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 173,496 80,735
Accumulated other comprehensive income (loss) (230) 17,995
------------- -------------
Total Stockholder's Equity 522,590 448,054
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,104,095 $ 14,053,581
============= =============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 272,038 $ 308,702 $ 336,661
Net realized investment gains 12,460 13,289 8,862
Policy charge revenue 197,662 178,933 158,829
------------ ------------ ------------
Total Revenues 482,160 500,924 504,352
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 195,676 209,542 235,255
Market value adjustment expense 5,528 4,079 6,071
Policy benefits (net of reinsurance recoveries: 1998 - $9,761;
1997 - $10,439; 1996 - $8,317) 31,891 27,029 21,052
Reinsurance premium ceded 19,972 17,879 15,582
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Insurance expenses and taxes 51,735 49,105 47,077
------------ ------------ ------------
Total Benefits and Expenses 349,637 379,745 387,073
------------ ------------ ------------
Earnings Before Federal Income Tax Provision 132,523 121,179 117,279
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 40,535 52,705 22,814
Deferred (773) (12,261) 15,078
------------ ------------ ------------
Total Federal Income Tax Provision 39,762 40,444 37,892
------------ ------------ ------------
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
============ ============ ============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (31,718) 22,347 (79,749)
Reclassification adjustment for gains included in net earnings (15,932) (12,390) (8,622)
------------ ------------ ------------
Net unrealized gains (losses) on investment securities (47,650) 9,957 (88,371)
Adjustments for:
Policyholder liabilities 14,483 10,094 58,415
Deferred policy acquisition costs 5,129 (822) 12,411
Income tax (expense) benefit related to items of
other comprehensive income 9,813 (6,730) 6,141
------------ ------------ ------------
Other comprehensive income (loss), net of tax (18,225) 12,499 (11,404)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 74,536 $ 93,234 $ 67,983
============ ============ ============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<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, 1996 $ 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 loss, net of tax (11,404) (11,404)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 498,820
Dividend to Parent (55,613) (79,387) (135,000)
Net earnings 80,735 80,735
Other comprehensive income, net of tax 12,499 12,499
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1997 2,000 347,324 80,735 17,995 448,054
Net earnings 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
=========== =========== =========== ============ =============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 92,761 $ 80,735 $ 79,387
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Capitalization of policy acquisition costs (80,241) (71,577) (43,668)
Amortization (accretion) of investments (5,350) (4,672) (4,836)
Net realized investment gains (12,460) (13,289) (8,862)
Interest credited to policyholders' account balances 195,676 209,542 235,255
Provision (benefit) for deferred Federal income tax (773) (12,261) 15,078
Changes in operating assets and liabilities:
Accrued investment income 4,765 7,962 5,756
Claims and claims settlement expenses 13,351 10,908 9,854
Federal income taxes - current (8,598) 3,470 13,935
Other policyholder funds (6,358) 7,740 5,813
Liability for guaranty fund assessments (1,510) (3,399) (2,371)
Affiliated receivables/payables 988 (6,330) 3,735
Policy loans on insurance contracts (21,317) (26,068) (52,804)
Trading account securities (287) (14,928) -
Unearned policy charge revenue 23,133 11,269 7,801
Other, net 3,506 452 (10,194)
Net cash and cash equivalents provided ----------- ----------- -----------
by operating activities 242,121 251,665 315,915
----------- ----------- -----------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 893,619 846,041 847,091
Maturities of available-for-sale securities 451,759 595,745 536,449
Purchases of available-for-sale securities (1,028,086) (1,156,222) (956,840)
Mortgage loans principal payments received - 68,864 22,789
Purchases of mortgage loans - (5,375) -
Sales of real estate held-for-sale 14,135 6,060 5,407
Recapture of investment in Separate Accounts - 11,026 8,829
Investment in Separate Accounts (12,000) (21) (10,063)
Net cash and cash equivalents provided ----------- ----------- -----------
by investing activities 319,427 366,118 453,662
----------- ----------- -----------
</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, 1998, 1997 AND 1996
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ - $ (135,000) $ (175,000)
Policyholders' account balances:
Deposits 1,042,509 1,101,934 542,062
Withdrawals (including transfers to/from Separate Accounts) (1,595,068) (1,593,320) (1,090,572)
Net cash and cash equivalents used ------------ ------------ ------------
by financing activities (552,559) (626,386) (723,510)
============ ============ ============
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,989 (8,603) 46,067
CASH AND CASH EQUIVALENTS
Beginning of year 86,388 94,991 48,924
------------ ------------ ------------
End of year $ 95,377 $ 86,388 $ 94,991
============ ============ ============
Supplementary Disclosure of Cash Flow Information
Cash paid to affiliates for:
Federal income taxes $ 49,133 $ 49,235 $ 8,880
Interest 860 842 988
</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
Description of Business: 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 primarily 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.
Basis of Reporting: 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.
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.
To facilitate comparisons with the current year, certain
amounts in the prior years have been reclassified.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for mortality
risk and the cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
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 as a component of accumulated other
comprehensive income (loss), net of tax. Unrealized gains and
losses on trading account securities are included in net
realized investment gains (losses). 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.
All outstanding mortgage loans were repaid during 1997. The
Company recognized income from mortgage loans based on the cash
payment interest rate of the loan, which may have been
different from the accrual interest rate of the loan for
certain 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 (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.
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.
<PAGE>
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 7.5%. 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:
1998 1997 1996
----------- ----------- -----------
Beginning balance $ 102,252 $ 112,249 $ 124,833
Capitalized amounts 6,085 5,077 5,077
Interest accrued 7,669 9,653 10,669
Amortization (14,213) (24,727) (28,330)
----------- ----------- -----------
Ending balance $ 101,793 $ 102,252 $ 112,249
=========== =========== ===========
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.
1999 $ 7,045
2000 $ 6,110
2001 $ 5,670
2002 $ 5,400
2003 $ 5,386
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. At December 31, 1998, the
$12,030 excess of Separate Accounts Assets over Separate
Accounts liabilities represents the Company's temporary
investment in certain investment divisions that were made to
facilitate the establishment of those investment divisions.
Net investment income and net realized and unrealized gains
(losses) attributable to Separate Accounts assets accrue
directly to the policyholder and are not reported as revenue in
the Company's Statement of Earnings.
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.
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:
<PAGE>
Interest-sensitive life products 4.00% - 5.70%
Interest-sensitive deferred annuities 3.40% - 8.69%
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.
Claims and Claims Settlement Expenses: For life insurance
products, the liability equals the death benefit for claims
that have been reported to the Company and an estimate based
upon prior experience for unreported claims. For annuity
products, the liability equals the guaranteed minimum death
benefit reserve.
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.
Unearned Policy Charge Revenue: Certain variable life insurance
products contain policy charges that are assessed at policy
issuance. These policy charges are deferred and amortized into
policy charge revenue based on the estimated future gross
profits for each group of contracts. The Company records a
liability equal to the unamortized balance of these policy
charges.
Accounting Pronouncements: During 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This pronouncement requires a Company to
present disaggregated information based on the internal
segments used in managing its business. Adoption did not impact
the Company's financial position or results of operations, but
it did affect the presentation of the Company's disclosures
(See Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities". This
pronouncement will be effective for annual periods beginning
after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial
position or results of operations.
<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:
1998 1997
------------ -------------
Assets:
Fixed maturity securities (1) $ 2,543,097 $ 3,008,608
Equity securities (1), (2) 158,591 73,612
Trading account securities (1) 17,280 15,625
Policy loans on insurance contracts (3) 1,139,456 1,118,139
Cash and cash equivalents (4) 95,377 86,388
Separate Accounts assets (5) 10,571,489 9,149,119
------------- -------------
Total financial instruments $ 14,525,290 $ 13,451,491
============= =============
(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, 1998 and 1997, securities without a
readily ascertainable market value, having an amortized cost of
$376,993 and $389,728, had an estimated fair value of $375,470
and $396,253, respectively.
(2) The Company has investments in two limited partnerships that
do not have readily ascertainable market values. Management has
estimated the fair value as equal to cost based on the review of
the underlying investments of the partnerships. At December 31,
1998 and 1997, the Company's limited partnership investments were
$11,569 and $4,744, respectively.
(3) 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.
(4) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(5) 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>
1998
-----------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,079,867 $ 56,703 $ 29,078 $ 2,107,492
Mortgage-backed securities 229,197 7,908 43 237,062
U.S. Government and agencies 150,500 6,393 1,328 155,565
Foreign governments 21,157 35 2,996 18,196
Municipals 23,878 905 1 24,782
------------ ------------ ------------ ------------
Total fixed maturity securities $ 2,504,599 $ 71,944 $ 33,446 $ 2,543,097
============ ============ ============ ============
Equity securities:
Non-redeemable preferred stocks $ 151,130 $ 699 $ 4,823 $ 147,006
Limited partnerships 11,569 - - 11,569
Common stocks 11 5 - 16
------------ ------------ ------------ ------------
Total equity securities $ 162,710 $ 704 $ 4,823 $ 158,591
============ ============ ============ ============
</TABLE>
<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
Limited partnerships 4,744 - - 4,744
Common stocks 10 11 - 21
------------ ------------ ------------ ------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============ ============ ============ ============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1998 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------ ------------
Fixed maturity securities:
Due in one year or less $ 383,825 $ 383,628
Due after one year through five years 926,665 950,938
Due after five years through ten years 599,278 610,339
Due after ten years 365,634 361,130
------------ ------------
2,275,402 2,306,035
Mortgage-backed securities 229,197 237,062
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
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, 1998 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------ ------------
AAA $ 479,923 $ 495,661
AA 146,703 148,169
A 756,880 773,977
BBB 992,041 1,005,835
Non-investment grade 129,052 119,455
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
<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 available-for-sale
investments had actually been realized, with corresponding
credits or charges reported in stockholder's equity as a
component of accumulated other comprehensive income (loss), net
of taxes. The following reconciles net unrealized investment
gains (losses) on available-for-sale investments at December 31:
1998 1997
------------ ------------
Assets:
Fixed maturity securities $ 38,498 $ 81,046
Equity securities (4,119) 1,013
Deferred policy acquisition costs (323) (5,452)
Federal income taxes - deferred 124 -
Separate Accounts assets 30 -
------------ ------------
34,210 76,607
------------ ------------
Liabilities:
Policyholders' account balances 34,440 48,923
Federal income taxes - deferred - 9,689
------------ ------------
34,440 58,612
------------ ------------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ (230) $ 17,995
============ ============
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 included in net
realized investment gains were $932 and $520 at December 31,
1998 and 1997, respectively.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1998 1997 1996
---------- ---------- ----------
Proceeds $ 893,619 $ 846,041 $ 847,091
Gross realized investment gains 20,232 16,783 19,078
Gross realized investment losses 17,429 7,193 10,749
<PAGE>
The Company had investment securities with a carrying value of
$27,189 and $26,508 that were deposited with insurance
regulatory authorities at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the Company's $12,030 investment in
Separate Account assets included $30 of unrealized gains.
During 1997, the Company realized a $1,005 gain on the sale of
its investment in the Separate Accounts.
All outstanding mortgage loans were repaid during 1997.
Information on impaired loans for the years ended December 31
follows:
1997 1996
----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668
Interest income recognized (cash basis) 2,830 4,848
For the years ended December 31, 1997 and 1996, $7,891 and
$28,555, respectively, of real estate held-for-sale was
acquired in satisfaction of debt.
Net investment income arose from the following sources for the
years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 202,313 $ 236,325 $ 266,916
Equity securities 9,234 3,020 1,876
Mortgage loans - 4,627 9,764
Real estate held-for-sale 2,264 1,939 563
Policy loans on insurance contracts 59,236 57,998 56,512
Cash and cash equivalents 3,912 9,570 6,710
Other 761 709 899
------------ ----------- -----------
Gross investment income 277,720 314,188 343,240
Less investment expenses (5,682) (5,486) (6,579)
------------ ----------- -----------
Net investment income $ 272,038 $ 308,702 $ 336,661
============ =========== ===========
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 2,617 $ 6,149 $ 4,690
Equity securities 186 3,441 3,639
Trading account securities 1,368 697 -
Investment in Separate Accounts - 1,005 106
Mortgage loans - 6,252 599
Real estate held-for-sale 8,290 (4,252) (171)
Cash and cash equivalents (1) (3) (1)
------------ ----------- -----------
Net realized investment gains $ 12,460 $ 13,289 $ 8,862
============ =========== ===========
<PAGE>
The following is a reconciliation of the change in valuation
allowances that were recorded to reflect other-than-temporary
declines in the estimated fair value of mortgage loans for the
years ended December 31, 1997 and 1996.
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ----------- ----------- -----------
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Provision for income taxes computed at
Federal statutory rate $ 46,383 $ 42,413 $ 41,048
Decrease in income taxes resulting from:
Dividend received deduction (3,664) (1,969) (3,135)
Foreign tax credit (2,957) - -
Other - - (21)
------------ ------------ ------------
Federal income tax provision $ 39,762 $ 40,444 $ 37,892
============ ============ ============
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1998 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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 11,062 $ (2,422) $ (5,770)
Policyholders' account balances (10,950) (16,099) 15,004
Liability for guaranty fund assessments 529 1,190 760
Investment adjustments (1,350) 5,070 5,122
Other (64) - (38)
------------ ------------ ------------
Deferred Federal income tax
provision (benefit) $ (773) $ (12,261) $ 15,078
============ ============ ============
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 106,132 $ 95,182
Investment adjustments 1,951 601
Liability for guaranty fund assessments 4,852 5,381
Net unrealized investment loss on investment securities 124 -
------------ ------------
Total deferred tax assets 113,059 101,164
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 99,732 88,670
Net unrealized investment gain on investment securities - 9,689
Other 3,924 3,988
------------ ------------
Total deferred tax liabilities 103,656 102,347
------------ ------------
Net deferred tax (asset) liability $ (9,403) $ 1,183
============ ============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
NOTE 5. 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 $750 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 $589 that can be drawn upon for
delinquent reinsurance recoverables.
<PAGE>
As of December 31, 1998, the Company had the following life
insurance in-force:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $13,124,108 $ 3,259,006 $ 1,771 $ 9,866,872 0%
</TABLE>
The Company has 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.
NOTE 6. 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 $43,179, $43,028 and $43,515 for the years
ended December 31, 1998, 1997 and 1996, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG that approximates the daily Federal funds rate. Total
intercompany interest paid was $860, $842 and $988 for 1998,
1997 and 1996, 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
$1,915, $1,913 and $2,279 for 1998, 1997 and 1996,
respectively.
MLIG has entered into agreements with MLAM and Hotchkis & Wiley
("H&W"), a division of MLAM, with respect to administrative
services for the Merrill Lynch Series Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., and Hotchkis & Wiley Variable
Trust (collectively, "the Funds"). The Company invests in the
various mutual fund portfolios of the Funds in connection with
the variable life insurance and annuity contracts the Company
has in-force. Under this agreement, MLAM and H&W pay
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Funds to MLAM
and H&W. The Company received from MLIG its allocable share of
such compensation in the amount of $20,289, $19,057 and $16,514
during 1998, 1997 and 1996, respectively.
<PAGE>
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 $79,117, $72,729 and $42,639 for
1998, 1997 and 1996, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisitions
costs and are being amortized in accordance with the policy
discussed in Note 1.
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 7. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
The Company paid no dividends in 1998. During 1997 and 1996,
the Company paid dividends of $135,000 and $175,000,
respectively, to MLIG. Of these stockholders' dividends,
$110,030 and $175,000 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, 1998 and 1997, approximately $29,707 and
$24,304, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1998 and 1997, were $299,069 and $245,042,
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 1998, 1997 and 1996 was
$55,813, $81,963 and $93,532, 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 that
a life insurance company should have based upon that company's
risk profile. As of December 31, 1998 and 1997, based on the
RBC formula, the Company's total adjusted capital level was
473% and 394%, respectively, of the minimum amount of capital
required to avoid regulatory action.
<PAGE>
In March 1998, the NAIC adopted the Codification of Statutory
Accounting Principles ("Codification"). The Codification,
which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be
effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if,
the state of Arkansas will require adoption of Codification for
the preparation of statutory financial statements.
Codification is not expected to have a material impact on the
Company's capital requirements or statutory financial
statements.
NOTE 8. 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). The Company has utilized public information to
estimate what future assessments it will incur as a result of
insolvencies. At December 31, 1998 and 1997, the Company has
established an estimated liability for future guaranty fund
assessments of $13,864 and $15,374, 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.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1998, $6,569 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 9. 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
<PAGE>
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 described in the summary of significant accounting
policies. 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 assets and related earnings
that do not support policyholder liabilities.
The following table summarizes each business segment's
contribution to the consolidated amounts:
<TABLE>
<CAPTION>
Life
1998 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 35,228 $ 32,765 $ 8,369 $ 76,362
Other revenues 84,836 124,864 422 210,122
------------ ------------ ------------ ------------
Net revenues 120,064 157,629 8,791 286,484
------------ ------------ ------------ ------------
Policy benefits 18,397 13,494 - 31,891
Reinsurance premiums ceded 19,972 - - 19,972
DAC amortization 13,040 31,795 - 44,835
Other non-interest expenses 18,030 39,233 - 57,263
------------ ------------ ------------ ------------
Total non-interest expenses 69,439 84,522 - 153,961
------------ ------------ ------------ ------------
Net earnings before Federal income
tax provision 50,625 73,107 8,791 132,523
Income tax expense 16,033 20,653 3,076 39,762
------------ ------------ ------------ ------------
Net earnings $ 34,592 $ 52,454 $ 5,715 $ 92,761
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 6,069,649 $ 8,885,981 $ 148,465 $15,104,095
Deferred policy acquisition costs $ 207,713 $ 197,927 $ - $ 405,640
Policy liabilities and accruals $ 2,186,001 $ 1,694,668 $ - $ 3,880,669
Other policyholder funds $ 16,033 $ - $ 4,769 $ 20,802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
1997 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 38,826 $ 47,973 $ 12,361 $ 99,160
Other revenues 86,301 102,782 3,139 192,222
------------ ------------ ------------ ------------
Net revenues 125,127 150,755 15,500 291,382
------------ ------------ ------------ ------------
Policy benefits 15,876 11,153 - 27,029
Reinsurance premiums ceded 17,879 - - 17,879
DAC amortization 36,180 35,931 - 72,111
Other non-interest expenses 16,545 36,639 - 53,184
------------ ------------ ------------ ------------
Total non-interest expenses 86,480 83,723 - 170,203
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 38,647 67,032 15,500 121,179
Income tax expense 12,753 22,265 5,426 40,444
------------ ------------ ------------ ------------
Net earnings $ 25,894 $ 44,767 $ 10,074 $ 80,735
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,925,872 $ 7,998,461 $ 129,248 $14,053,581
Deferred policy acquisition costs $ 182,610 $ 182,495 $ - $ 365,105
Policy liabilities $ 2,229,533 $ 2,009,151 $ - $ 4,238,684
Other policyholder funds $ 18,788 $ - $ 8,372 $ 27,160
</TABLE>
<TABLE>
<CAPTION>
Life
1996 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 40,805 $ 44,994 $ 15,607 $ 101,406
Other revenues 78,759 86,430 2,502 167,691
------------ ------------ ------------ ------------
Net revenues 119,564 131,424 18,109 269,097
------------ ------------ ------------ ------------
Policy benefits 12,150 8,902 - 21,052
Reinsurance premiums ceded 15,582 - - 15,582
DAC amortization 30,988 31,048 - 62,036
Other non-interest expenses 18,169 34,979 - 53,148
------------ ------------ ------------ ------------
Total non-interest expenses 76,889 74,929 - 151,818
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 42,675 56,495 18,109 117,279
Income tax expense 13,895 17,658 6,339 37,892
------------ ------------ ------------ ------------
Net earnings $ 28,780 $ 38,837 $ 11,770 $ 79,387
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,623,370 $ 6,957,228 $ 156,895 $12,737,493
Deferred policy acquisition costs $ 194,979 $ 171,482 $ - $ 366,461
Policy liabilities and accruals $ 2,638,177 $ 1,881,537 $ - $ 4,519,714
Other policyholder funds $ 16,256 $ - $ 3,164 $ 19,420
</TABLE>
<PAGE>
(a) Management considers investment income net of interest
credited to policyholders' account balances in evaluating
results.
The table below summarizes the Company's net revenues by
product for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Life Insurance
Variable life insurance $ 91,806 $ 92,245 $ 89,897
Interest-sensitive life insurance 28,258 32,882 29,667
------------ ------------ ------------
Total Life Insurance 120,064 125,127 119,564
------------ ------------ ------------
Annuities
Variable annuities 105,545 88,509 70,116
Interest-sensitive annuities 52,084 62,246 61,308
------------ ------------ ------------
Total Annuities 157,629 150,755 131,424
------------ ------------ ------------
Other 8,791 15,500 18,109
------------ ------------ ------------
Total $ 286,484 $ 291,382 $ 269,097
============ ============ ============
</TABLE>
<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 4.8%. 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 2.8%, 4.8% and 6.8% 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:
---------------------------------------------------------------------------------------------
2.80% 4.80% 6.80%
- -----------------------------------------------------------------------------------------------------------------------------------
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 10,480 818 265 11,034 -0- 246 10,234 (747) 228 9,505
2 10,983 637 272 11,348 -0- 257 10,726 (592) 244 10,147
3 11,510 441 280 11,671 -0- 270 11,240 (417) 260 10,833
4 12,063 229 288 12,004 -0- 283 11,780 (221) 278 11,564
5 12,642 -0- -0- 12,642 -0- -0- 12,642 -0- -0- 12,642
- -----------------------------------------------------------------------------------------------------------------------------------
</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
-----------------------------------------------------------------------
n/365
Guaranteed Interest Rate 1 + Current Interest Rate
(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
</TABLE>
<TABLE>
<S> <C>
n/365
1 + Current Interest Rate
(3) Market Value Adjustment = Net Subaccount Value X [ 1 - ( ----------------------------- ) ]
1 + Guaranteed Interest Rate
</TABLE>
Where "n" is the number of days remaining in the Guarantee Period of the
subaccount, but not less than 365.
A-2
<PAGE> 44
REPORTS TO CONTRACT OWNERS. At least once each year prior to the annuity
date, we send you a report outlining your Certificate Value, Subaccount
Values, Guarantee Periods, Withdrawal Charges and MVAs, if any, applied
during the year. The report will not include financial statements.
PUBLIC INFORMATION. We are required to file certain reports pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). We file our Exchange Act documents and reports,
including our annual and quarterly reports on Form 10-K and Form 10-Q,
electronically pursuant to EDGAR under CIK No. 0000845091.
The Securities and Exchange Commission ("SEC") maintains a web site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The
address of the site is http://www.sec.gov.
You can also review and copy any materials filed with the SEC at its
Public Reference Room at 450 Fifth Street, N.W., Washington D.C., 20549.
You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330.
A-3
<PAGE> 45
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
<PAGE> 46
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> 47
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> 48
<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 Amendment, Restatement and Redomestication of
the Articles of Incorporation of Merrill Lynch Life
Insurance Company (Incorporated by Reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 10 to
Form N-4, Registration No. 33-43773, Filed December 10,
1996.)
3(b) Amended and Restated By-laws of Merrill Lynch Life Insurance
Company (Incorporated by Reference to Merrill Lynch Life
Variable Annuity Separate Account A's Post-Effective
Amendment No. 10 to Form N-4, Registration No. 33-43773,
Filed December 10, 1996.)
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.)
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.)
</TABLE>
II-3
<PAGE> 49
<TABLE>
<S> <C>
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.)
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.)
</TABLE>
II-4
<PAGE> 50
<TABLE>
<S> <C>
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.)
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.)
</TABLE>
II-5
<PAGE> 51
<TABLE>
<S> <C>
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.)
27 Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules.
None.
II-6
<PAGE> 52
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> 53
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 25th day of March, 1999.
<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 25th day of March, 1999.
<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
Barry G. Skolnick Attorney-in-Fact
</TABLE>
II-8
<PAGE> 54
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....................................................
27 Financial Data Schedule.....................................
</TABLE>
<PAGE> 1
EXHIBIT 5
March 25, 1999
[MERRILL LYNCH LIFE INSURANCE COMPANY LETTERHEAD]
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. 4
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 LETTERHEAD]
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. 4 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 25, 1999
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 4 to Registration
Statement No. 33-58303 of Merrill Lynch Life Insurance Company on Form S-1 of
our report dated February 22, 1999 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 29, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 2,543,097
<EQUITIES> 158,591
<MORTGAGE> 0
<REAL-ESTATE> 25,960
<TOTAL-INVEST> 3,884,384
<CASH> 95,377
<RECOVER-REINSURE> 2,893
<DEFERRED-ACQUISITION> 405,640
<TOTAL-ASSETS> 15,104,095
<POLICY-LOSSES> 63,925
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 20,802
<POLICY-HOLDER-FUNDS> 3,816,744
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 520,590
<TOTAL-LIABILITY-AND-EQUITY> 15,104,095
0
<INVESTMENT-INCOME> 272,038
<INVESTMENT-GAINS> 12,460
<OTHER-INCOME> 197,662
<BENEFITS> 31,891
<UNDERWRITING-AMORTIZATION> 44,835
<UNDERWRITING-OTHER> 51,735
<INCOME-PRETAX> 132,523
<INCOME-TAX> 39,762
<INCOME-CONTINUING> 92,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,761
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
