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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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.
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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 2002 2001
- ------ ----------- -----------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2002 - $2,057,235; 2001 - $2,009,129) $ 2,027,557 $ 2,007,123
Equity securities, at estimated fair value
(cost: 2002 - $166,181; 2001 - $167,959) 162,731 163,701
Trading account securities, at estimated fair value 23,791 23,636
Real estate held-for-sale 19,447 19,447
Limited partnerships, at cost 11,470 11,270
Policy loans on insurance contracts 1,181,933 1,194,478
----------- -----------
Total Investments 3,426,929 3,419,655
CASH AND CASH EQUIVALENTS 76,537 130,429
ACCRUED INVESTMENT INCOME 67,773 69,884
DEFERRED POLICY ACQUISITION COSTS 473,146 470,938
REINSURANCE RECEIVABLES 11,767 9,428
RECEIVABLES FROM SECURITIES SOLD 1,655 2,317
OTHER ASSETS 34,769 41,912
SEPARATE ACCOUNTS ASSETS 11,255,798 11,305,453
----------- -----------
TOTAL ASSETS $15,348,374 $15,450,016
=========== ===========
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 2002 2001
- ------------------------------------ ------------ ------------
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,200,840 $ 3,255,791
Claims and claims settlement expenses 99,080 95,020
------------ ------------
Total policyholder liabilities and accruals 3,299,920 3,350,811
OTHER POLICYHOLDER FUNDS 12,193 14,239
LIABILITY FOR GUARANTY FUND ASSESSMENTS 7,422 8,449
FEDERAL INCOME TAXES - DEFERRED 10,320 13,931
FEDERAL INCOME TAXES - CURRENT 15,662 5,522
PAYABLES FOR SECURITIES PURCHASED 7,026 29,795
AFFILIATED PAYABLES - NET 3,354 3,736
UNEARNED POLICY CHARGE REVENUE 115,589 113,676
OTHER LIABILITIES 6,441 7,594
SEPARATE ACCOUNTS LIABILITIES 11,250,196 11,298,821
------------ ------------
Total Liabilities 14,728,123 14,846,574
------------ ------------
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 296,899 273,046
Accumulated other comprehensive loss (26,472) (19,428)
------------ ------------
Total Stockholder's Equity 620,251 603,442
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,348,374 $ 15,450,016
============ ============
See accompanying 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
March 31,
-------------------------
2002 2001
--------- ---------
REVENUES:
Policy charge revenue $ 60,708 $ 65,972
Net investment income 53,375 56,249
Net realized investment gains (losses) 2,921 (1,375)
--------- ---------
Total Revenues 117,004 120,846
--------- ---------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 35,944 39,616
Market value adjustment expense 656 453
Policy benefits (net of reinsurance recoveries: 2002 - $4,709;
2001 - $3,777) 10,623 5,476
Reinsurance premium ceded 5,946 6,313
Amortization of deferred policy acquisition costs 15,592 16,474
Insurance expenses and taxes 11,546 13,526
--------- ---------
Total Benefits and Expenses 80,307 81,858
--------- ---------
Earnings Before Federal Income Tax Provision 36,697 38,988
FEDERAL INCOME TAX PROVISION:
Current 12,662 1,042
Deferred 182 10,958
--------- ---------
Total Federal Income Tax Provision 12,844 12,000
--------- ---------
NET EARNINGS $ 23,853 $ 26,988
========= =========
See accompanying 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 COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
March 31,
------------------------
2002 2001
-------- --------
NET EARNINGS $ 23,853 $ 26,988
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (23,926) 37,350
Reclassification adjustment for (gains) losses included in net earnings (2,962) 1,334
-------- --------
Net unrealized gains (losses) on investment securities (26,888) 38,684
Adjustments for:
Policyholder liabilities 8,555 (9,317)
Deferred policy acquisition costs 7,496 (13,578)
Deferred federal income taxes 3,793 (5,526)
-------- --------
Total other comprehensive income (loss), net of taxes (7,044) 10,263
-------- --------
COMPREHENSIVE INCOME $ 16,809 $ 37,251
======== ========
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, 2001 $ 2,500 $ 347,324 $ 194,808 $ (32,349) $ 512,283
Net earnings 78,238 78,238
Other comprehensive income, net of tax 12,921 12,921
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2001 2,500 347,324 273,046 (19,428) 603,442
Net earnings 23,853 23,853
Other comprehensive loss, net of tax (7,044) (7,044)
--------- --------- --------- --------- ---------
BALANCE, MARCH 31, 2002 $ 2,500 $ 347,324 $ 296,899 $ (26,472) $ 620,251
========= ========= ========= ========= =========
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,
--------------------------
2002 2001
--------- ---------
Cash Flows From Operating Activities:
Net earnings $ 23,853 $ 26,988
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 15,592 16,474
Capitalization of policy acquisition costs (10,304) (15,924)
Amortization (accretion) of investments 294 (254)
Interest credited to policyholders' account balances 35,944 39,616
Provision for deferred Federal income tax 182 10,958
(Increase) decrease in operating assets:
Accrued investment income 2,111 2,771
Reinsurance receivables (2,339) (1,082)
Affiliated receivables - 667
Other 7,143 1,879
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 4,060 4,282
Other policyholder funds (2,046) (6,952)
Liability for guaranty fund assessments (1,027) (28)
Affiliated payables (382) 8,542
Federal income taxes - current 10,140 1,042
Unearned policy charge revenue 1,913 4,303
Other (1,153) (7,109)
Other operating activities:
Net realized investment (gains) losses (2,921) 1,375
--------- ---------
Net cash and cash equivalents provided by operating activities 81,060 87,548
--------- ---------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 53,955 57,553
Maturities of available-for-sale securities 85,448 107,585
Purchases of available-for-sale securities (205,129) (67,605)
Trading account securities (274) 887
Sales of limited partnerships - 1,000
Purchases of limited partnerships (200) (19)
Policy loans on insurance contracts 12,545 (4,546)
Recapture of investments in separate accounts 1,041 -
Investment in separate accounts 2 -
--------- ---------
Net cash and cash equivalents provided (used) by investing activities $ (52,612) $ 94,855
--------- ---------
See accompanying 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
(Continued) (Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
March 31,
--------------------------
2002 2001
--------- ---------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 184,787 $ 295,014
Policyholder withdrawals (including transfers to / from separate accounts) (267,127) (382,883)
--------- ---------
Net cash and cash equivalents used by financing activities (82,340) (87,869)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53,892) 94,534
CASH AND CASH EQUIVALENTS:
Beginning of year 130,429 92,730
--------- ---------
End of period $ 76,537 $ 187,264
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 2,522 $ -
Intercompany interest 22 375
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 non-participating life insurance and annuity products,
including variable life insurance, variable annuities, modified guaranteed
annuities, and immediate annuities. The Company is domiciled in the State of
Arkansas.
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 ("2001 10K") for the year ended December 31, 2001. The nature of the
Company's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain reclassifications
have also been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
NOTE 2. STATUTORY ACCOUNTING PRACTICES
The Company'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, 2002 and December 31, 2001 were
$338,826 and $311,490, respectively. For the three month periods ended March 31,
2002 and 2001, statutory net income was $30,808 and $5,103, 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,
2002 2001
------------- -------------
Assets:
Fixed maturity securities $ (29,678) $ (2,006)
Equity securities (3,450) (4,258)
Deferred policy acquisition costs 11,202 3,706
Separate Accounts assets (1,517) (1,493)
--------- ---------
(23,443) (4,051)
--------- ---------
Liabilities:
Policyholders' account balances 17,283 25,838
Federal income taxes - deferred (14,254) (10,461)
--------- ---------
3,029 15,377
--------- ---------
Stockholder's equity:
Accumulated other comprehensive loss $ (26,472) $ (19,428)
========= =========
Net realized investment gains (losses), including other-than-temporary
writedowns in carrying value, for the three months ended March 31 were as
follows:
March 31, March 31,
2002 2001
--------- ---------
Available-for-sale securities $ 3,003 $ 259
Trading account securities:
Net realized investment gains (losses) 130 (490)
Net unrealized holding losses (249) (1,144)
Investment in Separate Accounts 37 -
------- -------
Total net realized investment gains (losses) $ 2,921 $(1,375)
======= =======
NOTE 4. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Life Insurance and Annuities. The Company's Life
Insurance segment consists of variable life insurance products and
interest-sensitive life 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 net 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 month periods ended
March 31:
Three Months Ended
March 31,
-----------------------
2002 2001
-------- --------
NET REVENUES (a):
Annuities $ 47,387 $ 45,785
Life Insurance 31,851 35,724
Other 1,822 (279)
-------- --------
Total Net Revenues $ 81,060 $ 81,230
======== ========
NET EARNINGS:
Annuities $ 13,015 $ 17,205
Life Insurance 9,654 9,965
Other 1,184 (182)
-------- --------
Total Net Earnings $ 23,853 $ 26,988
======== ========
(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,
2002 and 2001. This discussion should be read in conjunction with the
accompanying unaudited financial statements and notes thereto, in addition to
the 2001 Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the 2001 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.
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 increased approximately 44 basis points
as compared to December 2001 and decreased approximately 34 basis points as
compared to March 2001.
The Company defines credit spreads according to the Merrill Lynch U.S. Corporate
Bond Index for BBB-A Rated bonds with three to five year maturities. During the
first three months of 2002, credit spreads remained relatively flat and ended
the period at 179 basis points. During the first three months of 2001, credit
spreads contracted approximately 16 basis points and ended the period at 171
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 2002, the Dow increased 3.8%, the NASDAQ decreased 5.4%,
and the S&P Index remained relatively flat. 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.
NEW BUSINESS
Life insurance and annuity premiums decreased $134.3 million (or 40%) to $197.4
million during the first three months of 2002 as compared to the same period in
2001. Life insurance and annuity premiums by type of product were as follows:
($ In Millions) Change
---------------------------- --------------------
First Quarter First Quarter
2002 2001 $ %
------------- ------------- ------ ------
Variable Annuities:
B-Share $ 73.9 $130.9 $ (57.0) -44%
C-Share 61.4 165.6 (104.2) -63
L-Share 31.8 - 31.8 100
------ ------ ------- ------
167.1 296.5 (129.4) -44
------ ------ ------- ------
Variable Life Insurance 14.6 25.3 (10.7) -42
Modified Guaranteed Annuities 11.9 6.3 5.6 89
Other 3.8 3.6 0.2 6
------ ------ ------ ------
Total Direct Premiums $197.4 331.7 $(134.3) -40%
====== ====== ======= ======
During the first three months of 2002, variable annuity premiums decreased
$129.4 million (or 44%) as compared to the same period in 2001. Management
attributes the decrease in variable annuity premiums to increasing customer
demand for annuity products that offer some type of guarantee provision, such as
fixed rate products, variable products with fixed account options, variable
products with guaranteed minimum income benefits, or variable products with
guaranteed minimum account values. With the exception of the Company's modified
guaranteed annuity product, which offers a fixed interest crediting rate, the
Company currently does not offer these types of guarantees in its products.
During the first quarter 2002, sales of annuity products with these types of
guarantee features have recorded strong sales within the Merrill Lynch & Co.
distribution system. The Company is currently developing certain of these
guarantee provisions for placement in its existing variable products and
anticipates offering these features during the second half of 2002.
Management believes that the increasing demand for annuity products with
guarantee provisions has been fueled by the increasing volatility and general
negative performance of the equity markets that has occurred over the past two
years. As such, future variable annuity sales could be negatively impacted if
this trend continues.
The Company's L-Share variable annuity product was introduced in the fourth
quarter 2001.
Variable life insurance premiums decreased $10.7 million (or 42%) during the
current three month period as compared to the same period in 2001. The decrease
in variable life insurance premiums is primarily due to a decrease in estate
planning life insurance product sales. During the third quarter 2001, the
Company discontinued manufacturing and marketing estate planning life insurance
products. The Company will continue to issue its single premium variable life
insurance product that was introduced in March 2001.
Modified guaranteed annuity premiums increased $5.6 million (or 89%) primarily
due to the factors noted above.
WITHDRAWALS
Policy and contract surrenders decreased $27.4 million (or 9%) to $267.2 million
during the first three months of 2002 as compared to the same period in 2001.
During the first three months of 2002, variable annuity surrenders decreased
$30.8 million (or 15%) to $171.4 million. Also, modified guaranteed annuity
surrenders decreased $12.8 million (or 29%) during the current three month
period. The decrease in modified guaranteed annuity surrenders is primarily due
to increases in medium term interest rates during the first three months of
2002. The market value adjustment provision on these contracts has an inverse
relationship to changes in interest rates. Partially offsetting the decreases in
variable annuity and modified guaranteed annuity surrenders was an increase in
variable life surrenders. During the first three months of 2002, variable life
surrenders increased $12.2 million (or 31%).
FINANCIAL CONDITION
During the first three months of 2002, assets decreased $101.6 million (or 1%)
to $15.3 billion. The decrease in assets was primarily due to a $49.7 million
reduction in separate accounts assets, as well as a $19.4 million reduction in
market values on general account investments.
As of March 31, 2002, approximately $83.9 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 does not purchase non-investment
grade securities. Current non-investment grade holdings are the result of rating
downgrades. The Company 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, 2002, the Company held $62.2 million in emerging market
securities with an approximate unrealized loss of $6.0 million.
During the first three months of 2002, the Company experienced contract owner
withdrawals that exceeded deposits by $164.9 million. The components of contract
owner transactions were as follows:
March 31,
(In Millions) 2002
--------
Premiums collected $ 197.4
Internal tax-free exchanges (12.6)
--------
Net contract owner deposits 184.8
Contract owner withdrawals 267.1
Net transfers to/from separate accounts 82.6
--------
Net contract owner withdrawals 349.7
--------
Net contract owner activity $ (164.9)
========
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of March 31, 2002, the Company's assets included $2.1
billion of cash, short-term investments and investment grade publicly traded
available-for-sale securities that could be liquidated if funds were required.
MANAGEMENT ESTIMATES
The Company amortizes deferred policy acquisition costs based on the expected
future gross profits for each group of contracts. In estimating future gross
profits, management makes assumptions regarding such factors as policy charge
revenue, investment performance, policy lapse rates, mortality, and expenses for
the expected life of each group of contracts. Actual gross profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates and evaluates the
recoverability of deferred policy acquisition costs. The impact of revisions to
estimates on cumulative amortization is recorded as a charge or credit to
current operations.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2002 and 2001, the Company reported
net earnings of $23.9 million and $27.0 million, respectively.
Policy charge revenue decreased $5.3 million (or 8%) during the first three
months of 2002 as compared to the same period in 2001. The decrease in policy
charge revenue is primarily attributable to the decrease in average variable
account balances. Average variable account balances decreased $868 million (or
7%) during the first three months of 2002 as compared to the same period in
2001.
Net earnings derived from interest spread increased $0.8 million (or 5%) during
the first three months of 2002 as compared to the same period in 2001. The
increase in interest spread is primarily due to a $1.3 million increase in real
estate income.
Net realized investment gains increased $4.3 million during the first three
months of 2002 as compared to the same period in 2001. The following table
provides the changes in net realized investment gains (losses) by type for each
respective period:
Realized Gain (Loss) 1Q 2002 1Q 2001 Change
- --------------------------- ------- ------- ------
(In Millions)
Interest related gains $ 0.6 $ 0.2 $ (0.4)
Credit related gains 2.4 - 2.4 (1)
Trading account losses (0.1) (1.6) 1.5 (2)
------ ------ ------
$ 2.9 $ (1.4) $ 4.3
====== ====== ======
(1) Credit related gains included asset sales of several large security
holdings.
(2) 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 2002, the market value adjustment expense increased $0.2 million
(or 45%) as compared to the same period in 2001. The increase is primarily due
to the lower interest rate environment during 2002 as compared to 2001. The
market value adjustment expense has an inverse relationship to changes in
interest rates.
Policy benefits increased $5.1 million (or 94%) during the first three months of
2002 as compared to the same period in 2001. The increase in policy benefits is
primarily due to increased variable annuity death benefit expense incurred under
guaranteed minimum death benefit provisions.
Reinsurance premium ceded decreased $0.4 million (or 6%) during the first three
months of 2002 as compared to the same period in 2001. The decrease is
attributable to a decrease in life insurance inforce.
Amortization of deferred policy acquisition costs decreased $0.9 million (or 5%)
during the first three months of 2002 as compared to the same period in 2001.
The decrease in amortization of deferred policy acquisition costs is primarily
due to the decrease in policy charge revenue.
Insurance expenses and taxes decreased $2.0 million (or 15%) during the first
three months of 2002 as compared to the same period in 2001. During the current
three month period, insurance expenses decreased $1.1 million primarily due to
net refunds received from guaranty fund associations. Also contributing to the
decrease in insurance expenses and taxes was the cost savings due to the
Company's consolidation of its life and annuity policy administration service
centers. The consolidation was completed during the third quarter 2001.
The Company's effective federal income tax rate was 35% during the first three
months of 2002 as compared to 31% during the same period in 2001. The difference
in effective federal income tax rates was primarily due to certain permanent
adjustments recorded during 2001.
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 increase in other net revenues and other net earnings during the first three
months of 2002 is primarily due to decreased trading account losses incurred
during 2002.
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ MATTHEW J. RIDER
-----------------------------------------
Matthew J. Rider
Senior Vice President,
Chief Financial Officer and Treasurer
Date: May 13, 2002