<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863; 333-34192
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
7 ROSZEL ROAD
PRINCETON, NJ 08540-6205
(Address of Principal Executive Offices)
(609) 627-3950
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 250,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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<PAGE> 2
PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------- ------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2000 - $2,099,531; 1999 - $2,228,921) $ 2,021,600 $ 2,138,335
Equity securities, at estimated fair value
(cost: 2000 - $230,972; 1999 - $214,153) 215,116 186,575
Trading account securities, at estimated fair value 25,180 22,212
Real estate held-for-sale 19,447 20,072
Policy loans on insurance contracts 1,181,058 1,159,163
------------- -------------
Total Investments 3,462,401 3,526,357
CASH AND CASH EQUIVALENTS 143,877 92,181
ACCRUED INVESTMENT INCOME 72,998 73,167
DEFERRED POLICY ACQUISITION COSTS 501,639 475,915
FEDERAL INCOME TAXES - DEFERRED 29,148 37,383
REINSURANCE RECEIVABLES 4,009 4,194
AFFILIATED RECEIVABLES - NET 5,088 287
RECEIVABLES FROM SECURITIES SOLD 1,139 566
OTHER ASSETS 41,099 47,437
SEPARATE ACCOUNTS ASSETS 13,215,235 12,860,562
------------ -------------
TOTAL ASSETS $ 17,476,633 $ 17,118,049
============= =============
See accompanying notes to financial statements. (continued)
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Continued) (Dollars in thousands, except common stock par value and
shares) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
------------------------------------- ------------- -------------
<S> <C> <C>
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,456,963 $ 3,587,867
Claims and claims settlement expenses 102,563 85,696
------------- -------------
Total policyholder liabilities and accruals 3,559,526 3,673,563
OTHER POLICYHOLDER FUNDS 17,452 25,095
LIABILITY FOR GUARANTY FUND ASSESSMENTS 9,826 14,889
FEDERAL INCOME TAXES - CURRENT 20,934 12,806
PAYABLE FOR SECURITIES PURCHASED 9,981 339
UNEARNED POLICY CHARGE REVENUE 95,208 77,663
OTHER LIABILITIES 30,324 25,868
SEPARATE ACCOUNTS LIABILITIES 13,207,343 12,853,960
------------- -------------
Total Liabilities 16,950,594 16,684,183
STOCKHOLDER'S EQUITY:
Common stock ($10 par value; authorized: 1,000,000 shares;
issued and outstanding: 250,000 shares) 2,500 2,500
Additional paid-in capital 347,324 347,324
Retained earnings 220,565 134,127
Accumulated other comprehensive loss (44,350) (50,085)
------------- -------------
Total Stockholder's Equity 526,039 433,866
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 17,476,633 $ 17,118,049
============= =============
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 178,733 $ 192,173
Net realized investment gains 2,038 5,310
Policy charge revenue 202,882 168,541
------------ ------------
Total Revenues 383,653 366,024
------------ -------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 123,946 131,977
Market value adjustment expense 249 2,077
Policy benefits (net of reinsurance recoveries: 2000 - $12,169
1999 - $10,613) 29,943 24,334
Reinsurance premium ceded 17,747 16,118
Amortization of deferred policy acquisition costs 36,561 47,741
Insurance expenses and taxes 42,225 39,931
------------ ------------
Total Benefits and Expenses 250,671 262,178
------------- -------------
Earnings Before Federal Income Tax Provision 132,982 103,846
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 41,398 39,039
Deferred 5,146 (2,693)
------------ ------------
Total Federal Income Tax Provision 46,544 36,346
------------ ------------
NET EARNINGS $ 86,438 $ 67,500
============ =============
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 58,709 $ 62,011
Net realized investment gains 775 171
Policy charge revenue 74,809 58,713
------------ ------------
Total Revenues 134,293 120,895
------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 41,180 43,126
Market value adjustment expense 127 385
Policy benefits (net of reinsurance recoveries: 2000 - $3,417
1999 - $3,203) 9,464 8,254
Reinsurance premium ceded 6,061 5,383
Amortization of deferred policy acquisition costs 3,086 16,508
Insurance expenses and taxes 11,394 14,063
------------ ------------
Total Benefits and Expenses 71,312 87,719
------------ ------------
Earnings Before Federal Income Tax Provision 62,981 33,176
FEDERAL INCOME TAX PROVISION:
Current 18,179 11,310
Deferred 3,865 301
------------ ------------
Total Federal Income Tax Provision 22,044 11,611
------------ ------------
NET EARNINGS $ 40,937 $ 21,565
============ =============
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET EARNINGS $ 86,438 $ 67,500
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 25,744 (103,706)
Reclassification adjustment for gains included in net earnings (1,537) (5,481)
------------ ------------
Net unrealized gains (losses) on investment securities 24,207 (109,187)
Adjustments for:
Policyholder liabilities (6,050) 23,049
Deferred policy acquisition costs (9,333) 28,962
Deferred federal income taxes (3,089) 20,011
------------ ------------
Total other comprehensive income (loss), net of tax 5,735 (37,165)
------------ ------------
COMPREHENSIVE INCOME $ 92,173 $ 30,335
============ ============
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET EARNINGS $ 40,937 $ 21,565
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 31,364 (28,887)
Reclassification adjustment for gains included in net earnings (187) (144)
------------ ------------
Net unrealized gains (losses) on investment securities 31,177 (29,031)
Adjustments for:
Policyholder liabilities (8,164) (1,064)
Deferred policy acquisition costs (10,118) 9,542
Deferred federal income taxes (4,512) 7,193
------------ ------------
Total other comprehensive income (loss), net of tax 8,383 (13,360)
------------ ------------
COMPREHENSIVE INCOME $ 49,320 $ 8,205
============ ============
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands, except common stock par value and shares)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings loss equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 $ 2,000 $ 347,324 $ 173,496 $ (230) $ 522,590
Stock dividend paid to parent
($10 par value, 500 shares) 500 (500)
Cash dividend paid to parent (135,000) (135,000)
Net earnings 96,131 96,131
Other comprehensive loss, net of tax (49,855) (49,855)
----------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1999 2,500 347,324 134,127 (50,085) 433,866
Net earnings 86,438 86,438
Other comprehensive income, net of tax 5,735 5,735
----------- ----------- ----------- ------------- -------------
BALANCE, SEPTEMBER 30, 2000 $ 2,500 $ 347,324 $ 220,565 $ (44,350) $ 526,039
=========== =========== =========== ============= =============
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 86,438 $ 67,500
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 36,561 47,741
Capitalization of policy acquisition costs (71,618) (66,218)
Accretion of investments (1,010) (1,277)
Interest credited to policyholders' account balances 123,946 131,977
Provision (benefit) for deferred Federal income tax 5,146 (2,693)
(Increase) decrease in operating assets:
Trading account securities 621 (286)
Accrued investment income 169 (3,506)
Affiliated receivables (4,801) (260)
Other 6,520 2,865
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 16,867 17,733
Other policyholder funds (7,643) (1,852)
Liability for guaranty fund assessments (5,063) 1,219
Federal income taxes - current 8,128 (1,529)
Unearned policy charge revenue 17,545 17,175
Other 4,456 (10,431)
Other operating activities:
Net realized investment gains (excluding gains on cash and
cash equivalents) (2,038) (5,327)
------------ ------------
Net cash and cash equivalents provided by operating activities 214,224 192,831
------------ ------------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 135,791 509,012
Maturities of available-for-sale securities 200,777 306,155
Purchases of available-for-sale securities (216,231) (658,442)
Sales of real estate held-for-sale 1,375 13,282
Policy loans on insurance contracts (21,895) (9,821)
Recapture of investments in separate accounts 665 9,018
Investment in separate accounts (2,110) (5,326)
------------ ------------
Net cash and cash equivalents provided by investing activities $ 98,372 $ 163,878
------------ ------------
See accompanying notes to financial statements. (continued)
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 1,067,651 $ 873,698
Policyholder withdrawals (including transfers to/from separate accounts) (1,328,551) (1,143,944)
------------ ------------
Net cash and cash equivalents used by financing activities (260,900) (270,246)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 51,696 86,463
CASH AND CASH EQUIVALENTS:
Beginning of year 92,181 95,377
------------ ------------
End of period $ 143,877 $ 181,840
============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 33,270 $ 40,569
Intercompany interest 672 455
See accompanying notes to financial statements.
</TABLE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The interim financial statements for the three and nine month
periods are unaudited. In the opinion of management, these
unaudited financial statements include all adjustments
(consisting only of normal recurring accruals) necessary for a
fair presentation of the financial position and the results of
operations in accordance with generally accepted accounting
principles. These unaudited financial statements should be read
in conjunction with the audited financial statements included in
the Company's Annual Report on Form 10-K ("1999 10K") for the
year ended December 31, 1999. The nature of the Company's
business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain
reclassifications have also been made to prior period financial
statements, where appropriate, to conform to the current period
presentation.
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners. Statutory
capital and surplus at September 30, 2000 and December 31, 1999
was $327 million and $268 million, respectively. For the nine
month periods ended September 30, 2000 and 1999, statutory net
income was $57 million and $70 million, respectively.
In March 1998, the National Association of Insurance
Commissioners adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended
to standardize regulatory accounting and reporting for the
insurance industry, becomes effective January 1, 2001. However,
statutory accounting principles will continue to be established
by individual state laws and permitted practices. Codification is
not expected to have a material impact on the Company's capital
requirements or statutory financial statements.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as either available-for-sale or trading and are
recorded at fair value. Unrealized gains and losses on available-
for-sale securities are included in stockholder's equity as a
component of accumulated other comprehensive loss, net of tax.
Unrealized gains and losses on trading account securities are
included in net realized investment gains (losses). If
management determines that a decline in the value of a security
is other-than-temporary, the carrying value is adjusted to
estimated fair value and the decline in value is recorded as a
net realized investment loss.
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with unrealized holding gains or losses on investments
classified as available-for-sale. The Company adjusts those
assets and liabilities as if the unrealized holdings gains or
losses had actually been realized, with corresponding credits or
charges reported in accumulated other comprehensive loss, net of
taxes. The components of net unrealized gains (losses) included
in accumulated other comprehensive loss are as follows:
September 30, December 31,
2000 1999
------------- ------------
Assets:
Fixed maturity securities $ (77,931) $ (90,586)
Equity securities (15,856) (27,578)
Deferred policy acquisition costs 33,234 42,567
Federal income taxes - deferred 23,880 26,969
Other assets (7) (4)
Separate Accounts assets 861 1,028
------------- ------------
(35,819) (47,604)
------------- ------------
Liabilities:
Policyholders' account balances 8,531 2,481
------------- ------------
Stockholder's equity:
Accumulated other comprehensive loss $ (44,350) $ (50,085)
============= ============
Net realized investment gains (losses), including changes in
valuation allowances for the nine months ended September 30,
were as follows:
September 30, September 30,
2000 1999
------------- -------------
Available-for-sale securities $ (2,313) $ (2,763)
Trading account securities:
Net realized investment gains 5,587 807
Net unrealized holding losses (1,998) (473)
Investment in Separate Accounts 12 362
Real estate held-for-sale 750 7,394
Cash and cash equivalents - (17)
------------- -------------
Total net realized investment gains $ 2,038 $ 5,310
============= =============
NOTE 4. ACCOUNTING PRONOUNCEMENTS:
In June 1999, the Financial Accounting Standards Board deferred
for one year the effective date of the accounting and reporting
requirements of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No.133
requires the Company to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those
instruments at fair value. Changes in fair value for derivatives
that do not qualify for hedge accounting are reported in
earnings. The Company does not have any derivatives that qualify
for hedge accounting.
The Company will adopt the provisions of SFAS No. 133 on January
1, 2001, and has undertaken initiatives to implement this
standard. The Company does not expect SFAS No. 133 to have a
material impact on its financial position or results of
operations.
NOTE 5. SEGMENT INFORMATION
In reporting to management, the Company's operating results are
categorized into two business segments: Life Insurance and
Annuities. The Company's Life Insurance segment consists of
variable life insurance products and interest-sensitive life
products. The Company's Annuity segment consists of variable
annuities and interest sensitive annuities.
The Company's organization is structured in accordance with its
two business segments. Each segment has its own administrative
service center that provides product support to the Company and
customer service support to the Company's policyholders.
Additionally, marketing and sales management functions, within
MLIG, are organized according to these two business segments.
The accounting policies of the business segments are the same as
those for the Company's financial statements included herein.
All revenue and expense transactions are recorded at the product
level and accumulated at the business segment level for review by
management.
The "Other" category, presented in the following segment
financial information, represents net revenues and earnings on
assets that do not support policyholder liabilities.
The following table summarizes each business segment's
contribution to consolidated net revenues and net earnings for
the three and nine month periods ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net Revenues (a):
Life Insurance $ 40,843 $ 33,303 $ 108,793 $ 96,169
Annuities 48,799 41,516 142,200 128,675
Other 3,471 2,950 8,714 9,203
---------- ---------- ---------- ----------
Total Net Revenues $ 93,113 $ 77,769 $ 259,707 $ 234,047
========== ========== ========== ==========
Net Earnings:
Life Insurance $ 24,084 $ 8,882 $ 41,474 $ 25,441
Annuities 14,597 10,765 39,300 36,077
Other 2,256 1,918 5,664 5,982
---------- ---------- ---------- ----------
Total Net Earnings $ 40,937 $ 21,565 $ 86,438 $ 67,500
========== ========== ========== ==========
(a) Management considers investment income net of interest
credited to policyholders' account balances in evaluating
results.
Item 2 Management's Narrative Analysis of the Results of Operations
This Management's Narrative Analysis of the Results of Operations
addresses changes in revenues and expenses for the three month
and nine month periods ended September 30, 2000 and 1999. This
discussion should be read in conjunction with the accompanying
unaudited financial statements and notes thereto, in addition to
the 1999 Financial Statements and Notes to Financial Statements
and the Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the 1999 10K.
In addition to providing historical information, the Company may
make or publish forward-looking statements about management
expectations, strategic objectives, business prospects,
anticipated financial performance, and other similar matters. A
variety of factors, many of which are beyond the Company's
control, affect the operations, performance, business strategy,
and results of the Company and could cause actual results and
experience to differ materially from the expectations expressed
in these statements. These factors include, but are not limited
to, the factors listed in the Economic Environment section listed
below, as well as actions and initiatives taken by both current
and potential competitors and the effect of current, pending, and
future legislation and regulation. The Company undertakes no
responsibility to update or revise any forward-looking
statements.
Business Overview
The Company's gross earnings are principally derived from two
sources:
the net earnings from investment of fixed rate life insurance
and annuity contract owner deposits less interest credited to
contract owners, commonly known as interest spread, and
the charges imposed on variable life insurance and variable
annuity contracts
The costs associated with acquiring contract owner deposits are
amortized over the period in which the Company anticipates
holding those funds. In addition, the Company incurs expenses
associated with the maintenance of inforce contracts.
Economic Environment
The Company's financial position and/or results of operations are
primarily impacted by the following economic factors:
fluctuations in medium term interest rates
fluctuations in credit spreads
equity market performance
The Company defines medium term interest rates as the average
interest rate on U.S. Treasury securities with terms of 1 to 10
years. During the current nine month period, medium term
interest rates decreased approximately 32 basis points as
compared to December 1999, but increased 32 basis points as
compared to September 1999.
The Company defines credit spreads as the interest rate spread
between the 5-year U.S. Treasury Bond Index and the 5-year
Corporate Industrial Bond Index. During the first nine months of
2000, credit spreads widened approximately 39 basis points to end
the period at 150 basis points. During the first nine months of
1999, credit spreads contracted approximately 3 basis points to
end the period at 128 basis points.
There are several standard indices published on a daily basis
that measure performance of selected components of the U.S.
equity market. Examples include the Dow Jones Industrial Average
("Dow"), NASDAQ Composite Index ("NASDAQ") and the Standard &
Poor's 500 Composite Stock Price Index ("S&P Index"). During the
first nine months of 2000, the U.S. equity market experienced
increased volatility. Although all three indices reached
historical highs at various points during the current nine month
period, each index closed generally lower, on a daily basis, as
compared to their respective levels at December 31, 1999. During
the first nine months of 2000, the Dow, NASDAQ and S&P Index
decreased 7.4%, 9.8% and 2.2%, respectively. The investment
performance in the underlying mutual funds supporting the
Company's variable products do not replicate the returns on any
specific U.S. equity market index. However, investment
performance will generally increase or decrease with
corresponding increases or decreases in the overall U.S. equity
market.
Life insurance premiums and annuity deposits recorded increased
$114 million (or 34%) to $454 million and $210 million (or 23%)
to $1,143 million during the three and nine month periods ended
September 30, 2000, respectively, as compared to the same periods
in 1999. Life insurance premiums and annuity deposits collected,
which exclude premiums recorded from internal tax-free exchanges,
increased $104 million and $194 million during the current three
and nine month periods, respectively, as compared to the
equivalent periods in 1999. Variable annuity deposits continue
to dominate the Company's sales by comprising 91% and 88% of
total premiums recorded for the three and nine month periods
ended September 30, 2000, respectively. Life insurance premiums
and annuity deposits by type of product were as follows:
<TABLE>
<CAPTION>
Premiums Collected Change
----------------------------- -----------------------------
Third Quarter Nine Months Third Quarter Nine Months
2000 2000 2000-1999 2000-1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
($ In Millions) ($ In Millions)
Variable Annuities $ 411 $ 1,005 $ 118 $ 195
Modified Guaranteed Annuities 7 31 (6) 10
Variable Life Insurance 35 104 2 6
Other 1 3 - (1)
------------- ------------- ------------- -------------
Total Premiums Recorded 454 1,143 114 210
Internal tax-free Exchanges (30) (75) (10) (16)
------------- ------------- ------------- -------------
Total Premiums Collected $ 424 $ 1,068 $ 104 $ 194
============= ============= ============= =============
</TABLE>
During the second quarter 2000, the Company introduced a new
variable annuity product. This product contains certain features
and investment options that differ from the Company's existing
variable annuity product. Sales of the new variable annuity
product, which was introduced in April, were $269 million during
the six months ended September 30, 2000.
In addition to the introduction of the new variable annuity
product, management believes that the following factors have had
a positive impact on variable annuity sales:
an increase in the number of annuity specialists supporting the
Company's sales force
sales force participation in annuity focus programs
the generally favorable economic environment
Policy and contract surrenders increased $104 million (or 47%)
and $214 million (or 32%) during the current three and nine month
periods, respectively, compared to the equivalent periods in 1999
primarily due to an increase in variable annuity surrenders.
During the three and nine month periods ended September 30, 2000,
variable annuity surrenders increased $111 million (or 73%) and
$237 million (or 66%), respectively, as compared to the same
periods in 1999. These increases are primarily a result of the
anticipated increase in lapse rates on variable annuity contracts
reaching the end of their surrender charge period.
During the first nine months of 2000, separate accounts assets
increased $355 million (or 2.8%) to $13.2 billion. Despite
increased market volatility, positive investment performance in
the variable products' underlying mutual fund investment options
contributed $316 million to the increase in separate accounts
assets.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 30,
2000, the Company's assets included $1.8 billion of cash, short-
term investments and investment grade publicly traded available-
for-sale securities that could be liquidated if funds were
required.
As of September 30, 2000, approximately $93 million (or 4.6%) of
the Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured debt obligations that do not have a rating equivalent
to Standard and Poor's BBB- or higher (or similar rating agency).
Non-investment grade securities are speculative and are subject
to significantly greater risks related to the creditworthiness of
the issuers and the liquidity of the market for such securities.
The Company carefully selects, and closely monitors, such
investments.
The Company has exposure to selected emerging markets that
include securities issued by sovereigns or corporations of Asia
(excluding Japan), Latin America and Mexico. At September 30,
2000, the Company held $84 million in emerging market securities
with an approximate unrealized loss of $7.4 million.
During the current nine month period, the Company sold one real
estate property with a carrying value of $0.6 million for a
realized gain of $0.8 million.
Results of Operations
For the nine month periods ended September 30, 2000 and 1999, the
Company reported net earnings of $86 million and $68 million,
respectively. For the three month periods ended September 30,
2000 and 1999, the Company reported net earnings of $41 million
and $22 million, respectively.
Net earnings derived from interest spread decreased $1.4 million
and $5.4 million for the three and nine month periods ended
September 30, 2000, respectively, compared to the same periods in
1999. The reductions in interest spread are primarily a result
of the Company's $135 million dividend payment to MLIG during the
fourth quarter 1999, as well as the reduction of fixed rate
contracts inforce.
Net realized investment gains increased $0.6 million and
decreased $3.3 million during the three and nine month periods
ended September 30, 2000, respectively, compared to equivalent
periods during 1999. The following table provides the changes in
net realized investment gains (losses) by type for each
respective period:
Three Months Nine Months
Realized Gain (Loss) 2000 - 1999 2000 - 1999
-------------------- ------------ ------------
($ In Millions)
Interest related $ (0.8) $ (7.7) (1)
Credit related 0.2 8.1 (2)
Trading account 1.4 3.3 (3)
Real estate - (6.6) (4)
Investment in Separate Account (0.2) (0.4)
------------ ------------
0.6 (3.3)
============ ============
(1) The decreases in interest related gains are primarily
attributable to reductions in invested asset market valuations
as compared to the equivalent periods in 1999. The decreases in
invested asset market valuations are primarily due to period-to-
period increases in interest rates and credit spreads.
(2) Credit related losses for the nine month period ended
September 30, 1999 included book value writedowns and asset sales
of several large security holdings.
(3) The trading account is comprised of convertible debt and
convertible preferred equity securities. The valuations of these
securities will generally fluctuate in a direct relationship to
changes in the valuations of the underlying common equity
security.
(4) The nine month period ended September 30, 1999 included a
$7.4 million gain on the sale of one real estate property.
Policy charge revenue increased $16.1 million (or 27%) and $34.3
million (or 20%) during the three and nine month periods ended
September 30, 2000, respectively, compared to the same periods
during 1999. During the current three month period, the Company
revised its future gross profit assumptions on certain variable
life business. The retrospective adjustment of the Company's
unearned revenue liability resulted in a $4.6 million increase in
policy charge revenue. Excluding this adjustment, policy charge
revenue increased $11.5 million (or 20%) and $29.7 million (or
18%) during the current three and nine months periods,
respectively, as compared to 1999. The increases in policy
charge revenue are attributable to the increase in contract
owners' variable account balances. Average variable account
balances increased $2.0 billion (or 18%) during the current nine
month period as compared to the same period in 1999.
The market value adjustment expense is attributable to the
Company's modified guaranteed annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts that are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense decreased $0.3 million (or 67%)
and $1.8 million (or 88%) during the current three and nine month
periods, respectively, primarily due to the higher interest rate
environment as compared to the equivalent periods in 1999. The
market value adjustment has an inverse relationship to changes in
interest rates.
Policy benefits increased $1.2 million (or 15%) and $5.6 million
(or 23%) during the current three and nine month periods,
respectively, compared to equivalent periods in 1999. The
increases are primarily due to an increase in the number of
variable life death claims, an increase in the average net amount
at risk per variable life death claim, and normal reserve
increases for the mortality component of the Company's variable
annuity products.
Reinsurance premium ceded increased $0.7 million (or 13%) and
$1.6 million (or 10%) during the three and nine month periods
ended September 30, 2000, respectively, compared to the same
periods in 1999. These increases are attributable to the
combined effect of the increasing age of contract owners and
increased insurance inforce.
Amortization of deferred policy acquisition costs decreased $13.4
million (or 81%) and $11.2 million (or 23%) during the three and
nine month periods ended September 30, 2000, respectively,
compared to the equivalent periods in 1999. During the current
three month period, the Company revised its future gross profit
assumptions on certain life insurance business. The
retrospective adjustment of the Company's deferred policy
acquisition costs resulted in a $15.6 million decrease in
amortization of deferred policy acquisition costs. Excluding
this adjustment, amortization of deferred policy acquisition
costs increased $2.2 million and $4.4 million during the current
three and nine month periods, respectively, as compared to the
same periods in 1999. These increases are primarily due to the
growth in policy charge revenue.
Insurance expenses and taxes decreased $2.7 million (or 19%) and
increased $2.3 million (or 6%) during the current three and nine
month periods, respectively, compared to the same periods in
1999. During the current three month period, the Company's
liability for guaranty fund assessments was determined to be in
excess of amounts required resulting in a $5.8 million reduction
in guaranty fund expenses. Excluding this adjustment, insurance
expenses and taxes increased $3.1 million and $8.1 million during
the current three and nine month periods, respectively, as
compared to the same periods in 1999. These increases are
primarily due to increases in certain employee compensation
related expense allocations from Merrill Lynch & Co.,
expenditures related to financial systems enhancements,
and non-capitalizable asset-based commissions paid on
inforce life and annuity contracts.
Segment Information
The products that comprise the Life Insurance and Annuity
segments generally possess similar economic characteristics. As
such, the financial condition and results of operations of each
business segment are generally consistent with the Company's
consolidated financial condition and results of operations
presented herein.
The current three and nine month period increases in net revenues
and net earnings for the life insurance segment are primarily due
to the retrospective adjustment of unearned revenue and deferred
policy acquisition costs, noted above.
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ MATTHEW J. RIDER
-----------------------------------------
Matthew J. Rider
Senior Vice President and
Chief Financial Officer
Date: November 14, 2000
<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
