<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 JUNE 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>
June 30, December 31,
ASSETS 2000 1999
-------- ------------ ------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2000 - $2,167,852; 1999 - $2,228,921) $ 2,065,603 $ 2,138,335
Equity securities, at estimated fair value
(cost: 2000 - $231,313; 1999 - $214,153) 208,668 186,575
Trading account securities, at estimated fair value 25,085 22,212
Real estate held-for-sale 19,447 20,072
Policy loans on insurance contracts 1,171,856 1,159,163
------------ ------------
Total Investments 3,490,659 3,526,357
CASH AND CASH EQUIVALENTS 73,449 92,181
ACCRUED INVESTMENT INCOME 75,719 73,167
DEFERRED POLICY ACQUISITION COSTS 491,070 475,915
FEDERAL INCOME TAXES - DEFERRED 37,527 37,383
REINSURANCE RECEIVABLES 4,384 4,194
OTHER ASSETS 46,014 48,290
SEPARATE ACCOUNTS ASSETS 13,141,035 12,860,562
------------ ------------
TOTAL ASSETS $17,359,857 $17,118,049
============ ============
</TABLE>
See accompanying notes to financial statements. (continued)
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>
June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
------------------------------------ ------------ ------------
<S> <C> <C>
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,487,492 $ 3,587,867
Claims and claims settlement expenses 100,199 85,696
------------ ------------
Total policyholder liabilities and accruals 3,587,691 3,673,563
OTHER POLICYHOLDER FUNDS 18,407 25,095
LIABILITY FOR GUARANTY FUND ASSESSMENTS 14,507 14,889
FEDERAL INCOME TAXES - CURRENT 11,845 12,806
UNEARNED POLICY CHARGE REVENUE 93,251 77,663
OTHER LIABILITIES 23,237 26,207
SEPARATE ACCOUNTS LIABILITIES 13,134,200 12,853,960
------------ ------------
Total Liabilities 16,883,138 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 179,628 134,127
Accumulated other comprehensive loss (52,733) (50,085)
------------ ------------
Total Stockholder's Equity 476,719 433,866
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $17,359,857 $17,118,049
============ ============
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 120,024 $ 130,162
Net realized investment gains 1,263 5,139
Policy charge revenue 128,073 109,828
------------ ------------
Total Revenues 249,360 245,129
------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 82,766 88,851
Market value adjustment expense 122 1,692
Policy benefits (net of reinsurance recoveries: 2000 - $8,752
1999 - $7,410) 20,479 16,080
Reinsurance premium ceded 11,686 10,735
Amortization of deferred policy acquisition costs 33,475 31,233
Insurance expenses and taxes 30,831 25,868
------------ ------------
Total Benefits and Expenses 179,359 174,459
------------ ------------
Earnings Before Federal Income Tax Provision 70,001 70,670
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 23,219 27,729
Deferred 1,281 (2,994)
------------ ------------
Total Federal Income Tax Provision 24,500 24,735
------------ ------------
NET EARNINGS $ 45,501 $ 45,935
============ ============
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 59,676 $ 62,836
Net realized investment gains (losses) (808) 3,782
Policy charge revenue 65,163 55,867
------------ ------------
Total Revenues 124,031 122,485
------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 41,698 44,003
Market value adjustment expense 93 857
Policy benefits (net of reinsurance recoveries: 2000 - $3,277
1999 - $4,128) 10,284 8,130
Reinsurance premium ceded 5,975 5,538
Amortization of deferred policy acquisition costs 17,384 14,538
Insurance expenses and taxes 15,881 13,337
------------ ------------
Total Benefits and Expenses 91,315 86,403
------------ ------------
Earnings Before Federal Income Tax Provision 32,716 36,082
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 8,845 13,579
Deferred 2,605 (950)
------------ ------------
Total Federal Income Tax Provision 11,450 12,629
------------ ------------
NET EARNINGS $ 21,266 $ 23,453
============ ============
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET EARNINGS $ 45,501 $ 45,935
------------ ------------
OTHER COMPREHENSIVE LOSS:
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding losses arising during the period (5,620) (74,819)
Reclassification adjustment for gains included in net earnings (1,350) (5,337)
------------ ------------
Net unrealized losses on investment securities (6,970) (80,156)
Adjustments for:
Policyholder liabilities 2,112 24,112
Deferred policy acquisition costs 785 19,421
Deferred federal income taxes 1,425 12,818
------------ ------------
Total other comprehensive loss, net of tax (2,648) (23,805)
------------ ------------
COMPREHENSIVE INCOME $ 42,853 $ 22,130
============ ============
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET EARNINGS $ 21,266 $ 23,453
------------ ------------
OTHER COMPREHENSIVE LOSS:
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding losses arising during the period (10,518) (40,611)
Reclassification adjustment for (gains) losses included in net 433 (4,013)
earnings ------------ ------------
Net unrealized losses on investment securities (10,085) (44,624)
Adjustments for:
Policyholder liabilities (1,954) 18,304
Deferred policy acquisition costs 2,836 14,835
Deferred federal income taxes 3,221 4,020
------------ ------------
Total other comprehensive loss, net of tax (5,982) (7,465)
------------ ------------
COMPREHENSIVE INCOME $ 15,284 $ 15,988
============ ============
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands, 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 45,501 45,501
Other comprehensive loss, net of tax (2,648) (2,648)
----------- ----------- ----------- ------------- -------------
BALANCE, JUNE 30, 2000 $ 2,500 $ 347,324 $ 179,628 $ (52,733) $ 476,719
=========== =========== =========== ============= =============
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 45,501 $ 45,935
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 33,475 31,233
Capitalization of policy acquisition costs (47,845) (40,909)
Accretion of investments (809) (1,323)
Interest credited to policyholders' account balances 82,766 88,851
Provision (benefit) for deferred Federal income tax 1,281 (2,994)
(Increase) decrease in operating assets:
Trading account securities (257) (556)
Accrued investment income (2,552) (4,376)
Other 1,723 (5,987)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 14,503 11,131
Other policyholder funds (6,688) (964)
Liability for guaranty fund assessments (382) (179)
Federal income taxes - current (961) 739
Unearned policy charge revenue 15,588 11,769
Other (2,739) (4,181)
Other operating activities:
Net realized investment gains (excluding gains on cash and
cash equivalents) (1,263) (5,139)
------------- ------------
Net cash and cash equivalents provided by operating activities 131,341 123,050
------------- ------------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 117,282 432,272
Maturities of available-for-sale securities 119,952 255,577
Purchases of available-for-sale securities (194,515) (582,380)
Sales of real estate held-for-sale 1,375 13,282
Policy loans on insurance contracts (12,693) (3,428)
Recapture of investments in separate accounts 665 6,653
Investment in separate accounts (1,110) (5,326)
------------- ------------
Net cash and cash equivalents provided by investing activities $ 30,956 $ 116,650
------------- ------------
</TABLE>
See accompanying notes to financial statements. (continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement $ 643,585 $ 553,542
deposits)
Policyholder withdrawals (including transfers to/from separate (824,614) (751,150)
accounts) ------------ ------------
Net cash and cash equivalents used by financing activities (181,029) (197,608)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,732) 42,092
CASH AND CASH EQUIVALENTS:
Beginning of year 92,181 95,377
------------ ------------
End of period $ 73,449 $ 137,469
============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 24,180 $ 26,990
Intercompany interest 359 359
</TABLE>
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The interim financial statements for the three and six 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 June 30, 2000 and December 31, 1999 was $298 million
and $268 million, respectively. For the six month periods ended
June 30, 2000 and 1999, statutory net income was $29 million and
$58 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as either available for-sale or trading and are
recorded at fair value. Unrealized gains and losses on available
for-sale securities are included in 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:
June 30, December 31,
2000 1999
----------- -----------
Assets:
Fixed maturity securities $ (102,249) $ (90,586)
Equity securities (22,645) (27,578)
Deferred policy acquisition costs 43,352 42,567
Federal income taxes - deferred 28,394 26,969
Other assets (20) (4)
Separate Accounts assets 804 1,028
----------- -----------
(52,364) (47,604)
----------- -----------
Liabilities:
Policyholders' account balances 369 2,481
----------- -----------
Stockholder's equity:
Accumulated other comprehensive loss $ (52,733) $ (50,085)
=========== ===========
The following summarizes the net impact of available-for-sale
securities, trading account securities and real estate held-for-
sale on net realized investment gains:
June 30, June 30,
2000 1999
----------- -----------
Available-for-sale securities:
Net realized investment losses $ (2,103) $ (2,963)
Trading account securities:
Net realized investment gains 3,994 523
Net unrealized holding gains (losses) (1,378) 185
Real estate held-for-sale:
Net realized investment gains 750 7,394
----------- -----------
Total net realized investment gains $ 1,263 $ 5,139
=========== ===========
NOTE 4. 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 six
month periods ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ----------
Net Revenues (a):
Life Insurance $ 34,773 $ 30,819 $ 67,950 $ 62,866
Annuities 46,039 44,794 93,401 87,158
Other 1,521 2,869 5,243 6,254
--------- --------- --------- ----------
Total Net Revenues $ 82,333 $ 78,482 $166,594 $ 156,278
========= ========= ========= ==========
Net Earnings:
Life Insurance $ 8,590 $ 8,207 $ 17,390 $ 16,559
Annuities 11,687 13,381 24,703 25,311
Other 989 1,865 3,408 4,065
--------- --------- --------- ----------
Total Net Earnings $ 21,266 $ 23,453 $ 45,501 $ 45,935
========= ======== ========= ==========
(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
six month periods ended June 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 six month period, medium term interest
rates were relatively flat as compared to December 1999, but
increased approximately 131 basis points as compared to the first
six months of 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 half of 2000,
credit spreads widened approximately 43 basis points to end the
period at 154 basis points. During the first half of 1999, credit
spreads contracted approximately 25 basis points to end the period
at 106 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
six months of 2000, the U.S. equity market experienced increased
volatility. Although all three indices reached historical highs at
various points during the current six month period, each index
closed generally lower, on a daily basis, as compared to their
respective levels at December 31, 1999. During the first six months
of 2000, the Dow, NASDAQ and S&P Index decreased 9.1%, 2.5% and
1.0%, 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 $30
million (or 9%) to $356 million and $96 million (or 16%) to $689
million during the three and six month periods ended June 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 $27 million and $90 million during the current three
and six month periods, respectively, as compared to the
equivalent periods in 1999. Variable annuity deposits continue
to dominate the Company's sales by comprising 88% and 86% of total
premiums recorded for the three and six month periods ended
June 30, 2000, respectively. Life insurance premiums and annuity
deposits by type of product were as follows:
<TABLE>
<CAPTION>
Premiums Collected Change
------------------------------- --------------------------------
Second Quarter Six Months Second Quarter Six Months
2000 2000 2000-1999 2000-1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
($ In Millions) ($ In Millions)
Variable Annuities $ 313 $ 594 $ 19 $ 77
Modified Guaranteed Annuities 12 24 8 16
Variable Life Insurance 31 69 4 4
Other - 2 (1) (1)
-------------- ------------- -------------- -------------
Total Premiums Recorded 356 689 30 96
Internal tax-free exchanges (26) (45) (3) (6)
-------------- ------------- -------------- -------------
Total Premiums Collected $ 330 $ 644 $ 27 $ 90
============== ============= ============== =============
</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
were $95 million during the three months ended June 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
Modified guaranteed annuity deposits increased $8 million (or 200%)
to $12 million and $16 million (or 200%) to $24 million during
the three and six month periods ended June 30, 2000, respectively,
as compared to the same periods in 1999. The increases in modified
guaranty annuity deposits are primarily due to the higher interest
rate environment as compared to the prior three and six month periods.
Policy and contract surrenders increased $48 million (or 20%) and
$110 million (or 25%) during the current three and six month
periods, respectively, compared to the equivalent periods in 1999
primarily due to an increase in variable annuity surrenders. During
the three and six months periods ending June 30, 2000, variable
annuity surrenders increased $44 million (or 32%) and $111 million
(or 45%), 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 six months of 2000, separate accounts assets
increased $280 million (or 2.2%) to $13.1 billion. Despite
increased market volatility, positive investment performance in the
variable products' underlying mutual fund investment options
contributed exclusively to the increase in separate accounts
assets.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of June 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 June 30, 2000, approximately $97 million (or 4.7%) 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
carfully selects, and closley 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 June 30, 2000 the Company
held $93 million in emerging market securities with an approximate
unrealized loss of $8.6 million.
During the current six 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 both six month periods ended June 30, 2000 and 1999, the
Company reported net earnings of $46 million. For the three month
periods ended June 30, 2000 and 1999, the Company reported net
earnings of $21 million and $23 million, respectively.
Net earnings derived from interest spread decreased $0.9
million and $4.1 million for the three and six month periods
ended June 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 decreased $4.6 million and $3.9
million during the three and six month periods ended June 30, 2000,
respectively, compared to equivalent periods during 1999. The
following table provides the changes in net realized investment
gains (losses) by type for each respective period:
Three Months Six Months
Realized Gain (Loss) 2000 - 1999 2000 - 1999
-------------------- ------------ ------------
($ In Millions)
Interest related $ (1.2) $ (6.9) (1)
Credit related 4.1 7.9 (2)
Trading account (0.1) 1.9 (3)
Real estate (7.4) (6.6) (4)
Investment in Separate Account - (0.2)
----------- ------------
(4.6) (3.9)
=========== ============
(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) The prior periods' credit related losses 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 second quarter 1999 included a $7.4 million gain on
the sale of one real estate property.
Policy charge revenue increased $9.3 million (or 17%) and $18.2
million (or 17%) during the three and six month periods ended
June 30, 2000, respectively, compared to the same periods during
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 six month period as compared to the
same period in 1999.
Policy benefits increased $2.2 million (or 26%) and $4.4 million
(or 21%) during the current three and six 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.
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 $0.8 million (or 89%) and
$1.6 million (or 93%) during the current three and six 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.
Reinsurance premium ceded increased $0.4 million (or 8%) and $1.0
million (or 9%) during the three and six month periods ended June
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 increased $2.8
million (or 20%) and $2.2 million (or 7%) during the three and six
month periods ended June 30, 2000, respectively, compared to the
equivalent periods in 1999. The increases in amortization of
deferred policy acquisition costs are primarily due to the growth
in policy fee income. Partially offsetting the six month period
increase was the impact of lower interest related realized
investment gains during the first quarter 2000 as compared to the
first quarter 1999.
Insurance expenses and taxes increased $2.5 million (or 19%) and
$5.0 million (or 19%) during the current three and six month
periods, respectively, compared to the same periods in 1999. The
increases are primarily due to increases in certain employee
compensation related expense allocations from Merrill Lynch & Co.,
variable product prospectus costs, 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.
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE, JR.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: August 14, 2000
<PAGE> 5
EXHIBIT INDEX
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Exhibit
No. Description
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27 Financial Data Schedule
