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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 FISCAL QUARTER ENDED SEPTEMBER 30, 1994
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I Financial Information
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
===============================================================================
ASSETS September 30, December 31,
- - ------ 1994 1993
-------------- --------------
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $4,121,412; 1993 - $5,369,236) $ 4,042,858 $ 5,597,359
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1994 - $146,735; 1993 - $140,635) 141,649 144,035
Equity securities available for sale, at estimated fair value
(cost: 1994 - $8,965; 1993 - $24,424) 10,605 24,970
Equity securities held for trading, at estimated fair value
(cost: 1994 - $11,336; 1993 - $19,694) 11,568 20,585
Mortgage loans on real estate 153,663 191,214
Real estate available for sale 24,557 29,761
Policy loans on insurance contracts 969,130 924,579
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Total Investments 5,354,030 6,932,503
CASH AND CASH EQUIVALENTS 96,797 122,218
ACCRUED INVESTMENT INCOME 101,782 120,337
DEFERRED POLICY ACQUISITION COSTS 434,623 318,903
FEDERAL INCOME TAXES - DEFERRED 46,026 16,878
REINSURANCE RECEIVABLES 1,960 1,190
RECEIVABLES FROM AFFILIATES - NET 3,605 789
OTHER ASSETS 31,818 21,481
SEPARATE ACCOUNTS ASSETS 5,783,660 4,715,278
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TOTAL ASSETS $ 11,854,301 $ 12,249,577
============= =============
See notes to financial statements. (Continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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BALANCE SHEETS
(Concluded) (Dollars in Thousands) (Unaudited)
===============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY September 30, December 31,
- - ------------------------------------ 1994 1993
-------------- --------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 5,272,934 $ 6,691,811
Claims and claims settlement expenses 25,711 20,295
------------- -------------
Total policy liabilities and accruals 5,298,645 6,712,106
OTHER POLICYHOLDER FUNDS 13,413 28,768
LIABILITY FOR GUARANTY FUND ASSESSMENTS 25,113 28,083
OTHER LIABILITIES 49,302 68,165
FEDERAL INCOME TAXES - CURRENT 9,213 10,122
SEPARATE ACCOUNTS LIABILITIES 5,768,122 4,715,278
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Total Liabilities 11,163,808 11,562,522
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STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 637,590 637,590
Retained earnings 88,294 47,860
Net unrealized investment loss (37,391) (395)
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Total Stockholder's Equity 690,493 687,055
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 11,854,301 $ 12,249,577
============= =============
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
===============================================================================
Nine Months Ended
September 30,
---------------------------------------
1994 1993
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REVENUES:
Investment revenue:
Net investment income $ 333,167 $ 454,415
Net realized investment gains (losses) (10,587) 32,028
Policy charge revenue 83,211 67,653
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Total Revenues 405,791 554,096
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 243,735 357,398
Market value adjustment expense 6,143 18,946
Policy benefits (net of reinsurance recoveries: 1994 - $4,647;
1993 - $5,282) 12,353 14,126
Reinsurance premium ceded 10,444 9,362
Amortization of deferred policy acquisition costs 53,624 71,288
Insurance expenses and taxes 28,056 36,533
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Total Benefits and Expenses 354,355 507,653
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Earnings Before Federal Income Tax Provision 51,436 46,443
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 20,229 12,834
Deferred (9,227) 2,902
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Total Federal Income Tax Provision 11,002 15,736
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NET EARNINGS $ 40,434 $ 30,707
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See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
===============================================================================
Three Months Ended
September 30,
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1994 1993
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REVENUES:
Investment revenue:
Net investment income $ 102,149 $ 141,169
Net realized investment gains (losses) (414) 17,524
Policy charge revenue 29,370 24,000
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Total Revenues 131,105 182,693
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 71,661 105,545
Market value adjustment expense 631 11,020
Policy benefits (net of reinsurance recoveries: 1994 - $1,436;
1993 - $799) 4,289 8,049
Reinsurance premium ceded 3,451 3,150
Amortization of deferred policy acquisition costs 17,338 25,431
Insurance expenses and taxes 9,040 11,278
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Total Benefits and Expenses 106,410 164,473
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Earnings Before Federal Income Tax Provision 24,695 18,220
FEDERAL INCOME TAX PROVISION:
Current 9,212 2,752
Deferred (7,466) 3,494
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Total Federal Income Tax Provision 1,746 6,246
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NET EARNINGS $ 22,949 $ 11,974
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See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands) (Unaudited)
===============================================================================
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
--------- ---------- --------- ---------- ---------
BALANCE, JANUARY 1, 1993 $ 2,000 $ 654,717 $ 102,873 $ 2,884 $ 762,474
Dividend to Parent 0 (17,127) (102,873) 0 (120,000)
Net earnings 0 0 47,860 0 47,860
Net unrealized investment loss 0 0 0 (3,279) (3,279)
--------- --------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1993 2,000 637,590 47,860 (395) 687,055
Net earnings 0 0 40,434 0 40,434
Net unrealized investment loss 0 0 0 (36,996) (36,996)
--------- --------- --------- ---------- ---------
BALANCE, SEPTEMBER 30, 1994 $ 2,000 $ 637,590 $ 88,294 $ (37,391) $ 690,493
========= ========= ========= ========== =========
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
===============================================================================
Nine Months Ended
September 30,
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1994 1993
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OPERATING ACTIVITIES:
Net earnings $ 40,434 $ 30,707
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 53,624 71,288
Capitalization of policy acquisition costs (90,955) (56,268)
Depreciation and amortization (2,985) 1,514
Net realized investment (gains) losses 10,587 (32,028)
Interest credited to policyholders' account balances 243,735 357,398
Provision (benefit) for deferred Federal income tax (9,227) 2,902
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income 18,555 (8,075)
Claims and claims settlement expenses 5,416 13,785
Federal income taxes - current (909) 12,835
Other policyholder funds (15,355) 35,618
Liability for guaranty fund assessments (2,970) (2,518)
Receivable from affiliates - net (2,816) (8,599)
Change in policy loans (44,551) (66,613)
Change in investment trading securities 873 (126,578)
Other, net (29,897) 33,846
Net cash and cash equivalents provided by operating ------------- -------------
activities 173,559 259,214
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INVESTING ACTIVITIES:
Fixed maturity securities sold 653,327 326,864
Fixed maturity securities matured 1,066,944 2,000,480
Fixed maturity securities purchased (467,420) (1,518,487)
Equity securities available for sale sold 16,876 4,516
Equity securities available for sale purchased 0 (3,324)
Mortgage loans on real estate principal payments received 31,872 20,543
Real estate encumbrances paid off 0 (956)
Real estate available for sale - improvements acquired (1,323) 0
Real estate available for sale sold 8,616 0
Investment in Separate Accounts (15,076) (20,000)
Recapture of investment in Separate Accounts 0 9,841
Net cash and cash equivalents provided by investing ------------- -------------
activities 1,293,816 819,477
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See notes to financial statements (continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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STATEMENTS OF CASH FLOWS
(Concluded) (Dollars in Thousands) (Unaudited)
===============================================================================
Nine Months Ended
September 30,
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1994 1993
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FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 771,832 464,029
Withdrawals (includes transfers to Separate Accounts) (2,264,628) (1,650,924)
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Net cash and cash equivalents used by financing activities (1,492,796) (1,186,895)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (25,421) (108,204)
CASH AND CASH EQUIVALENTS:
Beginning of year 122,218 172,124
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End of period $ 96,797 $ 63,920
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See notes to financial statements
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
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NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 (Unaudited)
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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 condensed financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
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 for the periods
presented. Results for the three and nine months ended September
30, 1994 and 1993 are not necessarily indicative of annual
results. To facilitate comparison with the current periods,
certain amounts in the prior periods have been reclassified.
These unaudited financial statements should be read in
conjunction with the financial statements and the notes thereto
included in the Company's 1993 Annual Report on Form 10-K ("1993
Report").
The Company paid Federal income taxes of $21.1 million during the
first nine months of 1994. The Company did not pay any Federal
income taxes during the first nine months of 1993. The Company
paid interest on affiliated borrowings of $0.6 million and $0.3
million for the nine months ended September 30, 1994 and 1993,
respectively.
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, 1994 and December 31, 1993,
was $395.7 million and $374.2 million, respectively. For the
nine months ended September 30, 1994 and 1993, statutory net
income was $15.2 million and $35.7 million, respectively.
NOTE 3. COMMITMENTS:
The Company had previously entered into interest rate swap
contracts for the purpose of minimizing exposure to fluctuations
in interest rates of specific assets held. Termination of these
commitments as of September 30, 1994 would not have a material
effect on the financial condition of the Company.
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
should be read in conjunction with the accompanying unaudited
financial statements and notes thereto, in addition to the 1993
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations filed in the 1993 Report.
Changes in revenues and expenses in most cases are similar for
the three and nine months periods. Therefore, the discussion
emphasizes the comparison between the nine months of 1994 and
1993, with additional information on the three month periods
presented where appropriate.
Business Overview
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The Company's earnings are principally derived from two sources;
the net investment income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. 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.
Life insurance and annuity deposits received in the first nine
months of 1994 increased $307.8 million to $771.8 million, when
compared to the same period in 1993. The increase was primarily
attributable to sales of the Company's variable annuity product.
During 1994, approximately $1.892 billion of fixed deferred
annuity liabilities will reach the expiration of their interest
rate guarantee period. This represents approximately 28% of the
Company's policy liabilities and accruals as of December 31,
1993. During the first nine months of 1994, approximately $1.599
billion of these fixed deferred annuity liabilities reached the
expiration of their interest rate guarantee period. At the
expiration of an interest rate guarantee period, the contract
owner has an option to either surrender the contract without
incurring a surrender charge, or to "renew" with an adjustment of
the interest crediting rate to the prevailing rate at the time of
renewal. The Company has offered those contract owners electing
to surrender the opportunity to exchange their contract for
either a variable annuity or market value adjusted annuity
contract. The following table summarizes the contract owners'
selections for the first nine months of 1994 and for the year
ended December 31, 1993:
1994 1993
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Amount % Amount %
--------- ---- --------- ----
(Dollars in Millions)
Renewed with an adjustment to the
applicable interest crediting rate $ 262 17% $ 273 22%
Exchanged into either the variable annuity
product or the market value adjusted
annuity product offered by the Company 735 45% 453 36%
Surrendered 602 38% 543 42%
--------- ---- --------- ---
Total $ 1,599 100% $ 1,269 100%
========= ==== ========= ====
The rates of renewal, exchange and surrender experienced are
consistent with management's expectations. For 1995 and 1996,
fixed deferred annuity liabilities which will reach the
expiration of their interest rate guarantee period will decline
significantly from the 1993 and 1994 levels to $453.3 million and
$192.6 million, respectively.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 30,
1994, the Company's invested assets and cash equivalents less
policy loans on insurance contracts consist of approximately 75%
liquid or readily marketable securities.
As of September 30, 1994, approximately $391.0 million (9.3%) of
the Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured corporate debt obligations which do not have a rating
equivalent to Standard and Poor's BBB or higher (or similar
rating agency), 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. The Company carefully selects,
and closely monitors, such investments.
Results of Operations
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For the nine month periods ended September 30, 1994 and 1993, the
Company reported net earnings of $40.4 million and $30.7 million,
respectively. For the three month periods ended September 30,
1994 and 1993, the Company reported $22.9 million and $12.0
million, respectively.
Net investment income and interest credited to policyholders'
account balances for the nine months ended September 30, 1994 as
compared to the same period in 1993 have declined by
approximately $121.2 million and $113.7 million, respectively,
resulting in a $7.5 million reduction in interest spread. The
reductions in net investment income, interest credited to
policyholders' account balances and interest spread are primarily
attributable to the reduction in fixed rate contracts inforce.
The Company experienced net realized investment losses of $10.6
million during the current nine month period as compared to net
realized investment gains of $32.0 million for the same period
during 1993. During the first nine months of 1994 there was
significant volatility in both the equity and debt markets with
ending values generally being lower at September 30, 1994 than
they were at December 31, 1993. Reflecting the general declines
in value, the Company's trading portfolios experienced $11.6
million of realized and unrealized losses during the current
period as compared to $6.0 million of realized and unrealized
gains during the same period in 1993. As well, dispositions in
the available for sale portfolios resulted in substantially
reduced net realized investment gains during the current nine
month period as compared to the same period during 1993.
Policy charge revenue increased approximately $15.6 million
during the current nine month period as compared to the same
period in 1993. This increase is primarily attributable to the
80% increase in policyholders' account balances, as compared to
December 31, 1993, of the variable annuity product.
The market value adjustment expense is attributable to the
Company's market value adjusted annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts which are surrendered before
the expiration of their interest rate guarantee period. Due to
the current lower level of interest rates as compared to the
average guaranteed interest rate of the inforce contracts, this
market value adjustment generally has resulted in an expense to
the Company. The Company's market value adjusted annuity has
experienced a decrease in surrenders during the first nine months
of 1994 as compared to the same period during 1993. The decrease
in surrender activity and the recent rise in interest rates has
resulted in the $12.8 million decrease in the market value
adjustment expense.
Policy benefits decreased approximately $1.7 million from $14.1
million for the first nine months of 1993 to $12.4 million for
the current nine month period. This decrease is primarily
attributable to a reduction in mortality claims during the
current nine month period as compared to the same period during
1993.
Reinsurance premium ceded increased approximately $1.0 million
from $9.4 million during the first nine months of 1993 to $10.4
million for the current period. This increase is primarily
attributable to the increase in average attained age of the
Company's life insurance policyholders. As the average age of the
policyholders increases the cost to the Company of reinsurance
increases.
Amortization of deferred policy acquisition costs declined $17.7
million during the current period as compared to the same period
during 1993. The Company adjusts the amortization of deferred
policy acquisition costs based on realized investment gains
recognized on normal dispositions in the Company's investment
portfolios. The decline in realized investment gains during the
current nine month period as compared to the same period during
1993 contributed to the reduction in amortization of deferred
acquisition costs. Additionally, contributing to the decrease in
amortization is a decline in fixed annuity contracts inforce
partially offset by the increase in the variable annuity
contracts inforce.
Insurance expenses and taxes decreased $8.5 million during the
current nine month period as compared to the same period in 1993.
Approximately $2.7 million of the decrease was attributable to a
period to period reduction in the amount of allowances
established for future assessments related to the rehabilitation
of insolvent and/or impaired life insurance companies. The
remaining reduction in expenses is attributable to operational
efficiencies and the completion during 1993 of certain policy
administration system enhancements.
The Company's effective federal income tax rate decreased from
34% during the first nine months of 1993 to 21% for the same
period during 1994 principally as a result of recording an
adjustment to prior years tax liabilities during the current
period.
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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.
Exhibit 27.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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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
-------------------------------------
Joseph E. Crowne
Senior Vice President and
Chief Financial Officer
Date: November 11, 1994
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule