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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 SEPTEMBER 30, 2006
COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863; 333-34192; 333-133223; 333-133225
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>
1300 Merrill Lynch Drive, 2nd Floor
Pennington, NJ 08534
(Address of Principal Executive Offices)
(609) 274-6900
(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 __
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ 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 (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(dollars in thousands) 2006 2005
------------- ------------
ASSETS
INVESTMENTS
Fixed maturity available-for-sale securities, at estimated fair value
(amortized cost: 2006 - $1,723,173; 2005 - $1,900,606) $ 1,705,263 $ 1,884,039
Equity available-for-sale securities, at estimated fair value
(cost: 2006 - $66,172; 2005 - $61,696) 67,492 64,278
Trading account securities, at estimated fair value -- 27,436
Limited partnerships, at cost 12,034 12,195
Policy loans on insurance contracts, at outstanding loan balances 968,757 992,143
----------- -----------
2,753,546 2,980,091
----------- -----------
CASH AND CASH EQUIVALENTS 80,977 56,319
ACCRUED INVESTMENT INCOME 52,027 52,466
DEFERRED POLICY ACQUISITION COSTS 272,834 296,189
DEFERRED SALES INDUCEMENTS 15,800 8,298
FEDERAL INCOME TAXES - DEFERRED 1,748 1,937
REINSURANCE RECEIVABLES 10,965 9,231
AFFILIATED RECEIVABLES - NET -- 5,519
OTHER ASSETS 36,617 33,592
SEPARATE ACCOUNTS ASSETS 10,941,435 10,917,234
----------- -----------
TOTAL ASSETS $14,165,949 $14,360,876
=========== ===========
See Notes to Financial Statements. (Continued)
1
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(dollars in thousands, except common stock par value and shares) 2006 2005
------------- ------------
LIABILITIES
POLICYHOLDER LIABILITIES AND ACCRUALS
Policyholder account balances $ 2,074,166 $ 2,163,838
Future policy benefits 418,663 420,542
Claims and claims settlement expenses 33,247 31,147
----------- -----------
2,526,076 2,615,527
----------- -----------
OTHER POLICYHOLDER FUNDS 5,038 1,948
LIABILITY FOR GUARANTY FUND ASSESSMENTS 6,536 6,791
FEDERAL INCOME TAXES - CURRENT 14,588 17,572
AFFILIATED PAYABLES - NET 5,613 --
UNEARNED POLICY CHARGE REVENUE 37,375 45,604
OTHER LIABILITIES -- 3,367
SEPARATE ACCOUNTS LIABILITIES 10,941,435 10,917,234
----------- -----------
TOTAL LIABILITIES 13,536,661 13,608,043
----------- -----------
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 397,324 397,324
Accumulated other comprehensive loss, net of taxes (12,393) (11,699)
Retained earnings 241,857 364,708
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 629,288 752,833
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,165,949 $14,360,876
=========== ===========
See Notes to Financial Statements.
2
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF EARNINGS (UNAUDITED)
THREE MONTHS ENDED
(dollars in thousands) SEPTEMBER 30,
-------------------
2006 2005
-------- --------
NET REVENUES
Policy charge revenue $ 70,594 $ 78,243
Net investment income 35,635 36,923
Net realized investment gains 758 4,683
-------- --------
TOTAL NET REVENUES 106,987 119,849
-------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder liabilities 25,100 26,883
Policy benefits (net of reinsurance recoveries: 2006 - $2,783;
2005 - $ 2,946) 10,688 13,940
Reinsurance premium ceded 6,756 6,594
Amortization of deferred policy acquisition costs 20,071 26,653
Insurance expenses and taxes 14,344 14,631
-------- --------
TOTAL BENEFITS AND EXPENSES 76,959 88,701
-------- --------
EARNINGS BEFORE FEDERAL INCOME TAXES 30,028 31,148
-------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current 11,588 13,146
Deferred (2,455) (4,094)
-------- --------
TOTAL FEDERAL INCOME TAX EXPENSE 9,133 9,052
-------- --------
NET EARNINGS $ 20,895 $ 22,096
======== ========
See Notes to Financial Statements.
3
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF EARNINGS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
(dollars in thousands) 2006 2005
-------- --------
NET REVENUES
Policy charge revenue $197,117 $193,272
Net investment income 107,121 110,613
Net realized investment gains 1,765 4,130
-------- --------
TOTAL NET REVENUES 306,003 308,015
-------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder liabilities 76,277 80,463
Policy benefits (net of reinsurance recoveries:
2006 - $11,657; 2005 - $13,581) 36,816 38,624
Reinsurance premium ceded 20,324 20,343
Amortization of deferred policy acquisition costs 45,630 45,980
Insurance expenses and taxes 42,247 44,907
-------- --------
TOTAL BENEFITS AND EXPENSES 221,294 230,317
-------- --------
EARNINGS BEFORE FEDERAL INCOME TAXES 84,709 77,698
-------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current 26,998 17,510
Deferred 562 1,831
-------- --------
TOTAL FEDERAL INCOME TAX EXPENSE 27,560 19,341
-------- --------
NET EARNINGS $ 57,149 $ 58,357
======== ========
See Notes to Financial Statements.
4
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in thousands) 2006 2005
------- --------
NET EARNINGS $20,895 $ 22,096
------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains (losses) on
available-for-sale securities:
Net unrealized holding gains (losses) arising
during the period 29,501 (23,308)
Reclassification adjustment for gains included
in net earnings (759) (4,079)
------- --------
28,742 (27,387)
------- --------
Adjustments for policyholder liabilities (4,674) 5,214
Adjustments for deferred federal income taxes (8,424) 7,761
------- --------
Total other comprehensive income (loss), net of
taxes 15,644 (14,412)
------- --------
COMPREHENSIVE INCOME $36,539 $ 7,684
======= ========
See Notes to Financial Statements.
5
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
(dollars in thousands) 2006 2005
------- --------
NET EARNINGS $57,149 $ 58,357
------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized losses on
available-for-sale securities:
Net unrealized holding losses arising during
the period (1,552) (36,869)
Reclassification adjustment for gains included
in net earnings (1,053) (4,501)
------- --------
(2,605) (41,370)
------- --------
Adjustments for policyholder liabilities 1,538 8,041
Adjustments for deferred federal income taxes 373 11,665
------- --------
Total other comprehensive loss, net of taxes (694) (21,664)
------- --------
COMPREHENSIVE INCOME $56,455 $ 36,693
======= ========
See Notes to Financial Statements.
6
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
ACCUMULATED
ADDITONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
(dollars in thousands) STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
------ --------- ------------- --------- -------------
BALANCE, JANUARY 1, 2005 $2,500 $397,324 $ 14,298 $ 297,344 $ 711,466
Net earnings 67,364 67,364
Other comprehensive loss, net of taxes (25,997) (25,997)
------ -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2005 2,500 397,324 (11,699) 364,708 752,833
Net earnings 57,149 57,149
Cash dividend paid to parent (180,000) (180,000)
Other comprehensive loss, net of taxes (694) (694)
------ -------- -------- --------- ---------
BALANCE, SEPTEMBER 30, 2006 $2,500 $397,324 $(12,393) $ 241,857 $ 629,288
====== ======== ======== ========= =========
See Notes to Financial Statements.
7
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
(dollars in thousands) 2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 57,149 $ 58,357
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 45,630 45,980
Capitalization of policy acquisition costs (22,275) (22,429)
Amortization of deferred sales inducements 1,350 84
Capitalization of sales inducements (8,852) (6,378)
Amortization of investments 5,983 7,277
Interest credited to policyholder liabilities 76,277 80,463
Change in variable contract reserves 6,361 3,232
Provision for deferred federal income tax 562 1,831
(Increase) decrease in operating assets:
Trading account securities 28,148 113
Accrued investment income 439 2,777
Reinsurance receivables (1,734) (6,206)
Affiliated receivables - net 5,519 411
Other (3,209) 2,685
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 2,100 2,715
Other policyholder funds 3,090 590
Liability for guaranty fund assessments (255) (181)
Federal income taxes - current (2,984) (7,469)
Amortization of unearned policy charge revenue (8,466) (15,908)
Capitalization of unearned policy charge revenue 237 1,398
Affiliated payables - net 5,613 --
Other (2,405) 2,564
Other operating activities:
Net realized investment gains (1,765) (4,130)
--------- ---------
Net cash and cash equivalents provided by
operating activities 186,513 147,776
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Sales of available-for-sale securities 245,259 331,034
Maturities of available-for-sale securities 97,801 159,491
Purchases of available-for-sale securities (175,811) (441,347)
Sales of limited partnerships 411 2,547
Purchases of limited partnerships (250) (2,100)
Policy loans on insurance contracts - net 23,386 39,500
--------- ---------
Net cash and cash equivalents provided by investing
activities $ 190,796 $ 89,125
--------- ---------
See Notes to Financial Statements. (Continued)
8
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
(dollars in thousands) 2006 2005
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Cash dividend paid to parent $(180,000) $ --
Policyholder deposits (excludes internal policy
replacement deposits) 486,607 469,396
Policyholder withdrawals (including transfers
from separate accounts) (659,258) (697,299)
--------- ---------
Net cash and cash equivalents used in financing
activities (352,651) (227,903)
--------- ---------
Net increase in cash and cash equivalents 24,658 8,998
Cash and cash equivalents, beginning of period 56,319 64,203
--------- ---------
Cash and cash equivalents, end of period $ 80,977 $ 73,201
========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid to affiliates for:
Federal income taxes $ 29,982 $ 24,979
Interest 425 269
See Notes to Financial Statements.
9
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 annuity products, including variable
annuities, modified guaranteed annuities, and immediate annuities. The Company
is domiciled in the State of Arkansas.
For a complete discussion of the Company's 2005 Financial Statements and
accounting policies, refer to the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
The interim Financial Statements for the three and nine month periods are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair statement of the Financial
Statements have been included. These unaudited Financial Statements should be
read in conjunction with the audited Financial Statements included in the 2005
Annual Report on Form 10-K. The December 31, 2005 unaudited Balance Sheet was
derived from the audited 2005 Financial Statements. 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. In presenting the Financial Statements,
management makes estimates that affect the reported amounts and disclosures in
the Financial Statements. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ from those
estimates and could have a material impact on the Financial Statements, and it
is possible that such changes could occur in the near term.
Certain reclassifications and format changes have been made to prior period
Financial Statements, where appropriate, to conform to the current period
presentation.
New Accounting Pronouncements
In September of 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 is effective
for Financial Statements issued for fiscal years beginning after November 15,
2007 with early adoption permitted. The Company is currently evaluating whether
or not it will early adopt SFAS No. 157 as of the first quarter of fiscal 2007
as permitted. The adoption is not expected to have a material impact on the
Company's Financial Statements.
In June 2006, FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
Company's Financial Statements and prescribes a recognition threshold and
measurement attribute for the Financial Statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company will adopt
FIN 48 in the first quarter of 2007. The adoption of FIN 48 is not expected to
have a material impact on the Company's Financial Statements.
In September 2005, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection With Modifications or Exchanges of Insurance Contracts." SOP 05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in Statement of Financial Accounting
Standards No. 97. The SOP defines an internal replacement as a modification in
product benefits, features, rights, or coverages that occurs by the exchange of
a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. This
SOP is effective for internal replacements occurring in fiscal years beginning
after December 15, 2006. The Company will adopt SOP 05-1 on January 1, 2007. The
Company is currently
10
assessing the Financial Statement impact related to the adoption of SOP 05-1.
The adoption of SOP 05-1 is not expected to have a material impact on the
Company's Financial Statements.
NOTE 2. INVESTMENTS
The Company's investments in fixed maturity and equity securities are classified
as either available-for-sale or trading and are carried 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 taxes. Unrealized gains and losses on trading account securities are included
in net realized investment gains (losses). During the first quarter 2006 the
Company liquidated its trading portfolio.
If management determines that a decline in the value of an available-for-sale
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. There were no realized investment losses on securities deemed to have
incurred other-than-temporary declines in fair value for the three and nine
months ended September 30, 2006 and 2005.
The Company has recorded certain adjustments to policyholder account balances in
connection with unrealized holding gains or losses on investments classified as
available-for-sale. The Company adjusts policyholder account balances 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, net of taxes were as follows:
SEPTEMBER DECEMBER
2006 2005
--------- --------
Assets:
Fixed maturity securities $(17,910) $(16,567)
Equity securities 1,320 2,582
Federal income taxes - deferred 6,672 6,299
-------- --------
(9,918) (7,686)
-------- --------
Liabilities:
Policyholder account balances 2,475 4,013
-------- --------
Stockholder's Equity:
Accumulated other comprehensive loss, net of taxes $(12,393) $(11,699)
======== ========
Net realized investment gains (losses) were as follows:
THREE NINE MONTHS
MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -----------------
2006 2005 2006 2005
---- ------ ------- -------
Available-for-sale securities $759 $4,026 $ 1,053 $ 4,440
Trading account securities:
Net realized investment gains -- 285 1,902 982
Net unrealized holding gains (losses) -- 372 (1,190) (1,292)
---- ------ ------- -------
Total net realized investment gains $759 $4,683 $ 1,765 $ 4,130
==== ====== ======= =======
11
NOTE 3. DEFERRED POLICY ACQUISITION COSTS AND UNEARNED POLICY CHARGE REVENUE
The impact of revisions to estimates on cumulative amortization of deferred
policy acquisition costs ("DAC") and unearned policy charge revenue ("UPCR") is
recorded as a charge or benefit to current operations ("unlocking").
The components of amortization of DAC for the three and nine month periods ended
September 30 were as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
Normal amortization related to variable life and annuity
insurance products $16,181 $12,183 $44,575 $31,510
Unlocking related to variable universal life insurance product 3,890 14,470 1,055 14,470
------- ------- ------- -------
Total amortization of DAC $20,071 $26,653 $45,630 $45,980
======= ======= ======= =======
During the third quarter 2006, the Company revised mortality assumptions for the
current year on its variable universal life insurance product resulting in an
unlocking charge of $3,890. The increase in normal DAC amortization for the
three and nine month periods ended September 30, 2006 is attributable to lower
mortality as well as an increase in policy charge revenue as compared to the
same periods in 2005.
The components of amortization (accretion) of UPCR for the three and nine month
periods ended September 30 were as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
2006 2005 2006 2005
------ ------- ------- -------
Normal amortization (accretion) related to variable universal
life insurance product $3,919 $ 677 $6,934 $(1,181)
Unlocking related to variable universal life insurance product 4,523 17,089 1,532 17,089
------ ------- ------ -------
Total amortization of UPCR $8,442 $17,766 $8,466 $15,908
====== ======= ====== =======
During the third quarter 2006, the Company revised mortality assumptions for the
current year on its variable universal life insurance product resulting in an
unlocking benefit of $4,523. The increase in normal UPCR amortization
(accretion) for the three and nine month periods ended September 30, 2006 is
attributable to lower mortality as compared to the same periods in 2005.
NOTE 4. STOCKHOLDER'S EQUITY AND 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 September 30, 2006 and December 31, 2005 were
$292,288 and $400,951, respectively. For the nine month periods ended September
30, 2006 and 2005, statutory net income was $70,411 and $64,489, respectively.
During the first half of 2006, the Company paid cash dividends of $180,000 to
MLIG, of which $39,800 were ordinary dividends and $140,200 were extraordinary.
12
NOTE 5. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Annuities and Life Insurance. The Company's Annuity
segment consists of variable annuities and interest sensitive annuities. The
Company's Life Insurance segment consists of variable life insurance products
and interest-sensitive life insurance products. During 2003, the Company ceased
manufacturing or issuing life insurance products. 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 invested assets that do
not support annuity or life insurance contract owner liabilities.
The following table summarizes each business segment's contribution to
consolidated net revenues and net earnings.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
2006 2005 2006 2005
------- ------- -------- --------
Net Revenues (1):
Annuities $46,853 $47,091 $139,039 $132,792
Life Insurance 33,292 43,498 82,701 90,098
Other 1,742 2,377 7,986 4,662
------- ------- -------- --------
Net Revenues $81,887 $92,966 $229,726 $227,552
======= ======= ======== ========
Net Earnings:
Annuities $10,719 $12,529 $ 30,136 $ 34,001
Life Insurance 9,044 8,022 21,822 21,326
Other 1,132 1,545 5,191 3,030
------- ------- -------- --------
Net Earnings $20,895 $22,096 $ 57,149 $ 58,357
======= ======= ======== ========
(1) Net revenues include total net revenues net of interest credited to
policyholder liabilities.
13
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
This Management's Narrative Analysis of Results of Operations should be read in
conjunction with the Financial Statements and Notes to Financial Statements
included herein.
FORWARD LOOKING STATEMENTS
Certain statements in this report may be considered forward-looking, including
those about management expectations, strategic objectives, growth opportunities,
business prospects, anticipated financial results and other similar matters.
These forward-looking statements represent only management's beliefs regarding
future performance, which is inherently uncertain. There are a variety of
factors, many of which are beyond the Company's control, which affect its
operations, performance, business strategy and results and could cause its
actual results and experience to differ materially from the expectations and
objectives expressed in any forward-looking statements. These factors include,
but are not limited to, actions and initiatives taken by current and potential
competitors, general economic conditions, the effects of current, pending and
future legislation, regulation and regulatory actions, and the other risks and
uncertainties detailed in this report. See Risk Factors in the 2005 Annual
Report on Form 10-K. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the dates on
which they are made. The Company does not undertake to update forward-looking
statements to reflect the impact of circumstances or events that arise after the
dates they are made. The reader should, however, consult further disclosures the
Company may make in future filings of its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K.
BUSINESS OVERVIEW
The Company conducts its business primarily in the annuity markets and to a
lesser extent in the life insurance markets of the financial services industry.
These markets are highly regulated with particular emphasis on company solvency
and sales practice monitoring. Demographically, the population is aging and
there is a growing number of individuals preparing for retirement, which favors
life insurance and annuity products. The Company currently offers guaranteed
minimum death benefits (GMDB's), guaranteed minimum income benefits (GMIB's) and
guaranteed minimum withdrawal benefits (GMWB's) within its variable annuity
product suite. The Company believes that the demand for retirement products
containing guarantee features will continue to increase in the future. The
Company believes it is well positioned to continue meeting these demands for
product guarantees.
The Company's gross earnings are principally derived from two sources:
- - the charges imposed on variable annuity and variable life insurance
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 (deferred policy
acquisition costs) are amortized over the period in which the Company
anticipates holding those funds, as noted in the Critical Accounting Policies
section below. Insurance expenses and taxes reported in the Statements of
Earnings are net of amounts deferred. In addition, the Company incurs expenses
associated with the maintenance of inforce contracts.
LIFE INSURANCE STRATEGY
During 2003, the Company discontinued manufacturing its single premium variable
life insurance product. As a result, the Company currently does not manufacture,
market, or issue life insurance products.
During the first quarter 2005, the Company transitioned the policy
administration of its inforce life insurance contracts to an unaffiliated third
party service provider, which is considered a leading provider of insurance
products administration services. The Company remains committed to the delivery
of high quality services for all life insurance contracts inforce.
BUSINESS ENVIRONMENT
The Company's financial position and/or results of operations are primarily
impacted by the following economic factors: equity market performance,
fluctuations in medium term interest rates, and the corporate credit environment
via credit quality and fluctuations in credit spreads. The following discusses
the impact of each economic factor.
14
EQUITY MARKET PERFORMANCE
Changes in the U.S. equity market directly affect the values of the underlying
U.S. equity-based mutual funds supporting separate accounts assets and,
accordingly, the values of variable contract owner account balances.
Approximately 76% of separate accounts assets are invested in equity-based
mutual funds at September 30, 2006. Since asset-based fees collected on inforce
variable contracts represent a significant source of revenue, the Company's
financial condition will be impacted by fluctuations in investment performance
of equity-based separate accounts assets.
Fluctuations in the U.S. equity market also directly impact the Company's
exposure to guarantee benefit provisions contained in the variable annuities it
manufactures. Minimal or negative investment performance generally results in
greater exposure to guarantee benefit provisions, to the extent there is an
increase in the number of variable contracts (and amount per contract) in which
the guarantee benefits exceed the variable account balance. Prolonged periods of
minimum or negative investment performance may result in greater guarantee
benefits expense because it may change the Company's assumptions regarding the
long term cost of guarantee benefits. If the Company increases its estimated
long term cost of guarantee benefits, it will result in establishing greater
guarantee benefit liabilities as compared to current practice. Guarantee benefit
expenses are recorded as a component of policy benefits.
The investment performance of the underlying U.S. equity-based mutual funds
supporting the Company's variable products do not replicate the returns of any
specific U.S. equity market index. However, investment performance will
generally increase or decrease with corresponding increases or decreases of the
overall U.S. equity market. 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"), the NASDAQ
Composite Index ("NASDAQ") and the Standard & Poor's 500 Composite Stock Price
Index ("S&P"). The major U.S. equity indices rebounded during the third quarter
aided by the U.S. Federal Reserve System's Federal Open Market Committee's
("FOMC") interest rate policies. The Dow rose by 4.7% for the quarter and is up
9.0% since the start of the year. The NASDAQ increased 4.0% for the quarter and
2.4% on a year-to-date basis, while the S&P increased 5.2% for the quarter and
7.0% on a year-to-date basis.
During the first nine months of 2006 average variable account balances increased
$179.8 million (or 2%) to $10.9 billion as compared to the same period in 2005.
The increase in average variable account balances contributed to the $0.3
million and $4.0 million increases in asset-based policy charge revenue during
the three and nine month periods ended September 30, 2006 respectively, as
compared to the same periods in 2005.
MEDIUM TERM INTEREST RATES
Changes in interest rates affect the value of investments, primarily fixed
maturity securities and preferred equity securities, as well as interest
sensitive liabilities. Changes in interest rates have an inverse relationship to
the value of investments and interest sensitive liabilities. Also, since the
Company has certain fixed products that contain guaranteed minimum crediting
rates, decreases in interest rates can decrease the amount of interest spread
earned by the Company.
Both debt and equity markets conditions recovered due in part to the FOMC's
decision to keep interest rates unchanged at 5.25% at its August and September
meetings. The yield curve, although inverted at times, remained relatively flat
during the quarter. The medium-term interest rate increased to 4.67% at
September 30, 2006 from 4.36% at December 31, 2005 and 4.08% at September 30,
2005. The Company defines medium term interest rates as the average interest
rate on U.S. Treasury securities with terms of 1 to 5 years.
CORPORATE CREDIT AND CREDIT SPREADS
Changes in the corporate credit environment directly impact the value of the
Company's investments, primarily fixed maturity securities. The Company
primarily invests in investment-grade corporate debt to support its fixed rate
product liabilities.
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. Credit
spreads represent the credit risk premiums required by market participants for a
given credit quality, i.e. the additional yield that a debt instrument issued by
a AA-rated entity must produce over a risk-free alternative (e.g., U.S. Treasury
instruments). Changes in credit spreads have an inverse relationship to the
value of investments.
15
The impact of changes in medium term interest rates, corporate credit and credit
spreads on market valuations were as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2006 2005 2006 2005
----- ------ ----- ------
Average medium term interest rate yield 4.67% 4.08% 4.67% 4.08%
Increase (decrease) in medium term interest rates (in basis points) (58) 48 31 92
Credit spreads (in basis points) 87 90 87 90
Expanding (contracting) of credit spreads (in basis points) 1 (3) (19) 18
Increase (decrease) on market valuations: (in millions)
Available-for-sale investment securities $28.7 $(27.4) $(2.6) $(41.4)
Interest-sensitive policyholder liabilities (4.7) 5.2 1.5 8.0
----- ------ ----- ------
Net increase (decrease) on market valuations $24.0 $(22.2) $(1.1) $(33.4)
===== ====== ===== ======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ and could have a
material impact on the Financial Statements, and it is possible that such
changes could occur in the near term.
The Company's critical accounting policies and estimates are discussed below.
For a full description of these and other accounting policies see Note 1 of the
2005 Annual Report.
VALUATION OF FIXED MATURITY AND EQUITY SECURITIES
The Company's principal investments are available-for-sale fixed maturity and
equity securities as defined by Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The fair value of publicly traded fixed maturity and equity
securities are based on independently quoted market prices. The Company
primarily utilizes pricing services and broker quotes to determine the fair
value of non-publicly traded fixed maturity and equity securities. Since
significant judgment is required for the valuation of non-publicly traded
securities, the estimated fair value of these securities may differ from amounts
realized upon an immediate sale. At September 30, 2006 and December 31, 2005,
approximately, $225.1 million (or 13%) and, $238.2 million (or 12%),
respectively, of the Company's fixed maturity and equity securities portfolio
consisted of non-publicly traded securities.
Changes in the fair value of fixed maturity and equity securities are reported
as a component of accumulated other comprehensive loss, net of taxes on the
Balance Sheets and are not reflected in the Statements of Earnings until a sale
transaction occurs or when declines in fair value are deemed
other-than-temporary.
OTHER-THAN-TEMPORARY IMPAIRMENT LOSSES ON INVESTMENTS
The Company regularly reviews each investment in its fixed maturity and equity
securities portfolio to evaluate the necessity of recording impairment losses
for other-than-temporary ("OTT") declines in the fair value of investments.
Management makes this determination through a series of discussions with the
Company's portfolio managers and credit analysts, information obtained from
external sources (i.e. company announcements, ratings agency announcements, or
news wire services) and the Company's ability and intent to hold the investments
for a period of time sufficient for a forecasted market price recovery up to or
beyond the amortized cost of the investment. The factors that may give rise to a
potential OTT impairment include, but are not limited to, i) certain
credit-related events such as default of principal or interest payments by the
issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv)
fair market value less than amortized cost for an extended period of time. In
the absence of a readily ascertainable market value, the estimated fair value on
these securities represents management's best estimate and is based on
comparable securities and other assumptions as appropriate. Management bases
this determination on the most recent information available. OTT impairment
losses result in a permanent reduction of the cost basis of the investment.
There were no OTT impairments on investments in fixed maturity securities for
the three and nine month periods ended September 30, 2006 and 2005.
16
DEFERRED POLICY ACQUISITION COSTS FOR VARIABLE ANNUITIES AND VARIABLE LIFE
INSURANCE
The costs of acquiring business, principally commissions, certain expenses
related to policy issuance, and certain variable sales expenses that relate to
and vary with the production of new and renewal business, are deferred and
amortized in accordance with SFAS No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments. Deferred policy acquisition costs ("DAC")
are subject to recoverability testing at the time of policy issuance and loss
recognition testing at the end of each reporting period. At September 30, 2006,
variable annuities and variable life insurance accounted for $174.4 million (or
64%) and $87.8 million (or 32%), respectively, of the Company's DAC asset. At
December 31, 2005, variable annuities and variable life insurance accounted for
$181.9 million (or 61%) and $103.2 million (or 35%), respectively, of the
Company's DAC asset.
DAC for variable annuities is amortized with interest over the lives of the
policies in relation to the present values of estimated future gross profits
from asset-based fees, contract fees, and surrender charges, less a provision
for GMDB expenses, policy maintenance expenses, and non-capitalized commissions.
DAC for variable life insurance is amortized with interest over the lives of the
policies in relation to the present values of estimated future gross profits
from fees related to contract loans, asset-based fees, and cost of insurance
charges, less claims (net of reinsurance), cost of mortality reinsurance, policy
maintenance expenses, and non-capitalized commissions.
The most significant assumptions involved in the estimation of future gross
profits are future net separate accounts performance, surrender rates, mortality
rates and reinsurance costs. For variable annuities, the Company generally
establishes a long-term rate of net separate accounts growth. If returns over a
determined historical period differ from the long-term assumption, returns for
future determined periods are calculated so that the long-term assumption is
achieved. The result is that the long-term rate is assumed to be realized over a
period of approximately ten years. However, the long-term rate may be adjusted
if expectations change. This method for projecting market returns is known as
reversion to the mean, a standard industry practice. For variable life
insurance, the Company generally assumes a level long-term rate of net variable
life separate accounts growth for all future years and the long-term rate may be
adjusted if expectations change. Additionally, the Company may modify the rate
of net separate accounts growth over the short term to reflect near-term
expectations of the economy and financial market performance in which separate
accounts assets are invested. Surrender and mortality rates for all variable
contracts are based on historical experience and a projection of future
experience.
Future gross profit estimates are subject to periodic evaluation with necessary
revisions applied against amortization to date. The impact of revisions and
assumptions to estimates on cumulative amortization is recorded as a charge or
benefit to current operations, commonly referred to as "unlocking". See Note 3
to the Financial Statements for period-to-period differences in DAC unlocking.
Changes in assumptions can have a significant impact on the amount of DAC
reported and their related amortization patterns. In general, increases in the
estimated separate accounts return and decreases in surrender or mortality
assumptions increase the expected future profitability of the underlying
business and may lower the rate of DAC amortization. Conversely, decreases in
the estimated separate accounts returns and increases in surrender or mortality
assumptions reduce the expected future profitability of the underlying business
and may increase the rate of DAC amortization.
POLICYHOLDER LIABILITIES
The Company establishes liabilities for amounts payable on its life and annuity
contracts based on methods and underlying assumptions in accordance with SFAS
No. 60, Accounting and Reporting by Insurance Enterprises, SFAS No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments and
Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts and applicable actuarial standards.
The Company's liability for policyholder account balances represents the
contract value that has accrued to the benefit of the policyholder as of the
balance sheet date. The liability is generally equal to the accumulated account
deposits plus interest credited less policyholder withdrawals and other charges
assessed against the account balance. Policyholder account balances at September
30, 2006 and December 31, 2005 were $2.1 billion and $2.2 billion, respectively.
Future policy benefits are actuarially determined reserves, which are calculated
to meet future obligations and are generally payable over an extended period of
time. Principle assumptions used in the establishment of liabilities for future
policy benefits are mortality, surrender rates, policy expenses, investment
yields and inflation. These estimates and assumptions are influenced by
historical experience, current developments and anticipated market trends. At
September 30, 2006 and December 31, 2005, future policy benefits were $418.7
million and $420.5 million, respectively.
17
Included within future policy benefits are liabilities established for guarantee
benefit provisions relating to certain variable annuity and variable life
contracts that the Company issues. These reserves are calculated in accordance
with SOP 03-1 and are determined by estimating the expected value of living and
death benefits in excess of the projected account balance and recognizing the
excess ratably over the accumulation period based on total expected assessments.
The Company regularly evaluates estimates used and adjusts the additional
liability balance, with a related charge or benefit to policy benefits expense,
if actual experience or other evidence suggests that earlier assumptions should
be revised. The assumptions used in estimating the liabilities are consistent
with those used for amortizing DAC. The assumptions of investment performance
and volatility are consistent with historical market returns. The benefits used
in calculating the liabilities are based on the average benefits payable over a
range of scenarios. At September 30, 2006 and December 31, 2005, liabilities for
living and death benefit reserves included within future policy benefits were
$116.9 million and $110.6 million, respectively.
UNEARNED POLICY CHARGE REVENUE LIABILITY FOR VARIABLE LIFE INSURANCE
The Company's variable universal life insurance product includes a premium load
that is higher in early policy years than in later years. The excess of the
initial load over the ultimate load is recognized as income over time in the
same manner that DAC is amortized. In addition, the unearned policy charge
revenue liability is subject to the same periodic reassessment as DAC. See Note
3 to the Financial Statements for period-to-period differences in unearned
policy charge revenue unlocking. At September 30, 2006 and December 31, 2005,
the Company's unearned policy charge revenue liability was $37.4 million and
$45.6 million, respectively.
FEDERAL INCOME TAXES
The Company uses the asset and liability method in providing income taxes on all
transactions that have been recognized in the financial statements. The asset
and liability method requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or realized. The Company
provides for federal income taxes based on amounts it believes it will
ultimately owe. Inherent in the provision for federal income taxes are estimates
regarding the realization of certain tax deductions and credits.
Specific estimates include the realization of dividend-received deductions
("DRD") and foreign tax credits ("FTC"). A portion of the Company's investment
income related to separate accounts business qualifies for the DRD and FTC.
Information necessary to calculate these tax adjustments is typically not
available until the following year. However, within the current year's
provision, management makes estimates regarding the future tax deductibility of
these items. These estimates are primarily based on recent historic experience.
During the three and nine month periods ended September 30, 2006, the Company
decreased its provision for federal income taxes due to DRD and FTC adjustments
by $1.4 million and $2.1 million, respectively. During the three and nine month
periods ended September 30, 2005, the Company reduced its provision for federal
income taxes due to DRD and FTC adjustments by $1.8 million and $7.9 million
respectively.
RECENT DEVELOPMENTS
NEW ACCOUNTING PRONOUNCEMENTS
In September of 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 is effective
for Financial Statements issued for fiscal years beginning after November 15,
2007 with early adoption permitted. The Company is currently evaluating whether
or not it will early adopt SFAS No. 157 as of the first quarter of fiscal 2007
as permitted. The adoption is not expected to have a material impact on the
Company's Financial Statements.
In June 2006, FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
Company's Financial Statements and prescribes a recognition threshold and
measurement attribute for the Financial Statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company will adopt
FIN 48 in the first quarter of 2007. The adoption of FIN 48 is not expected to
have a material impact on the Company's Financial Statements.
In September 2005, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection With Modifications or Exchanges of Insurance Contracts." SOP 05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in Statement of Financial Accounting
Standards No. 97. The SOP defines an internal replacement as a modification in
product benefits, features, rights, or coverages that occurs by the exchange of
a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. This
SOP is effective for internal replacements occurring in
18
fiscal years beginning after December 15, 2006. The Company will adopt SOP 05-1
on January 1, 2007. The Company is currently assessing the Financial Statement
impact related to the adoption of SOP 05-1. The adoption of SOP 05-1 is not
expected to have a material impact on the Company's Financial Statements.
NEW BUSINESS
The Company has strategically placed its marketing emphasis on the sale of
variable annuity products. These products are designed to address the retirement
planning needs of Merrill Lynch & Co.'s clients. Each variable annuity product
is designed to provide tax-deferred retirement savings with the opportunity for
diversified investing in a wide selection of underlying mutual fund portfolios.
During March 2005, the Company introduced a new variable annuity product line,
Merrill Lynch Investor Choice Annuity ("ICA"), which replaced all new sales of
existing variable annuity products. ICA provides the ability to customize
variable annuity products with specific contract features, charge structures,
and investment options. ICA is offered in B-Share, C-Share and L-Share classes
similar to previous variable annuity products. These classes are differentiated
by the surrender charge period and the types of contract fees charged to the
contract owner. Additionally, ICA offers a bonus class in which a specified
amount is added to the contract value with each deposit.
Total direct deposits decreased $37.1 million (or 17%) to $177.9 million and
increased $24.8 million (or 5%) to $553.6 million during the three and nine
month periods ended September 30, 2006, respectively, as compared to the same
periods in 2005. Total direct deposits by product were as follows:
(DOLLARS IN
MILLIONS) % CHANGE
---------------- -------------------
THIRD NINE
THIRD NINE QUARTER MONTHS
QUARTER MONTHS 2006 VS. 2006 VS.
2006 2006 2005 2005
------- ------ -------- --------
Variable Annuities (including ICA):
L-Share $ 63.6 $197.1 (9)% 49%
Bonus 62.2 163.4 (5) 41
B-Share 28.1 115.4 (48) (46)
C-Share 13.2 49.1 (16) 26
------ ------ --- ---
167.1 525.0 (18) 5
------ ------ --- ---
All Other Deposits 10.8 28.6 6 4
------ ------ --- ---
Total Direct Deposits $177.9 $553.6 (17)% 5%
====== ====== === ===
During the current three month period, variable annuity deposits decreased $37.7
million (or 18%) to $167.1 million compared to the same period in 2005 as the
prior year quarter was favorably impacted by the momentum and marketing efforts
supporting the ICA product launch. During the current nine month period,
variable annuity deposits increased $23.6 million (or 5%) to $525.0 million due
to the product enhancements included in ICA and the continued demand for
guaranteed benefit provisions.
All other deposits include deposits on modified guaranteed annuities and
immediate annuities as well as renewal deposits on existing life insurance and
fixed annuity contracts that are no longer manufactured.
19
FINANCIAL CONDITION
At September 30, 2006, the Company's assets were $14.2 billion or $194.9 million
lower than the $14.4 billion in assets at December 31, 2005. Assets excluding
separate accounts assets decreased $219.1 million (or 6%) primarily due to the
$180.0 million dividend payment, a reduction in the number of fixed rate
contracts inforce and a decrease in market values on investment securities as a
result of the current interest rate environment. Separate accounts assets, which
represent 77% of total assets, increased $24.2 million to $10.9 billion. Changes
in separate accounts assets were as follows:
(dollars in millions) 1Q06 2Q06 3Q06 TOTAL
------- ------- ------- ---------
Investment performance $ 483.5 $(141.5) $ 342.1 $ 684.1
Deposits 165.4 200.9 171.5 537.8
Policy fees and charges (51.3) (52.4) (51.7) (155.4)
Surrenders, benefits and withdrawals (336.7) (378.2) (327.4) (1,042.3)
------- ------- ------- ---------
Net increase (decrease) $ 260.9 $(371.2) $ 134.5 $ 24.2
======= ======= ======= =========
During the first nine months of 2006, the Company experienced contract owner
withdrawals that exceeded deposits on all products by $703.4 million. The
components of contract owner transactions were as follows:
THIRD
QUARTER
(dollars in millions) 2006
--------
Deposits collected $ 553.6
Internal tax-free exchanges (67.0)
--------
Net contract owner deposits 486.6
--------
Contract owner withdrawals 659.3
Net transfers from separate accounts 530.7
--------
Net contract owner withdrawals 1,190.0
--------
Net contract owner activity $ (703.4)
========
At September 30, 2006 and December 31, 2005, approximately $1.7 billion (or 98%)
and $1.9 billion (or 99%), respectively, of fixed maturity securities were
considered investment grade. The Company defines investment grade securities as
unsecured debt obligations that have a rating equivalent to Standard and Poor's
BBB- or higher (or similar rating agency). Also, at September 30, 2006,
approximately $93.3 million (or 5%) of fixed maturity securities were rated
BBB-, which is the lowest investment grade rating given by Standard and Poor's.
This compares to $132.0 million (or 7%) of BBB- rated fixed maturity securities
at December 31, 2005.
At September 30, 2006 and December 31, 2005, approximately $35.0 million (or 2%)
and $26.8 million (or 1%), respectively, of fixed maturity securities were
considered below investment grade. Below 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. Current below investment grade holdings are the result of ratings
downgrades on existing securities as the Company does not purchase below
investment grade securities. The Company closely monitors such investments.
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of September 30, 2006, 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.
In order to continue to issue annuity products, the Company must meet or exceed
the statutory capital and surplus requirements of the insurance departments of
the states in which it conducts business. The Company has developed a
comprehensive capital management plan that will continue to provide appropriate
levels of capital for the risks assumed, but will allow the Company to reduce
its absolute
20
level of surplus. During the first half of 2006, the Company paid cash dividends
of $180.0 million to its parent, Merrill Lynch Insurance Group Inc., of which
$39.8 million were ordinary dividends and $140.2 million, were extraordinary.
During 2003, the Company and Merrill Lynch & Co. executed a "keepwell"
agreement. The agreement obligates Merrill Lynch & Co. to maintain a level of
capital in the Company in excess of minimum regulatory capital requirements.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of
September 30, 2006:
LESS THAN THREE TO MORE THAN
(dollars in millions) THREE YEARS FIVE YEARS FIVE YEARS TOTAL
----------- ---------- ---------- ------
Contractual Obligations:
Long-term liabilities (1) $24.8 $33.5 $243.5 $301.8
(1) Long-term liabilities include policyholder liabilities for which the
Company believes the amount and timing of the payments are essentially
fixed and determinable. These amounts primarily relate to contracts where
the Company is currently making payments to policyholders and will continue
to do so until the occurrence of a specific event.
During 2000, the Company committed to participate in a limited partnership.
During the first quarter 2006, the Company committed the remaining $0.3 million
of a $10.0 million obligation and has no further commitment obligation.
RESULTS OF OPERATIONS
For the three month periods ended September 30, 2006 and 2005, the Company
recorded net earnings of $20.9 million and $22.1 million, respectively. For the
nine month periods ended September 30, 2006 and 2005, the Company reported net
earnings of $57.1 million and $58.4 million, respectively.
Policy charge revenue decreased $7.6 million (or 10%) and increased $3.8 million
(or 2%) during the current three and nine month periods ended September 30,
2006, respectively, as compared to the same periods in 2005. The following table
provides the changes in policy charge revenue by type for each respective
period:
THREE MONTHS NINE MONTHS
(dollars in millions) 2006 VS. 2005 2006 VS. 2005
------------- -------------
Asset-based policy charge revenue $0.3(1) $ 4.0(1)
Guarantee benefits based policy charge revenue 1.5(2) 3.8(2)
Non-asset based policy charge revenue (9.4)(3) (4.0)(3)
----- -----
$(7.6) $ 3.8
===== =====
(1) Asset-based policy charge revenue was favorably impacted by the increase in
average variable account balances.
(2) The increases in guarantee benefits based policy charge revenue are due to
the increase in inforce variable annuity contracts containing guaranteed
benefit riders resulting from increased demand for guaranteed benefit
provisions.
(3) The decreases in non-asset based policy charge revenue are primarily due to
period-to-period differences in deferred policy load amortization and
unlocking. See Note 3 to the Financial Statements regarding deferred policy
load amortization and unlocking.
Net earnings derived from interest spread increased $0.5 million (or 5%) and
$0.7 million (or 2%) during the current three and nine month periods ended
September 30, 2006, respectively, as compared to the same periods in 2005. The
increases are primarily due to higher portfolio yields as a result of the
current interest rate environment.
21
Net realized investment gains decreased $3.9 million and $2.4 million during the
current three and nine month periods ended September 30, 2006, respectively, as
compared to the same periods in 2005. The following table provides the changes
in realized investment gains by type:
THREE MONTHS NINE MONTHS
(dollars in millions) 2006 VS. 2005 2006 VS. 2005
------------- -------------
Credit related $(3.0)(1) $(3.2)(1)
Interest related (0.2)(2) (0.5)(2)
Trading account (0.7)(3) 1.3(3)
----- -----
$(3.9) $(2.4)
===== =====
(1) The decreases in credit related gains are primarily due to one large credit
related gain in the third quarter 2005.
(2) The decreases in interest related gains are primarily due to decreases in
asset valuations resulting from the current interest rate environment.
(3) During the first quarter 2006 the Company liquidated its trading portfolio.
The valuations of these securities generally fluctuated in a direct
relationship to changes in the valuations of the underlying common equity.
Policy benefits decreased $3.3 million (or 23%) and $1.8 million (or 5%) during
the current three and nine month periods ended September 30, 2006, respectively,
as compared to the same periods in 2005. The following table provides the
changes in policy benefits by type for each respective period:
THREE MONTHS NINE MONTHS
(dollars in millions) 2006 VS. 2005 2006 VS. 2005
------------- -------------
Variable annuity guarantee expense $ 0.2(1) $ 1.4(1)
Amortization of deferred sales inducements 0.5(2) 1.3(2)
Life insurance benefit expense (4.0)(3) (4.5)(3)
----- -----
$(3.3) $(1.8)
===== =====
(1) The increases in variable annuity guarantee expense are due to an increase
in living benefit reserves resulting from the increase in inforce contracts
containing living benefit provisions.
(2) The increases in amortization of deferred sales inducements coincide with
the March 2005 introduction of the bonus feature contained in the variable
annuity product line.
(3) The decreases in life insurance benefit expense are primarily due to
period-to-period differences in reinsurance activity.
Amortization of deferred policy acquisition costs decreased $6.6 million (or
25%) during the current three month period ended September 30, 2006, as compared
to the same period in 2005 primarily due to period-to-period differences in
unlocking. This amount was partially offset by increased amortization due to
lower life insurance mortality expense. Amortization of deferred policy
acquisition costs was relatively unchanged for the nine month period ended
September 30, 2006 as compared to the same period in 2005. See Note 3 to the
Financial Statements regarding DAC amortization and unlocking.
Insurance expenses and taxes decreased $2.7 million (or 6%) during the nine
month period ended September 30, 2006, as compared to the same period in 2005
primarily due to higher new product development expenses incurred during the
first nine months of 2005. Insurance expenses and taxes were relatively
unchanged for the three month period ended September 30, 2006 as compared to the
same period in 2005.
The Company's effective federal income tax rate was 30% and 33% during the
current three and nine month periods ended September 30, 2006, respectively, as
compared to 29% and 25% during the equivalent periods in 2005. The changes in
the effective federal income tax rate during the respective periods are
primarily due to period-to-period differences in DRD and FTC adjustments.
22
SEGMENT INFORMATION
The products that comprise the Annuity and Life Insurance 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.
23
ITEM 4. Controls and Procedures
The Company's Disclosure Committee assists with the monitoring and evaluation of
its disclosure controls and procedures. The Company's Chief Executive Officer,
Chief Financial Officer and Disclosure Committee have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this Report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective.
In addition, no change in the Company's internal control over financial
reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of
1934) occurred during the third fiscal quarter of 2006 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
24
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in the Annual Report on Form 10-K for the year ended December 31,
2005, which could materially affect the Company's business, financial condition
or future results. The risks described in the Company's Annual Report on Form
10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to the Company or that the Company
currently deems to be immaterial also may materially adversely affect the
Company's business, financial condition and/or operating results.
Item 5. Other Information.
(a) Nothing to report.
(b) Nothing to report.
Item 6. Exhibits.
2.1 Merrill Lynch Life Insurance Company Board of Directors
Resolution in Connection with the Merger between Merrill Lynch
Life Insurance Company and Tandem Insurance Group, Inc.
(Incorporated by reference to Exhibit 2.1, filed September 5,
1991, as part of Post-Effective Amendment No. 4 to the
Registrant's registration statement on Form S-1, File No.
33-26322.)
2.2 Plan and Agreement of Merger between Merrill Lynch Life
Insurance Company and Tandem Insurance Group, Inc. (Incorporated
by reference to Exhibit 2.1a, filed September 5, 1991, as part
of Post-Effective Amendment No. 4 to the Registrant's
registration statement on Form S-1, File No. 33-26322.)
3.1 Articles of Amendment, Restatement and Redomestication of the
Articles of Incorporation of Merrill Lynch Life Insurance
Company. (Incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 10 to Merrill Lynch Life Variable
Annuity Separate Account A's registration statement on Form N-4,
File No. 33-43773, filed December 10, 1996.)
3.2 Amended and Restated By-Laws of Merrill Lynch Life Insurance
Company. (Incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 10 to Merrill Lynch Life Variable
Annuity Separate Account A's registration statement on Form N-4,
File No. 33-43773, filed December 10, 1996.)
4.1 Group Modified Guaranteed Annuity Contract, ML-AY-361.
(Incorporated by reference to Exhibit 4.1, filed February 23,
1989, as part of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No.
33-26322.)
4.2 Individual Certificate, ML-AY-362. (Incorporated by reference to
Exhibit 4.2, filed February 23, 1989, as part of Pre-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
4.2a Individual Certificate, ML-AY-362 KS. (Incorporated by reference
to Exhibit 4.2a, filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
4.2b Individual Certificate, ML-AY-378. (Incorporated by reference to
Exhibit 4.2b, filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
4.2c Modified Guaranteed Annuity Contract. (Incorporated by reference
to Exhibit 4(a), filed August 18, 1997, as part of the
Registrant's registration statement on Form S-3, File No.
333-33863.)
4.3 Individual Tax-Sheltered Annuity Certificate, ML-AY-372. (Incorporated
by reference to Exhibit 4.3, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the Registrant's registration statement
on Form S-1, File No. 33-26322.)
4.3a Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS.
(Incorporated by reference to Exhibit 4.3a, filed March 9, 1990, as part
of Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.4 Qualified Retirement Plan Certificate, ML-AY-373. (Incorporated by
reference to Exhibit 4.4 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.4a Qualified Retirement Plan Certificate, ML-AY-373 KS. (Incorporated by
reference to Exhibit 4.4a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.5 Individual Retirement Annuity Certificate, ML-AY-374. (Incorporated by
reference to Exhibit 4.5 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.5a Individual Retirement Annuity Certificate, ML-AY-374 KS. (Incorporated
by reference to Exhibit 4.5a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.5b Individual Retirement Annuity Certificate, ML-AY-375 KS. (Incorporated
by reference to Exhibit 4.5b, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.5c Individual Retirement Annuity Certificate, ML-AY-379. (Incorporated by
reference to Exhibit 4.5c, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.6 Individual Retirement Account Certificate, ML-AY-375. (Incorporated by
reference to Exhibit 4.6, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the Registrant's registration statement
on Form S-1, File No. 33-26322.)
4.6a Individual Retirement Account Certificate, ML-AY-380. (Incorporated by
reference to Exhibit 4.6a, filed March 9, 1990, as part of
Post-Effective
Amendment No. 1 to the Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.7 Section 457 Deferred Compensation Plan Certificate, ML-AY-376.
(Incorporated by reference to Exhibit 4.7 to the Registrant's
registration statement on Form S-1, File No. 33-26322, filed January 3,
1989.)
4.7a Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS.
(Incorporated by reference to Exhibit 4.7a, filed March 9, 1990, as part
of Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.8 Tax-Sheltered Annuity Endorsement, ML-AY-366. (Incorporated by reference
to Exhibit 4.8 to the Registrant's registration statement on Form S-1,
File No. 33- 26322, filed January 3, 1989.)
4.8a Tax-Sheltered Annuity Endorsement, ML-AY-366 190. (Incorporated by
reference to Exhibit 4.8a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.8b Tax-Sheltered Annuity Endorsement, ML-AY-366 1096. (Incorporated by
reference to Exhibit 4(h)(3), filed March 27, 1997, as part of
Post-Effective Amendment No. 2 to the Registrant's registration
statement on Form S-1, File No. 33-58303.)
4.9 Qualified Retirement Plan Endorsement, ML-AY-364. (Incorporated by
reference to Exhibit 4.9 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.10 Individual Retirement Annuity Endorsement, ML-AY-368. (Incorporated by
reference to Exhibit 4.10 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.10a Individual Retirement Annuity Endorsement, ML-AY-368 190. (Incorporated
by reference to Exhibit 4.10a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.10b Individual Retirement Annuity Endorsement, ML009. (Incorporated by
reference to Exhibit 4(j)(3) to Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No. 33-60290,
filed March 31, 1994.)
4.10c Individual Retirement Annuity Endorsement. (Incorporated by reference to
Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-3, File No. 333-33863, filed October
31, 1997.)
4.11 Individual Retirement Account Endorsement, ML-AY-365. (Incorporated by
reference to Exhibit 4.11 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.11a Individual Retirement Account Endorsement, ML- AY-365 190. (Incorporated
by reference to Exhibit 4.11a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.12 Section 457 Deferred Compensation Plan Endorsement, ML-AY-367.
(Incorporated by reference to Exhibit 4.12 to the Registrant's
registration statement on Form S-1, File No. 33-26322, filed January 3,
1989.)
4.12a Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190.
(Incorporated by reference to Exhibit 4.12a, filed March 9, 1990, as
part of Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.13 Qualified Plan Endorsement, ML-AY-369. (Incorporated by reference to
Exhibit 4.13 to the Registrant's registration statement on Form S-1,
File No. 33-26322, filed January 3, 1989.)
4.13a Qualified Plan Endorsement, ML-AY-448. (Incorporated by reference to
Exhibit 4.13a, filed March 9, 1990, as part of Post-Effective Amendment
No. 1 to the Registrant's registration statement on Form S-1, File No.
33-26322.)
4.13b Qualified Plan Endorsement. (Incorporated by reference to Exhibit 4(c),
filed October 31, 1997, as part of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-3, File No. 333-33863.)
4.14 Application for Group Modified Guaranteed Annuity Contract.
(Incorporated by reference to Exhibit 4.14 to the Registrant's
registration statement on Form S-1, File No. 33-26322, filed January 3,
1989.)
4.15 Annuity Application for Individual Certificate Under Modified Guaranteed
Annuity Contract. (Incorporated by reference to Exhibit 4.15 to the
Registrant's registration statement on Form S-1, File No. 33-26322,
filed January 3, 1989.)
4.15a Application for Modified Guaranteed Annuity Contract. (Incorporated by
reference to Exhibit 4(d), filed August 18, 1997, as part of the
Registrant's registration statement on Form S-3, File No. 333-33863.)
4.16 Form of Company Name Change Endorsement. (Incorporated by reference to
Exhibit 4.16, filed September 5, 1991, as part of Post-Effective
Amendment No. 4 to the Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.17 Group Modified Guaranteed Annuity Contract, ML-AY-361/94. (Incorporated
by reference to Exhibit 4(a)(2), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.18 Individual Certificate, ML-AY-362/94. (Incorporated by reference to
Exhibit 4(b)(4), filed December 7, 1994, as part of Post-Effective
Amendment No. 3 to the Registrant's registration statement on Form S-1,
File No. 33-60290.)
4.19 Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94.
(Incorporated by reference to Exhibit 4(c)(3), filed December 7, 1994,
as part of Post-Effective Amendment No. 3 to the Registrant's
registration statement on Form S-1, File No. 33-60290.)
4.20 Qualified Retirement Plan Certificate, ML-AY-373/94. (Incorporated by
reference to Exhibit 4(d)(3), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.21 Individual Retirement Annuity Certificate, ML-AY-374/94. (Incorporated
by reference to Exhibit 4(e)(5), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.22 Individual Retirement Account Certificate, ML-AY-375/94. (Incorporated
by reference to Exhibit 4(f)(3), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.23 Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94.
(Incorporated by reference to Exhibit 4(g)(3), filed December 7, 1994,
as part of Post-Effective Amendment No. 3 to the Registrant's
registration statement on Form S-1, File No. 33-60290.)
4.24 Qualified Plan Endorsement, ML-AY-448/94. (Incorporated by reference to
Exhibit 4(m)(3), filed December 7, 1994, as part of Post-Effective
Amendment No. 3 to the Registrant's registration statement on Form S-1,
File No. 33-60290.)
10.1 Management Services Agreement between Family Life Insurance Company and
Merrill Lynch Life Insurance Company. (Incorporated by reference to
Exhibit 10.1 to the Registrant's registration statement on Form S-1,
File No. 33-26322, filed January 3, 1989.)
10.2 General Agency Agreement between Merrill Lynch Life Insurance Company
and Merrill Lynch Life Agency, Inc. (Incorporated by reference to
Exhibit 10.2, filed
February 23, 1989, as part of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No. 33-26322.)
10.3 Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life
Insurance Company and Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10.3, filed March 13, 1991, as
part of Post-Effective Amendment No. 2 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
10.3a Amendment to Service Agreement among Merrill Lynch Insurance Group,
Inc., Family Life Insurance Company and Merrill Lynch Life Insurance
Company. (Incorporated by reference to Exhibit 10(c)(2) to
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60290, filed March 31, 1994.)
10.4 Indemnity Reinsurance Agreement between Merrill Lynch Life Insurance
Company and Family Life Insurance Company. (Incorporated by reference to
Exhibit 10.4, filed March 13, 1991, as part of Post-Effective Amendment
No. 2 to the Registrant's registration statement on Form S-1, File No.
33-26322.)
10.5 Assumption Reinsurance Agreement between Merrill Lynch Life Insurance
Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance
Company and Family Life Insurance Company. (Incorporated by reference to
Exhibit 10.6, filed April 24, 1991, as part of Post-Effective Amendment
No. 3 to the Registrant's registration statement on Form S-1, File No.
33-26322.)
10.6 Amended General Agency Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference
to Exhibit 10(g) to the Registrant's registration statement on Form S-1,
File No. 33-46827, filed March 30, 1992.)
10.7 Indemnity Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit
10(h) to the Registrant's registration statement on Form S-1, File No.
33-46827, filed March 30, 1992.)
10.8 Management Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch Asset Management, Inc. (Incorporated by reference to
Exhibit 10(i) to the Registrant's registration statement on Form S-1,
File No. 33-46827, filed March 30, 1992.)
10.9 Amendment No. 1 to Indemnity Reinsurance Agreement between Family Life
Insurance Company and Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10.5, filed April 24, 1991, as
part of Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
10.10 Insurance Administrative Services Agreement between Merrill Lynch Life
Insurance Company and Liberty Insurance Services Corporation.
(Incorporated by reference to Exhibit 10.10 to the Registrant's Annual
Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290,
33-58303, 333-33863, filed March 30, 2005.)
31.1 Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).
31.2 Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ Joseph E. Justice
-----------------------------------------
Joseph E. Justice
Senior Vice President, Treasurer and
Chief Financial Officer
Date: November 13, 2006