1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
<Table>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 2001 2000
- ------ ------------- -------------
<s> <c> <c>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2001 - $1,922,086; 2000 - $2,050,333) $ 1,911,271 $ 2,012,016
Equity securities, at estimated fair value
(cost: 2001 - $196,343; 2000 - $229,045) 191,958 215,030
Trading account securities, at estimated fair value 24,266 24,859
Real estate held-for-sale 19,447 19,447
Policy loans on insurance contracts 1,195,057 1,193,690
------------- -------------
Total Investments 3,341,999 3,465,042
CASH AND CASH EQUIVALENTS 205,204 92,730
ACCRUED INVESTMENT INCOME 72,024 71,001
DEFERRED POLICY ACQUISITION COSTS 481,60 494,088
FEDERAL INCOME TAXES - DEFERRED 2,503 10,902
REINSURANCE RECEIVABLES 4,835 3,090
AFFILIATED RECEIVABLES - NET - 667
RECEIVABLES FROM SECURITIES SOLD 9,575 2,578
OTHER ASSETS 39,243 40,614
SEPARATE ACCOUNTS ASSETS 11,742,729 12,362,798
------------- -------------
TOTAL ASSETS $ 15,899,713 $ 16,543,510
============= =============
</Table>
See accompanying notes to financial statements. (Continued)
<Page>
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 2001 2000
- ------------------------------------ ------------- -------------
<s> <c> <c>
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,328,190 $ 3,421,873
Claims and claims settlement expenses 92,887 85,673
------------- -------------
Total policyholder liabilities and accruals 3,421,077 3,507,546
OTHER POLICYHOLDER FUNDS 10,886 17,678
LIABILITY FOR GUARANTY FUND ASSESSMENTS 10,222 10,250
FEDERAL INCOME TAXES - CURRENT 9,869 5,134
PAYABLES FOR SECURITIES PURCHASED 23,024 1,328
UNEARNED POLICY CHARGE REVENUE 108,693 101,182
OTHER LIABILITIES 10,669 32,074
AFFILIATED PAYABLES - NET 123 -
SEPARATE ACCOUNTS LIABILITIES 11,735,617 12,356,035
------------- -------------
Total Liabilities 15,330,180 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 242,235 194,808
Accumulated other comprehensive loss (22,526) (32,349)
------------- -------------
Total Stockholder's Equity 569,533 512,283
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,899,713 $ 16,543,510
============= =============
</Table>
See accompanying notes to financial statements.
<Page>
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,
-----------------------------
2001 2000
------------- -------------
<s> <c> <c>
REVENUES:
Policy charge revenue $ 130,220 $ 128,073
Net investment income 112,593 120,024
Net realized investment gains (losses) (627) 1,263
------------- -------------
Total Revenues 242,186 249,360
------------- -------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 77,615 82,766
Market value adjustment expense 957 122
Policy benefits (net of reinsurance recoveries:
2001 - $8,338; 2000 - $8,752) 16,043 20,479
Reinsurance premium ceded 12,608 11,686
Amortization of deferred policy acquisition costs 32,985 33,475
Insurance expenses and taxes 30,963 30,831
------------- -------------
Total Benefits and Expenses 171,171 179,359
------------- -------------
Earnings Before Federal Income Tax Provision 71,015 70,001
FEDERAL INCOME TAX PROVISION:
Current 20,479 23,219
Deferred 3,109 1,281
------------- -------------
Total Federal Income Tax Provision 23,588 24,500
------------- -------------
NET EARNINGS $ 47,427 $ 45,501
============= =============
</Table>
See accompanying notes to financial statements.
<Page>
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,
-----------------------------
2001 2000
------------- -------------
<s> <c> <c>
REVENUES:
Policy charge revenue $ 64,248 $ 65,163
Net investment income 56,344 59,676
Net realized investment gains (losses) 748 (808)
------------- -------------
Total Revenues 121,340 124,031
------------- -------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 37,999 41,698
Market value adjustment expense 504 93
Policy benefits (net of reinsurance recoveries:
2001 - $4,561; 2000 - $3,277) 10,567 10,284
Reinsurance premium ceded 6,295 5,975
Amortization of deferred policy acquisition costs 16,511 17,384
Insurance expenses and taxes 17,437 15,881
------------- -------------
Total Benefits and Expenses 89,313 91,315
------------- -------------
Earnings Before Federal Income Tax Provision 32,027 32,716
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 19,437 8,845
Deferred (7,849) 2,605
------------- -------------
Total Federal Income Tax Provision 11,588 11,450
------------- -------------
NET EARNINGS $ 20,439 $ 21,266
============= =============
</Table>
See accompanying notes to financial statements.
<Page>
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,
-----------------------------
2001 2000
------------- -------------
<s> <c> <c>
NET EARNINGS $ 47,427 $ 45,501
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale
securities:
Net unrealized holding gains (losses) arising during
the period 35,976 (5,620)
Reclassification adjustment for (gains) losses
included in net earnings 504 (1,350)
------------- -------------
Net unrealized gains (losses) on investment securities 6,480 (6,970)
Adjustments for:
Policyholder liabilities (8,857) 2,112
Deferred policy acquisition costs (12,510) 785
Deferred federal income taxes (5,290) 1,425
------------- -------------
Total other comprehensive income (loss), net of taxes 9,823 (2,648)
------------- -------------
COMPREHENSIVE INCOME $ 57,250 $ 42,853
============= =============
</Table>
See accompanying notes to financial statements.
<Page>
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,
-----------------------------
2001 2000
------------- -------------
<s> <c> <c>
NET EARNINGS $ 20,439 $ 21,266
OTHER COMPREHENSIVE LOSS:
Net unrealized gains (losses) on available-for-sale
securities:
Net unrealized holding losses arising during the period (1,374) (10,518)
Reclassification adjustment for (gains) losses included
in net earnings (830) 433
------------- ------------
Net unrealized losses on investment securities (2,204) (10,085)
Adjustments for:
Policyholder liabilities 460 (1,954)
Deferred policy acquisition costs 1,068 2,836
Deferred federal income taxes 236 3,221
------------- -------------
Total other comprehensive loss, net of taxes (440) (5,982)
------------- -------------
COMPREHENSIVE INCOME $ 19,999 $ 15,284
============= =============
</Table>
See accompanying notes to financial statements.
<Page>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands) (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, 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 47,427 47,427
Other comprehensive income, net of tax 9,823 9,823
---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 2001 $ 2,500 $ 347,324 $ 242,235 $ (22,526) $ 569,533
========== ========== ========== ========== ==========
</Table>
See accompanying notes to financial statements.
<Page>
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,
-----------------------------
2001 2000
------------- -------------
<s> <c> <c>
Cash Flows From Operating Activities:
Net earnings $ 47,427 $ 45,501
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 32,985 33,475
Capitalization of policy acquisition costs (33,008) (47,845)
Accretion of investments (553) (809)
Interest credited to policyholders' account balances 77,615 82,766
Provision for deferred Federal income tax 3,109 1,281
(Increase) decrease in operating assets:
Trading account securities (295) (257)
Accrued investment income (1,023) (2,552)
Affiliated receivables 667 -
Other (374) 1,723
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 7,214 14,503
Other policyholder funds (6,792) (6,688)
Liability for guaranty fund assessments (28) (382)
Federal income taxes - current 4,735 (961)
Affiliated payables 123 -
Unearned policy charge revenue 7,511 15,588
Other (21,802) (2,739)
Other operating activities:
Net realized investment (gains) losses 627 (1,263)
------------- -------------
Net cash and cash equivalents provided by operating
activities 118,138 131,341
------------- -------------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 135,687 117,282
Maturities of available-for-sale securities 214,870 119,952
Purchases of available-for-sale securities (173,698) (194,515)
Sale of real estate held-for-sale - 1,375
Policy loans on insurance contracts (1,367) (12,693)
Recapture of investments in separate accounts - 665
Investment in separate accounts (1,001) (1,110)
------------- -------------
Net cash and cash equivalents provided by investing
activities $ 174,491 $ 30,956
============= =============
</Table>
See accompanying notes to financial statements. (Continued)
<Page>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in thousands) (Unaudited)
<Table>
<Caption>
Six Months Ended
June 30,
-----------------------------
2001 2000
------------- -------------
<s> <c> <c>
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy
replacement deposits) $ 569,326 $ 643,585
Policyholder withdrawals (including transfers to / from
separate accounts) (749,481) (824,614)
------------- -------------
Net cash and cash equivalents used by financing activities (180,155) (181,029)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 112,474 (18,732)
CASH AND CASH EQUIVALENTS:
Beginning of year 92,730 92,181
------------- -------------
End of period $ 205,204 $ 73,449
============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 15,744 $ 24,180
Intercompany interest 651 359
</Table>
See accompanying notes to financial statements.
<Page>
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 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 June 30, 2001 and December 31,
2000 were $296,762 and $252,704, respectively. For the six month
periods ended June 30, 2001 and 2000, statutory net income was
$26,872 and $28,958, 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:
<Table>
<Caption>
June 30, December 31,
2001 2000
------------- -------------
<s> <c> <c>
Assets:
Fixed maturity securities $ (10,815) $ (38,317)
Equity securities (4,385) (14,015)
Deferred policy acquisition costs 6,747 19,257
Federal income taxes - deferred 12,129 17,419
Separate Accounts assets (1,005) (353)
------------- -------------
2,671 (16,009)
------------- -------------
Liabilities:
Policyholders' account balances 25,197 16,340
------------- -------------
Stockholder's equity:
Accumulated other comprehensive loss $ (22,526) $ (32,349)
============= =============
</Table>
<Page>
Net realized investment gains (losses), including changes in
valuation allowances for the six months ended June 30 were as
follows:
<Table>
<Caption>
June 30, June 30,
2001 2000
---------- ----------
<s> <c> <c>
Available-for-sale securities $ 261 $ (2,103)
Trading account securities:
Net realized investment gains (losses) (571) 3,994
Net unrealized holding losses (317) (1,378)
Real estate held-for-sale - 750
---------- ----------
Total net realized investment gains (losses) $ (627) $ 1,263
========== ==========
</Table>
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 the Company's derivatives
instruments are recorded in earnings. At June 30, 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
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 life or annuity contract
owner 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:
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
<s> <c> <c> <c> <c>
Net Revenues (a):
Life Insurance $ 34,745 $ 34,773 $ 70,469 $ 67,950
Annuities 46,704 46,039 92,489 93,401
Other 1,892 1,521 1,613 5,243
---------- ---------- ---------- ----------
Total Net Revenues $ 83,341 $ 82,333 $ 164,571 $ 166,594
========== ========== ========== ==========
Net Earnings:
Life Insurance $ 7,033 $ 8,590 $ 16,998 $ 17,390
Annuities 12,176 11,687 29,381 24,703
Other 1,230 989 1,048 3,408
---------- ---------- ---------- ----------
Total Net Earnings $ 20,439 $ 21,266 $ 47,427 $ 45,501
========== ========== ========== ==========
</Table>
Management considers investment income net of interest credited
to policyholders' account balances in evaluating results.
<Page>
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 and six
month periods ended June 30, 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 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.
During June 2001, Congress passed the Economic Growth and Tax
Relief Reconciliation Act of 2001 (the "Act"). The primary
provision in the Act that directly impacts the Company's business
is the reform and eventual repeal of the estate tax. Under the
new tax law, the annual estate tax exemption will increase from
$0.675 million in 2001 to $3.5 million in 2009, with a complete
repeal of the estate tax in 2010. The Company currently markets
an estate planning product through Merrill Lynch & Co.'s retail
network of Financial Advisors.
During the second quarter 2001, the Company began implementing
plans to consolidate its life and annuity policy administration
service centers into one location. The consolidation is expected
to be complete during the third quarter 2001 and is not expected
to have a material impact on the Company's financial statements.
The Company anticipates that future earnings will be positively
impacted by the anticipated reduction in cost associated with
maintaining one policy administration service center.
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 six month period, medium term interest
rates decreased approximately 58 basis points as compared to
December 2000 and decreased approximately 160 basis points as
compared to June 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 six months of
2001, credit spreads contracted approximately 35 basis points to
end the period at 143 basis points. During the first six months
of 2000, credit spreads widened approximately 43 basis points to
end the period at 154 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"). After a
volatile first quarter that ended with all three indices
significantly lower, the U.S. equity market rebounded during the
second quarter and recovered an appreciable percentage of the
first quarters negative performance. During the first six months
of 2001, the Dow, NASDAQ and S&P Index decreased 2.3%, 10.9% and
7.0%, 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 decreased $46.7
million (or 13%) to $309.6 million and $47.5 million (or 7%) to
$641.3 million during the current three and six month periods
ended June 30, 2001, respectively, as compared to the same
periods in 2000. Variable annuity deposits continue to dominate
the Company's overall sales by comprising 91% and 90% of total
direct premiums for the three and six month periods ended June
30, 2001, respectively. Life insurance premiums and annuity
deposits by type of product were as follows:
<Table>
<Caption>
Premiums % Change
------------------------ --------------------------
Second Six Second Six
Quarter Months Quarter Months
2001 2001 2001-2000 2001-2000
--------- --------- ---------- ----------
<s> <c> <c> <c> <c>
($ In Millions) %
Variable Annuities:
Without surrender charge provision $ 150.8 $ 316.4 58% 232%
With surrender charge provision 129.5 260.4 -41% -48%
--------- --------- ---------- ----------
280.3 576.8 -11% -3%
========= ========= ========== ==========
Variable Life Insurance:
Estate Planning 15.0 32.5 -20% -23%
Cash Value Accumulation 4.4 11.9 -60% -54%
--------- --------- ---------- ----------
19.4 44.4 -35% -35%
--------- --------- ---------- ----------
Modified Guaranteed Annuities 8.0 14.5 -33% -39%
Other 1.9 5.6 103% 87%
--------- --------- ---------- ----------
Total Direct Premiums $ 309.6 $ 641.3 -13% -7%
========= ========= ========== ==========
</Table>
During the current three and six month periods, variable annuity
deposits decreased $32.9 million (or 11%) and $17.1 million (or
3%), respectively, as compared to the same periods in 2000.
Management believes that variable annuity sales have been
impacted by increased equity market volatility during the past 12-
15 months. However, declines in the Company's variable annuity
deposits have been modest as compared to sales declines by other
variable annuity carriers ("non-proprietary") within the Merrill
Lynch & Co. distribution system. Non-proprietary variable annuity
sales have decreased approximately 20% during the current six month
period as compared to the same period in 2000. Management
attributes the Company's relative success within its distribution
system to the favorable impact of the Company's new variable
annuity product, which was introduced during April 2000. This
product offers certain features, most notably a "no surrender charge"
provision, that differentiate it from the Company's existing variable
annuity product, as well as the non-proprietary variable annuity
products within the Merrill Lynch & Co. distribution system. In a
relatively short period of time, sales of this product have surpassed
the sales of the Company's other "traditional" variable annuity
product.
As noted above, 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 current three and six months periods, variable life
insurance premiums decreased $10.6 million (or 35%) and $23.6 (or
35%), respectively, as compared to the same periods in 2000. The
decreases in variable life insurance premiums were attributable
to two factors. First, uncertainty regarding potential changes
in estate tax legislation negatively impacted sales of the
Company's estate planning product. Sales of this product
decreased $9.9 million (or 23%) as compared to the same period in
2000. 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.
During the current three and six months periods, modified
guaranteed annuity deposits decreased $4.0 million (or 33%) and
$9.4 million (or 39%), respectively, as compared to the same
periods in 2000. The decreases in modified guaranteed annuity
deposits are primarily due to the lower interest rate environment
as compared to the first six months of 2000. Sales of modified
guaranteed annuity products, which offer a fixed interest
crediting rate reflective of the current interest rate
environment, tend to have a direct relationship to changes in
interest rates.
Policy and contract surrenders increased $8.5 million (or 3%) and
$34.8 million (or 6%) during the current three and six month
periods, respectively, as compared to the same periods in 2000
primarily due to an increase in variable annuity surrenders.
During the current three and six month periods ended June 30,
2001, variable annuity surrenders increased $16.7 million (or 9%)
and $41.4 million (or 12%) as compared to the same periods in
2000. The 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 2001, separate accounts assets
decreased $620.1 million (or 5%) to $11.7 billion primarily due
to unfavorable investment performance associated with the general
decline in the equity market. Separate accounts assets decreased
$554.8 million, during the first six months of 2001, due to price
depreciation in the underlying mutual funds supporting variable
products. Also contributing to the decrease in separate accounts
assets was a $65.6 million net cash outflow for variable products
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of June 30, 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 June 30, 2001, approximately $99.2 million (or 5%) 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 June 30, 2001,
the Company held $81.6 million in emerging market securities with
an approximate unrealized loss of $2.4 million.
Results of Operations
For the three month periods ended June 30, 2001 and 2000, the
Company reported net earnings of $20.4 million and $21.3 million,
respectively. For the six month periods ended June 30, 2001 and
2000, the Company reported net earnings of $47.4 million and
$45.5 million, respectively.
Policy charge revenue decreased $0.9 million (or 1%) and increased
$2.1 million (or 2%) during the three and six month periods ended
June 30, 2001, respectively, as compared to the same periods in
2000. During the current six month period, non-asset based fees
increased $7.0 million (or 18%) as compared to the same 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 six month
period, asset based fees decreased $4.9 million (or 6%) 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 six month period, average variable
account balances decreased $949.3 million (or 7%) as compared to
the first six months of 2000.
Net earnings derived from interest spread increased $0.4 million
and decreased $2.3 million for the three and six month periods
ended June 30, 2001, respectively, as compared to the same
periods in 2000. Overall, net investment income and interest
credited to policyholders' account balances continue to decline
due to the reduction in fixed rate contracts inforce. The
reduction in interest spread during the current six month period
is primarily due to a $1.5 million reduction in real estate
income, as well as the reduction in invested assets resulting
from the Company's fourth quarter 2000 stockholder dividend
payment.
<Page>
Net realized investment gains increased $1.6 million and
decreased $1.9 million during the current three and six month
periods ended June 30, 2001, respectively, as compared to the
same periods during 2000. The following table provides the
changes in net realized investment gains (losses) by type for
each respective period:
Three Six
Months Months
Realized Gain (Loss) 2001 - 2000 2001 - 2000
-------------------- ----------- -----------
($ In Millions)
Interest related $ 0.8 $ 0.7 (1)
Credit related 0.4 1.4 (2)
Trading account 0.4 (3.2) (3)
Real estate - (0.8) (4)
---------- ----------
$ 1.6 $ (1.9)
========== ==========
(1) The increases in interest related gains are primarily
attributable to increases in invested asset market
valuations as compared to the same periods in 2000. The
increases in invested asset market valuations are primarily
due to period-to-period decreases in interest rates and
credit spreads.
(2) The prior periods' credit related losses included book value
writedowns and asset sales of two 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.
(4) The Company sold one property during the first quarter 2000
that resulted in a $0.8 million gain.
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 current three and six month periods ended June 30, 2001, the
market value adjustment expense increased $0.4 million and $0.8
million, respectively, as compared to the same periods in 2000.
The increases are primarily due to the lower interest rate
environment during 2001 as compared to 2000. The market value
adjustment expense has an inverse relationship to changes in
interest rates.
Policy benefits increased $0.3 million (or 3%) and decreased $4.4
million (or 22%) during the current three and six month periods
ended June 30, 2001, respectively, as compared to the same
periods in 2000. The decrease in the current six month period is
primarily due to a $5.7 million reduction in mortality benefit
accrual accumulations as compared to the prior period.
Reinsurance premium ceded increased $0.3 million (or 5%) and $0.9
million (or 8%) during the current three and six month periods
ended June 30, 2001, respectively, as compared to the same
periods in 2000. The increases are attributable to the combined
effect of the increasing age of contract owners and increased
insurance inforce.
Amortization of deferred policy acquisition costs decreased $0.9
million (or 5%) during the current three month period ended June
30, 2001, as compared to the same period in 2000. The decrease
in amortization of deferred policy acquisition costs is primarily
due to the decrease in asset based variable annuity policy charge
revenue. During the current six month period, amortization of
deferred policy acquisition costs was relatively flat as compared
to the same period in 2000.
Insurance expenses and taxes increased $1.6 million (or 10%)
during the current three month period ended June 30, 2001, as
compared to the same period in 2000. The increase is primarily
due to an increase in costs related to the consolidation of the
Company's policy administration service centers. During the
current six month period, insurance expenses and taxes was flat
as compared to the same period in 2000.
<Page>
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 during
the current six month period are primarily due to trading account
losses incurred during 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: August 14, 2001