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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, 2007
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>
1700 Merrill Lynch Drive, 3rd 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)
MARCH 31, DECEMBER 31,
(dollars in thousands) 2007 2006
- ---------------------- ----------- ------------
ASSETS
INVESTMENTS
Fixed maturity available-for-sale
securities, at estimated fair value
(amortized cost: 2007 - $1,526,499;
2006 - $1,586,196) $ 1,517,477 $ 1,570,383
Equity available-for-sale securities,
at estimated fair value (cost: 2007 -
$64,010; 2006 - $70,021) 65,281 72,728
Limited partnerships, at cost 11,321 11,417
Policy loans on insurance contracts, at
outstanding loan balances 958,988 968,874
----------- -----------
2,553,067 2,623,402
----------- -----------
CASH AND CASH EQUIVALENTS 160,020 230,586
ACCRUED INVESTMENT INCOME 45,338 47,548
DEFERRED POLICY ACQUISITION COSTS 289,072 285,648
DEFERRED SALES INDUCEMENTS 22,865 20,606
REINSURANCE RECEIVABLES 12,658 10,522
RECEIVABLES FROM SECURITIES SOLD -- 23,921
OTHER ASSETS 43,851 49,241
SEPARATE ACCOUNTS ASSETS 11,340,954 11,330,397
----------- -----------
TOTAL ASSETS $14,467,825 $14,621,871
=========== ===========
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)
(dollars in thousands, MARCH 31, DECEMBER 31,
except common stock par value and shares) 2007 2006
- ----------------------------------------- ----------- ------------
LIABILITIES
POLICYHOLDER LIABILITIES AND ACCRUALS
Policyholder account balances $ 2,011,663 $ 2,047,973
Future policy benefits 394,359 408,681
Claims and claims settlement expenses 38,956 42,426
----------- -----------
2,444,978 2,499,080
----------- -----------
OTHER POLICYHOLDER FUNDS 7,540 6,973
LIABILITY FOR GUARANTY FUND ASSESSMENTS 6,007 6,005
FEDERAL INCOME TAXES - CURRENT 12,318 16,295
FEDERAL INCOME TAXES - DEFERRED 11,998 2,846
PAYABLES FOR SECURITIES PURCHASED 12,794 40,319
AFFILIATED PAYABLES - NET 11,226 9,982
UNEARNED POLICY CHARGE REVENUE 32,198 35,545
OTHER LIABILITIES 3,353 5,393
SEPARATE ACCOUNTS LIABILITIES 11,340,954 11,330,397
----------- -----------
TOTAL LIABILITIES 13,883,366 13,952,835
----------- -----------
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 (6,591) (10,233)
Retained earnings 191,226 279,445
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 584,459 669,036
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,467,825 $14,621,871
=========== ===========
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
MARCH 31,
------------------
(dollars in thousands) 2007 2006
- ---------------------- -------- -------
NET REVENUES
Policy charge revenue $ 68,975 $62,587
Net investment income 34,641 36,265
Net realized investment gains 240 778
-------- -------
TOTAL NET REVENUES 103,856 99,630
-------- -------
BENEFITS AND EXPENSES
Interest credited to policyholder liabilities 24,044 26,279
Policy benefits (net of reinsurance
recoveries: 2007 - $1,579; 2006 - $5,812) (97) 14,956
Reinsurance premium ceded 6,990 6,593
Amortization of deferred policy acquisition
costs 4,459 12,485
Insurance expenses and taxes 15,170 13,229
-------- -------
TOTAL BENEFITS AND EXPENSES 50,566 73,542
-------- -------
EARNINGS BEFORE FEDERAL INCOME TAXES 53,290 26,088
-------- -------
FEDERAL INCOME TAX EXPENSE
Current 9,318 4,524
Deferred 7,191 2,634
-------- -------
TOTAL FEDERAL INCOME TAX EXPENSE 16,509 7,158
-------- -------
NET EARNINGS $ 36,781 $18,930
======== =======
See Notes to Financial Statements.
3
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
(dollars in thousands) 2007 2006
- ---------------------- ------- --------
NET EARNINGS $36,781 $ 18,930
------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 5,595 (18,841)
Reclassification adjustment for gains included in net earnings (240) (66)
------- --------
5,355 (18,907)
------- --------
Adjustments for policyholder liabilities 248 2,234
Adjustments for deferred federal income taxes (1,961) 5,835
------- --------
(1,713) 8,069
------- --------
Total other comprehensive income (loss), net of taxes 3,642 (10,838)
------- --------
COMPREHENSIVE INCOME $40,423 $ 8,092
======= ========
See Notes to Financial Statements.
4
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, 2006 2,500 397,324 (11,699) 364,708 752,833
Net earnings 94,737 94,737
Cash dividend paid to parent (180,000) (180,000)
Other comprehensive income, net of taxes 1,466 1,466
------ -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2006 2,500 397,324 (10,233) 279,445 669,036
Net earnings 36,781 36,781
Cash dividend paid to parent (125,000) (125,000)
Other comprehensive income, net of taxes 3,642 3,642
------ -------- -------- --------- ---------
BALANCE, MARCH 31, 2007 $2,500 $397,324 $ (6,591) $ 191,226 $ 584,459
====== ======== ======== ========= =========
See Notes to Financial Statements.
5
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
(dollars in thousands) 2007 2006
- ---------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 36,781 $ 18,930
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 4,459 12,485
Capitalization of policy acquisition costs (7,883) (7,245)
Amortization of deferred sales inducements 506 336
Capitalization of sales inducements (2,765) (2,480)
Amortization of unearned policy charge revenue (3,421) (17)
Capitalization of unearned policy charge revenue 74 362
Amortization of investments 1,323 2,178
Interest credited to policyholder liabilities 24,044 26,279
Change in variable contract reserves (9,777) 1,639
Deferred federal income tax expense 7,191 2,634
(Increase) decrease in operating assets:
Trading account securities -- 28,148
Accrued investment income 2,210 2,452
Reinsurance receivables (2,136) (554)
Affiliated receivables - net -- 5,519
Other 5,390 (2,490)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses (3,470) 10,194
Other policyholder funds 567 5,652
Liability for guaranty fund assessments 2 (47)
Federal income taxes - current (3,977) (10,048)
Affiliated payables - net 1,244 724
Other (2,040) 440
Other operating activities:
Net realized investment gains (240) (778)
-------- --------
Net cash and cash equivalents provided by operating activities 48,082 94,313
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Sales of available-for-sale securities 44,793 94,518
Maturities of available-for-sale securities 57,479 19,051
Purchases of available-for-sale securities (41,251) (40,921)
Sales of limited partnerships 96 400
Purchases of limited partnerships -- (250)
Policy loans on insurance contracts - net 9,886 8,554
-------- --------
Net cash and cash equivalents provided by investing activities 71,003 81,352
-------- --------
See Notes to Financial Statements. (Continued)
6
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
(dollars in thousands) 2007 2006
- ---------------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Cash dividend paid to parent $(125,000) $(130,000)
Policyholder deposits (excludes internal policy replacement deposits) 182,425 149,981
Policyholder withdrawals (including transfers from separate accounts) (247,076) (212,125)
--------- ---------
Net cash and cash equivalents used in financing activities (189,651) (192,144)
--------- ---------
Net decrease in cash and cash equivalents (70,566) (16,479)
Cash and cash equivalents, beginning of period 230,586 56,319
--------- ---------
Cash and cash equivalents, end of period $ 160,020 $ 39,840
========= ==========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid to affiliates for:
Federal income taxes $ 13,295 $ 14,572
Interest 99 100
See Notes to Financial Statements.
7
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 2006 Financial Statements and
accounting policies, refer to the Company's Annual Report on Form 10-K for the
year ended December 31, 2006.
The interim Financial Statements for the three month period 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 2006 Annual
Report on Form 10-K. The December 31, 2006 unaudited Balance Sheet was derived
from the audited 2006 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.
ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides a
fair value option election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain financial assets
and liabilities, with changes in fair value recognized in earnings as they
occur. SFAS No. 159 permits the fair value option election on an instrument by
instrument basis at initial recognition of an asset or liability or upon an
event that gives rise to a new basis of accounting for that instrument. SFAS No.
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007 provided that the
entity makes that choice in the first 120 days of that fiscal year, has not yet
issued financial statements for any interim period of the fiscal year of
adoption, and also elects to apply the provisions of SFAS No. 157, Fair Value
Measurements. The Company early adopted SFAS No. 159 as of the first quarter
2007. Since the Company did not elect the fair value option for any of its
existing assets or liabilities, the adoption did not have an impact on the
Company's Financial Statements.
On January 1, 2007, the Company adopted 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 SFAS No. 97. SOP 05-1 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. Since the Company's practice of accounting for deferred
acquisition costs, in connection with modifications or exchanges, substantially
meets the provisions prescribed within SOP 05-1, the adoption of SOP 05-1 did
not have a material impact on the Company's Financial Statements.
As of December 31, 2006, the Company adopted Staff Accounting Bulletin ("SAB")
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. The interpretations in the
SAB provide the Staff's views regarding the process of quantifying financial
statement misstatements. Specifically, the SEC staff believes that registrants
must quantify the impact on current period financial statements of correcting
all misstatements, including both those occurring in the current period and the
effect of reversing those that have accumulated from prior periods. Since the
Company's
8
method for quantifying financial statement misstatements already considers those
occurring in the current period and the effect of reversing those that have
accumulated from prior periods, the adoption of the SAB did not have an impact
on the Company's Financial Statements.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. 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, provided the entity has not yet issued financial statements
for the fiscal year, including any interim periods. The provisions of SFAS No.
157 are to be applied prospectively. The Company early adopted SFAS No. 157 as
of the first quarter 2007. The adoption did not have a material impact on the
Company's Financial Statements. See Note 2 to the Financial Statements for the
additional disclosures.
In June 2006, the 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 adopted
FIN 48 in the first quarter of 2007. The adoption of FIN 48 did not have an
impact on the Company's Financial Statements.
NOTE 2. FAIR VALUE DISCLOSURES
FAIR VALUE MEASUREMENTS AND HIERARCHY
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, establishes a fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair value
measurements. In compliance with SFAS No. 157, the Company has categorized its
financial instruments, based on the priority of the inputs to the valuation
technique, into a three level hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure fair value fall within different levels of the
hierarchy, the category level is based on the lowest priority level input that
is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded at fair value on the Balance Sheets
are categorized as follows:
Level 1. Unadjusted quoted prices for identical assets or liabilities in an
active market.
Level 2. Quoted prices in markets that are not active or inputs that are
observable either directly or indirectly for substantially the full term of
the asset or liability. Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets
b) Quoted prices for identical or similar assets or liabilities in
non-active markets
c) Inputs other than quoted market prices that are observable
d) Inputs that are derived principally from or corroborated by
observable market data through correlation or other means
Level 3. Prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. They
reflect management's own assumptions about the assumptions a market
participant would use in pricing the asset or liability.
9
The following table presents the Company's hierarchy for its assets and
liabilities measured at fair value on a recurring basis as of March 31, 2007:
DESCRIPTION LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
- ----------- ----------- ---------- ------- -----------
ASSETS:
Fixed maturity securities (1) $ 1,317,962 $ 199,515 $-- $ 1,517,477
Equity securities (1) 65,281 -- -- 65,281
Limited partnerships (2) -- 11,321 -- 11,321
Policy loans on insurance contracts (3) -- 958,988 -- 958,988
Cash and cash equivalents (4) 160,020 -- -- 160,020
Separate accounts assets (5) 11,340,954 -- -- 11,340,954
----------- ---------- --- -----------
Total $12,884,217 $1,169,824 $-- $14,054,041
=========== ========== === ===========
LIABILITIES:
Policyholder account balances (6) $ 2,011,663 $ -- $-- $ 2,011,663
Guaranteed minimum withdrawal benefit liability (7) -- -- -- --
Separate accounts liabilities (5) 11,340,954 -- -- 11,340,954
----------- ---------- --- -----------
$13,352,617 $ -- $-- $13,352,617
=========== ========== === ===========
(1) For publicly traded securities (Level 1) fair value is determined using
quoted market prices. For securities without a readily ascertainable market
value (Level 2), the Company utilizes pricing services and broker quotes.
Such estimated fair values do not necessarily represent the values for
which these securities could have been sold at the dates of the balance
sheets.
(2) The Company has investments in three limited partnerships that do not have
readily ascertainable market values. Based on the review of the underlying
investments of the partnerships, Management has estimated the fair value of
two of the partnerships as equal to cost and the third partnership equal to
zero.
(3) The Company estimates the fair value of policy loans as equal to the book
value of the loans. Policy loans are fully collateralized by the account
value of the associated insurance contracts, and the spread between the
policy loan interest rate and the interest rate credited to the account
value held as collateral is fixed.
(4) The estimated fair value of cash and cash equivalents approximates the
carrying value.
(5) Separate accounts assets and underlying liabilities are carried at the net
asset value provided by the fund managers.
(6) 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 policyholders' withdrawals and
other charges assessed against the account balance. The Company records
certain adjustments to policyholder account balances in conjunction with
the unrealized holding gains or losses on investments classified as
available-for-sale. The Company adjusts a portion of these liabilities as
if the unrealized holding gains or losses had actually been realized, with
corresponding credits or charges reported in accumulated other
comprehensive loss, net of taxes.
(7) The Company records liabilities for contracts containing guaranteed minimum
withdrawal benefit ("GMWB") provisions as a component of other policyholder
funds in the Balance Sheets, with changes in the fair value recognized as a
component of policy benefits in the Statement of Earnings. In accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, the GMWB provision is treated as an embedded derivative and is
required to be reported separately from the host variable annuity contract.
The fair value of the GMWB obligation is calculated based on actuarial and
capital market assumptions related to the projected cash flows, including
benefits and related contract
10
charges, over the anticipated life of the related contracts. The cash flow
estimates are produced by using stochastic techniques under a variety of
market return scenarios and other best estimate assumptions. Based on the
Company's modeling assumptions, the variable annuity GMWB liability at
March 31, 2007 and December 31, 2006 was $0.
NOTE 3. 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.
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 months ended
March 31, 2007 and 2006.
The components of net unrealized gains (losses) included in accumulated other
comprehensive loss, net of taxes were as follows:
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Assets:
Fixed maturity securities $(9,022) $(15,813)
Equity securities 1,271 2,707
------- --------
(7,751) (13,106)
------- --------
Liabilities:
Policyholder account balances 2,388 2,636
Federal income taxes - deferred (3,548) (5,509)
------- --------
(1,160) (2,873)
------- --------
Stockholder's Equity:
Accumulated other comprehensive loss, net of taxes $(6,591) $(10,233)
======= ========
NOTE 4. DEFERRED POLICY ACQUISITION COSTS ("DAC")
The components of amortization of DAC for the three month periods ended March
31, 2007 and 2006 were as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
-------- ----------
Normal amortization related to variable life
and annuity insurance products $ 15,104 $12,485
Unlocking related to variable annuity insurance products (10,645) --
-------- -------
Total amortization of DAC $ 4,459 $12,485
======== =======
During the first quarter 2007, the Company experienced favorable DAC unlocking
primarily resulting from actual separate account returns that exceeded
assumptions. The impact of unlocking was mitigated to a certain extent by the
application of the mean reversion technique.
11
NOTE 5. VARIABLE ANNUITY GUARANTEED BENEFIT LIABILITIES
The components of the variable annuity guaranteed minimum death benefit ("GMDB")
liability for the three month periods ended March 31, 2007 and 2006 were as
follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
Beginning Balance $100,301 $106,209
Guaranteed benefits incurred 6,427 7,112
Guaranteed benefits paid (4,130) (6,157)
Unlocking (15,695) --
-------- --------
Ending Balance $ 86,903 $107,164
======== ========
During the first quarter 2007, the Company experienced favorable GMDB liability
unlocking primarily resulting from actual separate account returns that exceeded
assumptions. The impact of unlocking was mitigated to a certain extent by the
projection of additional claim costs.
NOTE 6. 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 March 31, 2007 and December 31, 2006 were
$318,211 and $418,100, respectively. For the three month periods ended March 31,
2007 and 2006, statutory net income was $24,789 and $33,174, respectively.
During the first quarter of 2007, the Company paid cash dividends of $125,000 to
MLIG, of which $41,560 were ordinary and $83,440 were extraordinary. In
addition, the Company received regulatory approval to pay a $69,000
extraordinary dividend during the second quarter 2007 to MLIG. During 2006, the
Company paid cash dividends of $180,000 to MLIG, of which $39,800 were ordinary
dividends and $140,200 were extraordinary.
NOTE 7. 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. The Company no longer
manufactures or issues 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.
12
The following table summarizes each business segment's contribution to
consolidated net revenues and net earnings.
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------- --------
Net Revenues (1):
Annuities $48,230 $45,416
Life Insurance 28,195 23,973
Other 3,387 3,962
------- -------
Net Revenues $79,812 $73,351
======= =======
Net Earnings:
Annuities $27,578 $10,674
Life Insurance 7,001 5,680
Other 2,202 2,576
------- -------
Net Earnings $36,781 $18,930
======= =======
(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 2006 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 has strategically placed its
marketing emphasis on the sale of variable annuities. The Company currently
offers the following guaranteed benefits within its variable annuity product
suite: guaranteed minimum death benefits (GMDB's), guaranteed minimum income
benefits (GMIB's) and guaranteed minimum withdrawal benefits (GMWB's). 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 guaranteed benefits.
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.
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.
EQUITY MARKET PERFORMANCE
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"). Despite month-to-month market volatility during the first three
months of 2007, U.S. equity indices ended the quarter essentially flat to year
end 2006. The Dow ended the quarter with a decrease of 0.9%, while the NASDAQ
and S&P ended the quarter with slight increases of 0.3% and 0.2%, respectively.
14
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 78% of separate accounts assets were invested in equity-based
mutual funds at March 31, 2007. 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 guaranteed benefit provisions contained in the variable contracts it
manufactures. Minimal or negative investment performance generally results in
greater exposure to guaranteed provisions, to the extent there is an increase in
the number of variable contracts (and amount per contract) in which the
guaranteed benefit exceeds the variable account balance. Prolonged periods of
minimal or negative investment performance may result in greater guaranteed
benefit costs as compared to assumptions. If the Company determines that it
needs to increase its estimated long term cost of guaranteed benefits, it will
result in establishing greater guaranteed benefit liabilities as compared to
current practice.
During the first quarter 2007 average variable account balances increased $331.4
million (or 3%) to $11.3 billion as compared to the same period in 2006. The
increase in average variable account balances contributed to a $1.4 million (or
3%) increase in asset-based policy charge revenue during the three month period
ended March 31, 2007 as compared to the same period in 2006.
MEDIUM TERM INTEREST RATES, CORPORATE CREDIT AND CREDIT SPREADS
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.
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.
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.
The impact of changes in medium term interest rates, corporate credit and credit
spreads on market valuations were as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------ ------
Average medium term interest rate yield (1) 4.65% 4.83%
Increase (decrease) in medium term interest rates (in basis points) (12) 47
Credit spreads (in basis points) (2) 78 80
Expanding (contracting) of credit spreads (in basis points) 1 (26)
Increase (decrease) on market valuations: (in millions)
Available-for-sale investment securities $ 5.4 $(18.9)
Interest-sensitive policyholder liabilities 0.2 2.2
----- ------
Net increase (decrease) on market valuations $ 5.6 $(16.7)
===== ======
(1) The Company defines medium term interest rates as the average interest rate
on U.S. Treasury securities with terms of 1 to 5 years.
(2) 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.
15
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
2006 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. For non-publicly
traded fixed maturity and equity securities, the Company utilizes pricing
services and broker quotes to determine fair value. 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 March 31, 2007 and December 31, 2006, approximately, $199.5
million (or 13%) and $203.2 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 month periods ended March 31, 2007 and 2006.
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 March 31, 2007,
variable annuities and variable life insurance accounted for $201.4 million (or
70%) and $77.4 million (or 27%), respectively, of the Company's DAC asset. At
December 31, 2006, variable annuities and variable life insurance accounted for
$191.9 million (or 67%) and $83.2 million (or 29%), respectively, of The
Company's DAC asset.
DAC for variable annuities is amortized with interest over the anticipated lives
of the insurance contracts in relation to the present values of estimated future
gross profits from asset-based fees, contract fees, and surrender charges, less
provisions for guaranteed death and living benefit expenses, policy maintenance
expenses, and non-capitalized commissions.
DAC for variable life insurance is amortized with interest over the anticipated
lives of the insurance contracts 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.
16
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". 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. For the three month period ended March
31, 2007, the favorable impact to pre-tax earnings related to DAC unlocking was
$10.6 million. There was no DAC unlocking during the three month period ended
March 31, 2006. See Note 4 to the Financial Statements for a further discussion
of DAC.
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
60, Accounting and Reporting by Insurance Enterprises, SFAS 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 policyholders' withdrawals and other
charges assessed against the account balance. Policyholder account balances at
March 31, 2007 and December 31, 2006 were $2.0 billion.
Future policy benefits are actuarially determined reserves, which are calculated
to meet future obligations and are generally payable over an extended period of
time. Principal 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
March 31, 2007 and December 31, 2006, future policy benefits were $394.4 million
and $408.7 million, respectively. Included within future policy benefits are
liabilities for GMDB and GMIB provisions contained in the variable products that
the Company issues. At March 31, 2007 and December 31, 2006, GMDB and GMIB
liabilities included within future policy benefits were $98.6 million and $108.4
million, respectively. The Company regularly evaluates the assumptions used to
establish these liabilities, as well as actual experience and adjusts the GMDB
and/or GMIB liability balances with a related charge or credit to earnings
("unlocking"), if actual experience or evidence suggests that the assumptions
should be revised. For the three month period ended March 31, 2007 the favorable
impact to pre-tax earnings related to GMDB liability unlocking was $15.7
million. There was no unlocking during the three month period ended March 31,
2006. See Note 5 to the Financial Statements for a further discussion of the
GMDB liability.
UNEARNED POLICY CHARGE REVENUE ("UPCR") 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 accreted into revenue over time in the
same manner that DAC is amortized. In addition, the UPCR liability is subject to
the same periodic reassessment as DAC. At March 31, 2007 and December 31, 2006,
the Company's UPCR liability was $32.2 million and $35.5 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
17
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 month periods ended March 31, 2007 and 2006, the Company
reduced its provision for federal income taxes by $2.1 million and $2.0 million,
respectively due to DRD and FTC adjustments.
RECENT DEVELOPMENTS
ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides a
fair value option election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain financial assets
and liabilities, with changes in fair value recognized in earnings as they
occur. SFAS No. 159 permits the fair value option election on an instrument by
instrument basis at initial recognition of an asset or liability or upon an
event that gives rise to a new basis of accounting for that instrument. SFAS No.
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007 provided that the
entity makes that choice in the first 120 days of that fiscal year, has not yet
issued financial statements for any interim period of the fiscal year of
adoption, and also elects to apply the provisions of SFAS No. 157, Fair Value
Measurements. The Company early adopted SFAS No. 159 as of the first quarter
2007. Since the Company did not elect the fair value option for any of its
existing assets or liabilities, the adoption did not have an impact on the
Company's Financial Statements.
On January 1, 2007, the Company adopted 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
SFAS No. 97. SOP 05-1 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. Since
the Company's practice of accounting for deferred acquisition costs, in
connection with modifications or exchanges, substantially meets the provisions
prescribed within SOP 05-1, the adoption of SOP 05-1 did not have a material
impact on the Company's Financial Statements.
As of December 31, 2006, the Company adopted Staff Accounting Bulletin ("SAB")
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. The interpretations in the
SAB provide the Staff's views regarding the process of quantifying financial
statement misstatements. Specifically, the SEC staff believes that registrants
must quantify the impact on current period financial statements of correcting
all misstatements, including both those occurring in the current period and the
effect of reversing those that have accumulated from prior periods. Since the
Company's method for quantifying financial statement misstatements already
considers those occurring in the current period and the effect of reversing
those that have accumulated from prior periods, the adoption of the SAB did not
have an impact on the Company's Financial Statements.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. 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, provided the entity has not yet issued financial statements
for the fiscal year, including any interim periods. The provisions of SFAS No.
157 are to be applied prospectively. The Company early adopted SFAS No. 157 as
of the first quarter 2007. The adoption did not have a material impact on the
Company's Financial Statements. See Note 2 to the Financial Statements for the
additional disclosures.
In June 2006, the 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 adopted
FIN 48 in the first quarter of 2007. The adoption of FIN 48 did not have an
impact on the Company's Financial Statements.
18
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
called 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 including
guaranteed minimum death, income and withdrawal benefits, charge structures, and
investment options. The Company has also enhanced ICA income and withdrawal
benefits and investment options in the succeeding two years. 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 increased $31.3 million (or 19%) to $200.5 million during
the three month period ended March 31, 2007, as compared to the same period in
2006. Total direct deposits by product were as follows:
(DOLLARS IN MILLIONS)
----------------------------- CHANGE
FIRST QUARTER FIRST QUARTER ----------
2007 2006 $ %
------------- ------------- ---- ---
Variable Annuities (including ICA):
L-Share $ 83.7 $ 57.6 26.1 45%
Bonus 54.3 46.7 7.6 16
B-Share 45.2 40.3 4.9 12
C-Share 12.6 16.1 (3.5) (22)
------ ------ ---- ---
195.8 160.7 35.1 22
------ ------ ---- ---
All Other Deposits 4.7 8.5 (3.8) (45)
------ ------ ---- ---
Total Direct Deposits $200.5 $169.2 31.3 19%
====== ====== ==== ===
During the first three months of 2007 variable annuity deposits increased $35.1
million (or 22%) to $195.8 million as compared to the same period in 2006. The
increase in variable annuity deposits is primarily due to the product
enhancements included in ICA as well as 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.
FINANCIAL CONDITION
At March 31, 2007, the Company's assets were $14.5 billion or $154.0 million
lower than the $14.6 billion in assets at December 31, 2006. Assets excluding
separate accounts assets decreased $164.6 million (or 5%) primarily due to a
$125.0 million dividend payment to its parent and a reduction in the number of
fixed rate contracts inforce. Separate accounts assets, which represent 78% of
total assets, increased $10.6 million to $11.3 billion. Changes in separate
accounts assets were as follows:
FIRST
QUARTER
(dollars in millions) 2007
- --------------------- ------
Investment performance $193.7
Deposits 200.1
Policy fees and charges (55.0)
Surrenders, benefits and withdrawals (328.2)
------
Net increase $ 10.6
======
During the first three months of 2007, the Company experienced contract owner
withdrawals that exceeded deposits on all products by $199.4 million. The
components of contract owner transactions were as follows:
19
FIRST
QUARTER
(dollars in millions) 2007
- --------------------- -------
Deposits collected $ 200.5
Internal tax-free exchanges (18.1)
-------
Net contract owner deposits 182.4
-------
Contract owner withdrawals 247.1
Net transfers from separate accounts 134.7
-------
Net contract owner withdrawals 381.8
-------
Net contract owner activity $(199.4)
=======
At March 31, 2007 and December 31, 2006, approximately $1.5 billion (or 99%) and
$1.6 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 March 31, 2007,
approximately $62.4 million (or 4%) of fixed maturity securities were rated
BBB-, which is the lowest investment grade rating given by Standard and Poor's.
This compares to $58.7 million (or 4%) of BBB- rated fixed maturity securities
at December 31, 2006.
At March 31, 2007 and December 31, 2006, approximately $18.4 million (or 1%) and
$17.5 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 March 31, 2007, the Company's assets included $1.7
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 level of surplus. During the first quarter of 2007, the Company
paid cash dividends of $125.0 million to its parent, Merrill Lynch Insurance
Group Inc. ("MLIG"), of which $41.6 million were ordinary dividends and $83.4
million were extraordinary. In addition, the Company received regulatory
approval to pay a $69.0 million extraordinary dividend to MLIG during the second
quarter 2007. During the first half of 2006, the Company paid cash dividends of
$180.0 million to MLIG, of which $39.8 million were ordinary dividends and
$140.2 million were extraordinary.
The Company and Merrill Lynch & Co. are parties to a "keepwell" agreement. This
agreement obligates Merrill Lynch & Co. to maintain a level of capital in the
Company in excess of minimum regulatory requirements.
20
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of March
31, 2007:
LESS THAN THREE TO MORE THAN
(dollars in millions) THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- --------------------- ----------- ---------- ---------- ------
Contractual Obligations:
Long-term liabilities (1) $20.4 $33.7 $241.7 $295.8
(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.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2007 and 2006, the Company recorded
net earnings of $36.8 million and $18.9 million, respectively.
Policy charge revenue increased $6.4 million (or 10%) during the three month
period ended March 31, 2007, as compared to the same period in 2006. The
following table provides the changes in policy charge revenue by type for each
respective period:
FIRST FIRST
QUARTER QUARTER
(dollars in millions) 2007 2006 CHANGE
- --------------------- ------- ------- ------
Non-asset based policy charge revenue $21.8 $18.8 $3.0(1)
Guarantee benefits based policy charge revenue 4.6 2.6 2.0(2)
Asset-based policy charge revenue 42.6 41.2 1.4(3)
----- ----- ----
$69.0 $62.6 $6.4
===== ===== ====
(1) The increase in non-asset based policy charge revenue is primarily due to
an increase in UPCR accretion resulting from lower mortality.
(2) The increase in guarantee benefits based policy charge revenue is due to
the increase in inforce variable annuity contracts containing guaranteed
benefit riders.
(3) Asset-based policy charge revenue was favorably impacted by the increase
in average variable account balances.
Net earnings derived from interest spread increased $0.6 million (or 6%) during
the three month period ended March 31, 2007, as compared to the same period in
2006. The increase is primarily due to higher portfolio yields as compared to
the same period in 2006.
Net realized investment gains decreased $0.5 million during the three month
period ended March 31, 2007 as compared to the same period in 2006 primarily due
to decreased trading portfolio gains. During the first quarter 2006 the Company
liquidated its trading portfolio.
Policy benefits decreased $15.1 million (or 101%) during the three month period
ended March 31, 2007, as compared to the same period in 2006, primarily due to
period-to-period differences in variable annuity benefit reserve unlocking as
noted in the Critical Accounting Policies section above.
Reinsurance premium ceded increased $0.4 million (or 6%) during the three month
period ended March 31, 2007, as compared to the same period in 2006. The
increase during the first three months of 2007 is attributable to an increase in
net amount at risk for certain variable life insurance policies containing
reinsurance provisions.
Amortization of deferred policy acquisition costs decreased $8.0 million (or
64%) during the three month period ended March 31, 2007, as compared to the same
period in 2006 primarily due to period-to-period differences in variable annuity
DAC unlocking as
21
noted in the Critical Accounting Policies section above. Excluding the impact of
DAC unlocking, amortization increased $2.6 million (or 21%) primarily due to
lower mortality during the first three months of 2007 as compared to the same
period in 2006.
Insurance expenses and taxes increased $2.0 million (or 15%) during the three
month period ended March 31, 2007, as compared to the same period in 2006. The
following table provides the changes in insurance expenses and taxes for each
respective period:
FIRST FIRST
QUARTER QUARTER
(dollars in millions) 2007 2006 CHANGE
- --------------------- ------- ------- ------
General insurance expenses $ 6.3 $ 5.5 $0.8(1)
Commissions 8.2 7.5 0.7(2)
Taxes, licenses, and fees 0.7 0.2 0.5(3)
----- ----- ----
$15.2 $13.2 $2.0
===== ===== ====
(1) The increase in general insurance expenses is due to an increase in
occupancy expenses. During the first quarter 2006, the Company received a
credit for the termination of a lease agreement relating to office space
the Company no longer occupies.
(2) The increase in commissions is primarily due to an increase in variable
annuity asset-based commissions resulting from higher variable account
balances.
(3) The increase in taxes, licenses and fees is primarily due to increased
state income tax expenses.
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.
22
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 first fiscal quarter of 2007 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
23
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,
2006, 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: May 11, 2007
EXHIBIT INDEX
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.