1
THIS DOCUMENT IS A COPY OF THE 10-Q FILED ON MAY 16, 2001 PURSUANT TO A RULE
201 TEMPORARY HARDSHIP EXEMPTION.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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)
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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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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)
March 31, December 31,
ASSETS 2001 2000
- ------- ------------- -------------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2001 - $1,983,667; 2000 - $2,050,333) $ 1,979,516 $ 2,012,016
Equity securities, at estimated fair value
(cost: 2001 - $204,453; 2000 - $229,045) 196,162 215,030
Trading account securities, at estimated fair value 22,338 24,859
Real estate held-for-sale 19,447 19,447
Policy loans on insurance contracts 1,198,236 1,193,690
------------- -------------
Total Investments 3,415,699 3,465,042
CASH AND CASH EQUIVALENTS 187,264 92,730
ACCRUED INVESTMENT INCOME 68,230 71,001
DEFERRED POLICY ACQUISITION COSTS 479,960 494,088
FEDERAL INCOME TAXES - DEFERRED - 10,902
REINSURANCE RECEIVABLES 4,172 3,090
AFFILIATED RECEIVABLES - NET - 667
RECEIVABLES FROM SECURITIES SOLD 2,525 2,578
OTHER ASSETS 38,735 40,614
SEPARATE ACCOUNTS ASSETS 11,254,916 12,362,798
------------- -------------
TOTAL ASSETS $ 15,451,501 $ 16,543,510
============= =============
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)
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2001 2000
- ------------------------------------- ------------- -------------
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,382,937 $ 3,421,873
Claims and claims settlement expenses 89,955 85,673
------------- -------------
Total policyholder liabilities and accruals 3,472,892 3,507,546
OTHER POLICYHOLDER FUNDS 10,726 17,678
LIABILITY FOR GUARANTY FUND ASSESSMENTS 10,222 10,250
FEDERAL INCOME TAXES - DEFERRED 5,582 -
FEDERAL INCOME TAXES - CURRENT 6,176 5,134
PAYABLES FOR SECURITIES PURCHASED 7,621 1,328
UNEARNED POLICY CHARGE REVENUE 105,485 101,182
OTHER LIABILITIES 25,362 32,074
AFFILIATED PAYABLES - NET 8,542 -
SEPARATE ACCOUNTS LIABILITIES 11,249,359 12,356,035
------------- -------------
Total Liabilities 14,901,967 16,031,227
------------- -------------
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 221,796 194,808
Accumulated other comprehensive loss (22,086) (32,349)
------------- -------------
Total Stockholder's Equity 549,534 512,283
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,451,501 $ 16,543,510
============= =============
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)
Three Months Ended
March 31,
-----------------------------
2001 2000
----------- -----------
REVENUES:
Policy charge revenue $ 65,972 $ 62,910
Net investment income 56,249 60,348
Net realized investment gains (losses) (1,375) 2,071
----------- -----------
Total Revenues 120,846 125,329
----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 39,616 41,068
Market value adjustment expense 453 29
Policy benefits (net of reinsurance recoveries: 2001 - $3,777;
2000 - $5,475) 5,476 10,195
Reinsurance premium ceded 6,313 5,711
Amortization of deferred policy acquisition costs 16,474 16,091
Insurance expenses and taxes 13,526 14,950
----------- -----------
Total Benefits and Expenses 81,858 88,044
----------- -----------
Earnings Before Federal Income Tax Provision 38,988 37,285
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 1,042 14,374
Deferred 10,958 (1,324)
----------- -----------
Total Federal Income Tax Provision 12,000 13,050
----------- -----------
NET EARNINGS $ 26,988 $ 24,235
=========== ===========
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)
Three Months Ended
March 31,
-----------------------------
2001 2000
----------- -----------
NET EARNINGS $ 26,988 $ 24,235
OTHER COMPREHENSIVE INCOME:
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains arising during the period 37,350 4,898
Reclassification adjustment for gains (losses) included in
net earnings 1,334 (1,783)
----------- -----------
Net unrealized gains on investment securities 38,684 3,115
Adjustments for:
Policyholder liabilities (9,317) 4,066
Deferred policy acquisition costs (13,578) (2,051)
Deferred federal income taxes (5,526) (1,796)
----------- -----------
Total other comprehensive income, net of taxes 10,263 3,334
----------- -----------
COMPREHENSIVE INCOME $ 37,251 $ 27,569
=========== ===========
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) (Unaudited)
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings loss equity
--------- ------------ ---------- -------------- --------------
BALANCE, JANUARY 1, 2000 $ 2,500 $ 347,324 $ 134,127 $ (50,085) $ 433,866
Cash dividend paid to parent (65,000) (65,000)
Net earnings 125,681 125,681
Other comprehensive income, net of tax 17,736 17,736
--------- ------------ ---------- -------------- --------------
BALANCE, DECEMBER 31, 2000 2,500 347,324 194,808 (32,349) 512,283
Net earnings 26,988 26,988
Other comprehensive income, net of tax 10,263 10,263
--------- ------------ ---------- -------------- --------------
BALANCE, MARCH 31, 2001 $ 2,500 $ 347,324 $ 221,796 $ (22,086) $ 549,534
========= ============ ========== ============== ==============
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)
Three Months Ended
March 31,
-------------------------------
2001 2000
------------- -------------
Cash Flows From Operating Activities:
Net earnings $ 26,988 $ 24,235
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 16,474 16,091
Capitalization of policy acquisition costs (15,924) (24,067)
Accretion of investments (254) (387)
Interest credited to policyholders' account balances 39,616 41,068
Provision (benefit) for deferred Federal income tax 10,958 (1,324)
Decrease in operating assets:
Trading account securities 887 79
Accrued investment income 2,771 1,963
Affiliated receivables 667 287
Other 797 5,009
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 4,282 8,638
Other policyholder funds (6,952) (9,590)
Liability for guaranty fund assessments (28) (321)
Federal income taxes - current 1,042 4,568
Affiliated payables 8,542 263
Unearned policy charge revenue 4,303 8,344
Other (7,109) 10,448
Other operating activities:
Net realized investment (gains) losses 1,375 (2,071)
------------- -------------
Net cash and cash equivalents provided by operating
activities 88,435 83,233
------------- -------------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 58,553 79,237
Maturities of available-for-sale securities 107,585 75,289
Purchases of available-for-sale securities (67,624) (168,095)
Sale of real estate held-for-sale - 1,375
Policy loans on insurance contracts (4,546) (4,127)
Recapture of investments in separate accounts - 555
Investment in separate accounts - (1,000)
------------- -------------
Net cash and cash equivalents provided (used) by
investing activities $ 93,968 $ (16,766)
------------- -------------
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)
Three Months Ended
March 31,
-------------------------------
2001 2000
------------- -------------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement
deposits) $ 295,014 $ 314,150
Policyholder withdrawals (including transfers to / from separate
accounts) (382,883) (401,638)
------------- -------------
Net cash and cash equivalents used by financing activities (87,869) (87,488)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 94,534 (21,021)
CASH AND CASH EQUIVALENTS:
Beginning of year 92,730 92,181
------------- -------------
End of period $ 187,264 $ 71,160
============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ - $ 9,806
Intercompany interest 375 198
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 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 accounting principles generally accepted in
the United States of America. 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 ("2000 10K") for the year ended
December 31, 2000. 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.
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company's statutory financial statements are presented on the basis of
accounting practices prescribed or permitted by the Insurance Department of
the State of Arkansas. The State of Arkansas has adopted the National
Association of Insurance Commissioners' statutory accounting practices as
the basis of its statutory accounting practices.
Statutory capital and surplus at March 31, 2001 and December 31, 2000 were
$271,504 and $252,704, respectively. For the three month periods ended
March 31, 2001 and 2000, statutory net income was $5,103 and $30,845,
respectively.
NOTE 3. INVESTMENTS:
The Company's investments in fixed maturity and equity securities are
classified as either available-for-sale or trading and are recorded at
estimated fair value. Unrealized gains and losses on available-for-sale
securities are included in stockholder's equity as a component of
accumulated other comprehensive 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 were as follows:
March 31, December 31,
2001 2000
----------- --------------
Assets:
Fixed maturity securities $ (4,151) $ (38,317)
Equity securities (8,291) (14,015)
Deferred policy acquisition costs 5,679 19,257
Federal income taxes - deferred - 17,419
Separate Accounts assets (1,559) (353)
----------- --------------
(8,322) (16,009)
----------- --------------
Liabilities:
Federal income taxes - deferred (11,893) -
Policyholders' account balances 25,657 16,340
----------- --------------
13,764 16,340
----------- --------------
Stockholder's equity:
Accumulated other comprehensive loss $ (22,086) $ (32,349)
=========== ==============
Net realized investment gains (losses), including changes in valuation
allowances for the three months ended March 31 were as follows:
March 31, March 31,
2001 2000
---------- ----------
Available-for-sale securities $ 259 $ (673)
Trading account securities:
Net realized investment gains (losses) (490) 3,372
Net unrealized holding losses (1,144) (1,378)
Real estate held-for-sale - 750
---------- ----------
Total net realized investment gains (losses) $ (1,375) $ 2,071
========== ==========
NOTE 4. ACCOUNTING PRONOUNCEMENTS:
On January 1, 2001, the Company adopted the provisions 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. The accounting treatment for changes in fair
value for derivatives is dependent upon whether the derivative qualifies
for hedge accounting. As defined in SFAS No. 133, the Company does not
have any derivatives that qualify for hedge accounting and, as such,
changes in fair value of derivatives are recorded in earnings. At March
31, 2001, the change in fair value of derivatives did not have a material
impact on earnings.
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 insurance 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 contract owners. 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 contract owner liabilities.
The following table summarizes each business segment's contribution to
consolidated net revenues and net earnings for the three month periods
ended March 31:
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
Net Revenues (a):
Life Insurance $ 35,724 $ 33,177
Annuities 45,785 47,362
Other (279) 3,722
--------- ---------
Total Net Revenues $ 81,230 $ 84,261
========= =========
Net Earnings:
Life Insurance $ 9,965 $ 8,800
Annuities 17,205 13,016
Other (182) 2,419
--------- ---------
Total Net Earnings $ 26,988 $ 24,235
========= =========
(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 periods ended March
31, 2001 and 2000. This discussion should be read in conjunction with the
accompanying unaudited financial statements and notes thereto, in addition
to the 2000 Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the 2000 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 charges imposed on variable life insurance and variable annuity
contracts, and
- - 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
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 three month period, medium term interest rates decreased
approximately 70 basis points as compared to December 2000 and decreased
approximately 183 basis points as compared to March 2000.
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 three months of 2001, credit spreads contracted
approximately 21 basis points to end the period at 157 basis points.
During the first three months of 2000, credit spreads widened approximately
16 basis points to end the period at 127 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 three months of 2001, the U.S. equity market
continued its downward trend that began in 2000. During the first three
months of 2001, the Dow, NASDAQ and S&P Index decreased 8.4%, 25.5% and
12.1%, 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 decreased $0.8 million to
$331.7 million during the three month period ended March 31, 2001, as
compared to the same period in 2000. Variable annuity deposits continue to
dominate the Company's overall sales by comprising 89% and 84% of total
premiums for the three months ended March 31, 2001 and 2000, respectively.
Life insurance premiums and annuity deposits by type of product were as
follows:
Premiums Collected Change
------------------------ ------------------
1Q 2001 1Q 2000 2001-2000 %
---------- ---------- ----------- -----
($ In Millions)
Variable Annuities:
Without surrender charge provision $ 165.6 $ - $ 165.6 100%
With surrender charge provision 130.9 280.8 (149.9) -53
---------- ---------- ----------- -----
296.5 280.8 15.7 6
---------- ---------- ----------- -----
Variable Life Insurance:
Estate Planning 17.6 23.6 (6.0) -25
Cash Value Accumulation 7.7 14.8 (7.1) -48
---------- ---------- ----------- -----
25.3 38.4 (13.1) -34
---------- ---------- ----------- -----
Modified Guaranteed Annuities 6.3 11.8 (5.5) -47
Other 3.6 1.5 2.1 140
---------- ---------- ----------- -----
Total Direct Premiums Collected $ 331.7 $ 332.5 $ (0.8) 0%
========== ========== =========== =====
During the first three months of 2001, variable annuity deposits increased
$15.7 million (or 6%) as compared to the same period in 2000. Variable
annuity sales were favorably impacted by the introduction of a new variable
annuity product during April 2000. This product offers certain features
that differentiate it from the Company's existing variable annuity product
including no surrender charge provision, free asset allocation, and
alternative death benefit options. Additionally, the new variable annuity
product contains nine investment options that are not available on the
existing product, including seven investment options managed by
unaffiliated investment advisors.
Management believes that variable annuity sales are impacted by the
performance of the equity markets, therefore future variable annuity sales
could be negatively impacted by:
- - increased equity market volatility, or
- - a continuation in the decline in the equity markets from what was
experienced during 2000
During the first three months of 2001, variable life insurance premiums
decreased $13.1 million (or 34%) as compared to the same period in 2000.
The decrease in variable life insurance premiums was attributable to two
factors. First, uncertainty regarding potential changes in estate tax
legislation negatively impacted sales of the Company's estate planning
product. Second, marketing efforts for the Company's cash accumulation
product were de-emphasized as the Company developed a new single premium
variable life product ("SPVL") that was designed to replace the existing
single premium and multi-premium cash accumulation products. The new SPVL
product was introduced in March 2001.
Modified guaranteed annuity deposits decreased $5.5 million (or 47%)
primarily due to the lower interest rate environment as compared to the
first three months of 2000.
Policy and contract surrenders increased $26.3 million (or 10%) to $294.6
million during the current three month period as compared to the equivalent
period in 2000 primarily due to an increase in variable annuity surrenders.
During the first three months of 2001, variable annuity surrenders
increased $24.2 million (or 13%) to $202.1 million as compared to the same
period in 2000. This increase is 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 three months of 2001, separate accounts assets decreased
$1.1 billion (or 9%) to $11.3 billion primarily due to the unfavorable
investment performance associated with the general decline in the equity
market.
To fund all business activities, the Company maintains a high quality and
liquid investment portfolio. As of March 31, 2001, 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 March 31, 2001, approximately $82.3 million (or 4%) 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 March 31, 2001, the Company held $84.6
million in emerging market securities with an approximate unrealized loss
of $4.5 million.
Results of Operations
For the three month periods ended March 31, 2001 and 2000, the Company
reported net earnings of $27.0 million and $24.2 million, respectively.
Policy charge revenue increased $3.1 million (or 5%) during the first
quarter 2001 as compared to the same period in 2000. During the current
three month period, non-asset based fees increased $4.9 million (or 25%) as
compared to the equivalent period in 2000. The increase in non-asset based
fees is primarily due to increases in deferred policy load amortization and
net fee income associated with the Company's variable annuity assumption
reinsurance agreement. Conversely, during the current three month period,
asset based fees decreased $1.8 million (or 4%) as compared to the same
period in 2000. The decrease in asset based fees is primarily due to the
decrease in average variable account balances. During the current three
month period, average variable account balances decreased $888.6 million
(or 6%) as compared to the first three months of 2000.
Net earnings derived from interest spread decreased $2.6 million for the
first three months of 2001 as compared to the same period in 2000. The
reduction in interest spread is primarily due to a reduction in real estate
income, as well as the reduction in invested assets resulting from
stockholder dividend payments and the decline in fixed rate contracts
inforce.
Net realized investment gains decreased $3.5 million during the first three
months of 2001 as compared to the equivalent period during 2000. The
following table provides the changes in net realized investment gains
(losses) by type for each respective period:
Realized Gain (Loss) 1Q 2001 1Q 2000 Change
---------------------- ------- ------- ------
( In Millions)
Interest related gains $ 0.2 $ 0.4 $(0.2)
Credit related losses - (1.1) 1.1
Trading account (1.6) 2.0 (3.6) (1)
Real estate - 0.8 (0.8)
------- ------- ------
$ (1.4) $ 2.1 $(3.5)
======= ======= ======
(1)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.
The market value adjustment expense is attributable to the Company's
modified guaranteed annuity products. This contract provision results in a
market value adjustment to the cash surrender value of those contracts that
are surrendered before the expiration of their interest rate guarantee
period. During the first three months of 2001, the market value adjustment
expense increased $0.4 million as compared to the first three months of
2000, primarily due to the lower interest rate environment during the
current three month period. The market value adjustment expense has an
inverse relationship to changes in interest rates.
Policy benefits decreased approximately $4.7 million to $5.5 million during
the current three month period as compared to the same period during 2000.
The decrease is primarily due to a $4.6 million reduction in mortality
benefit accrual accumulations as compared to the prior period.
Reinsurance premium ceded increased $0.6 million (or 11%) to $6.3 million
during the first three months of 2001 as compared to the same period in
2000. The increase is attributable to the combined effect of the
increasing age of contract owners and increased insurance inforce.
Insurance expenses and taxes decreased $1.4 million (or 10%) during the
current three month period as compared to the same period in 2000. During
the current three month period, insurance expenses decreased $1.9 million
primarily due to a decrease in certain employee compensation related
expense allocations from Merrill Lynch & Co. as compared to the first three
months of 2000.
The Company's effective federal income tax rate was 31% during the current
three month period as compared to 35% during the equivalent period in 2000.
The decrease in the effective federal income tax rate is primarily due to
certain permanent adjustments recorded during the current three month
period.
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 decreases in other net revenues and other net earnings are primarily
due to trading account losses incurred during the first quarter 2001.
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.
None.
(b) Reports on Form 8-K.
None.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended 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: May 17, 2001