1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290; 33-58303
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
September 30, December 31,
1997 1996
-------------- --------------
ASSETS
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1997 - $3,055,403; 1996 - $3,232,643) $ 3,138,672 $ 3,301,588
Equity securities, at estimated fair value
(cost: 1997 - $46,700; 1996 - $32,988) 47,958 35,977
Trading account securities, at estimated fair value 15,720 -
Mortgage loans 22,868 70,503
Real estate held-for-sale 36,467 28,851
Policy loans on insurance contracts 1,101,209 1,092,071
-------------- --------------
Total Investments 4,362,894 4,528,990
CASH AND CASH EQUIVALENTS 134,344 94,991
ACCRUED INVESTMENT INCOME 88,168 86,186
DEFERRED POLICY ACQUISITION COSTS 361,493 366,461
REINSURANCE RECEIVABLES 1,707 2,642
OTHER ASSETS 47,739 42,861
SEPARATE ACCOUNTS ASSETS 9,260,658 7,615,362
-------------- ---------------
TOTAL ASSETS $ 14,257,003 $ 12,737,493
============== ===============
See notes to financial statements. (Continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Continued) (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
September 30, December 31,
1997 1996
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,267,949 $ 4,480,048
Claims and claims settlement expenses 53,947 39,666
-------------- --------------
Total policy liabilities and accruals 4,321,896 4,519,714
OTHER POLICYHOLDER FUNDS 19,805 19,420
LIABILITY FOR GUARANTY FUND ASSESSMENTS 16,048 18,773
FEDERAL INCOME TAXES - DEFERRED 494 6,714
FEDERAL INCOME TAXES - CURRENT 14,690 20,968
AFFILIATED PAYABLES - NET 3,648 6,164
OTHER LIABILITIES 56,246 50,726
SEPARATE ACCOUNTS LIABILITIES 9,260,658 7,605,194
-------------- --------------
Total Liabilities 13,693,485 12,247,673
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 402,937 402,937
Retained earnings 140,917 79,387
Net unrealized gain on investment securities available-for-sale 17,664 5,496
-------------- --------------
Total Stockholder's Equity 563,518 489,820
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,257,003 $ 12,737,493
============== ==============
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
Nine Months Ended
September 30,
----------------------------------
1997 1996
------------- ------------
REVENUES:
Investment revenue:
Net investment income $ 234,348 $ 255,276
Net realized investment gains 9,602 7,886
Policy charge revenue 129,854 117,418
------------- ------------
Total Revenues 373,804 380,580
------------- ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 156,256 178,498
Market value adjustment expense 2,737 5,107
Policy benefits (net of reinsurance recoveries: 1997 - $8,876;
1996 - $6,189) 20,776 16,089
Reinsurance premium ceded 13,198 11,582
Amortization of deferred policy acquisition costs 53,035 43,116
Insurance expenses and taxes 36,088 34,679
------------- ------------
Total Benefits and Expenses 282,090 289,071
------------- ------------
Earnings Before Federal Income Tax Provision 91,714 91,509
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 42,957 11,408
Deferred (12,773) 17,848
------------- ------------
Total Federal Income Tax Provision 30,184 29,256
------------- ------------
NET EARNINGS $ 61,530 $ 62,253
============= ============
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
Three Months Ended
September 30,
----------------------------------
1997 1996
------------ ------------
REVENUES:
Investment revenue:
Net investment income $ 76,266 $ 83,673
Net realized investment gains 2,682 166
Policy charge revenue 46,509 39,392
------------ ------------
Total Revenues 125,457 123,231
------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 50,481 57,794
Market value adjustment expense 1,082 603
Policy benefits (net of reinsurance recoveries: 1997 - $1,613;
1996 - $1,755) 7,074 5,192
Reinsurance premium ceded 4,357 3,903
Amortization of deferred policy acquisition costs 16,467 10,478
Insurance expenses and taxes 12,396 11,222
------------ ------------
Total Benefits and Expenses 91,857 89,192
------------ ------------
Earnings Before Federal Income Tax Provision 33,600 34,039
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 11,690 9,356
Deferred (141) 2,312
------------ ------------
Total Federal Income Tax Provision 11,549 11,668
------------ ------------
NET EARNINGS $ 22,051 $ 22,371
============ ============
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands) (Unaudited)
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
------------- ------------ ------------ -------------- ---------------
BALANCE, JANUARY 1, 1995 $ 2,000 $ 501,455 $ 76,482 $ 16,900 $ 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Net unrealized investment loss (11,404) (11,404)
------------- ------------ ------------ -------------- ---------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 489,820
Net earnings 61,530 61,530
Net unrealized investment gain 12,168 12,168
------------- ------------ ------------ -------------- ---------------
BALANCE, SEPTEMBER 30, 1997 $ 2,000 $ 402,937 $ 140,917 $ 17,664 $ 563,518
============= ============ ============ ============== ================
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
Nine Months Ended
September 30,
------------------------------------
1997 1996
------------- ---------------
OPERATING ACTIVITIES:
Net earnings $ 61,530 $ 62,253
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 53,035 43,116
Capitalization of policy acquisition costs (51,385) (32,609)
Amortization, (accretion) and depreciation of investments (2,861) (3,854)
Net realized investment gains (9,602) (7,886)
Interest credited to policyholders' account balances 156,256 178,498
Provision for deferred Federal income tax (12,773) 17,848
Changes in operating assets and liabilities:
Accrued investment income (1,982) (2,816)
Claims and claims settlement expenses 14,281 8,705
Federal income taxes - current (6,278) 1,261
Other policyholder funds 385 1,103
Liability for guaranty fund assessments (2,725) (543)
Affiliated payables (2,516) 2,131
Policy loans on insurance contracts (9,138) (36,487)
Trading accounts securities (14,843) -
Other, net 1,577 8,632
-------------- --------------
Net cash and cash equivalents provided by operating activities 172,961 239,352
-------------- --------------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 436,345 542,922
Maturities of available-for-sale securities 476,909 400,161
Purchases of available-for-sale securities (739,145) (689,414)
Mortgage loans principal payments received 40,019 16,100
Sales of real estate held-for-sale - 2,857
Recapture of investment in Separate Accounts 11,026 5,323
Investment in Separate Accounts (21) (344)
------------- ---------------
Net cash and cash equivalents provided by investing activities 225,133 277,605
------------- ---------------
See notes to financial statements. (continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in Thousands) (Unaudited)
Nine Months Ended
September 30,
------------------------------------
1997 1996
-------------- --------------
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 826,953 $ 403,472
Withdrawals (net of transfers to/from Separate Accounts) (1,185,694) (837,266)
-------------- --------------
Net cash and cash equivalents used by financing activities (358,741) (433,794)
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39,353 83,163
CASH AND CASH EQUIVALENTS:
Beginning of year 94,991 48,924
-------------- --------------
End of period $ 134,344 $ 132,087
============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 49,235 $ 10,147
Intercompany interest 695 765
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly-
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The unaudited condensed financial statements included herein have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. The preparation of financial statements in conformity
with generally accepted accounting principles and prevailing
industry practice requires management to make estimates that
affect the reported amounts and disclosure of contingencies in
the financial statements. Actual results could differ from
those estimates. Results for the three month and nine month
periods ended September 30, 1997 and 1996 are not necessarily
indicative of annual results. These unaudited financial
statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 1996
Annual Report on Form 10-K ("1996 Report").
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners. Statutory
capital and surplus at September 30, 1997 and December 31, 1996,
was $335 million and $252 million, respectively. For the nine
month periods ended September 30, 1997 and 1996, statutory net
income was $68.2 million and $66.7 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as either available-for-sale or trading and are
recorded at fair value. Unrealized gains and losses are included
in stockholder's equity for available-for-sale securities and
included in net realized investment gains for trading account
securities. The Company is required to adjust deferred policy
acquisition costs and certain policyholder liabilities associated
with available-for-sale securities. These adjustments are recorded
in stockholder's equity and assume that the unrealized gain or
loss on available-for-sale securities was realized. These
investments primarily support in-force, universal life-type
contracts. The following reconciles the net unrealized investment
gain recorded in stockholder's equity at September 30, 1997 and
December 31, 1996:
September 30, December 31,
1997 1996
--------------- --------------
(In Thousands)
Assets
Fixed maturity securities $ 83,269 $ 68,945
Equity securities 1,258 2,989
Deferred policy acquisition costs (7,948) (4,630)
Separate Account Assets - 168
--------------- -------------
76,579 67,472
--------------- -------------
Liabilities:
Policyholders' account balances 49,403 59,017
Federal income taxes - deferred 9,512 2,959
--------------- -------------
58,915 61,976
--------------- -------------
Stockholder's equity:
Net unrealized gain on investment
securities available-for-sale $ 17,664 $ 5,496
=============== =============
During the third quarter 1997, the Company initially funded a
trading portfolio, composed of convertible debt and equity
securities, with $15 million of cash. The net unrealized gain
on trading account securities earned in the third quarter 1997,
and included in net realized investment gains, composed of the
following:
1997
--------------
(In Thousands)
Fixed maturity securities $ 694
Equity securities 63
---------------
Net unrealized trading gains $ 757
===============
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
should be read in conjunction with the accompanying unaudited
financial statements and notes thereto, in addition to the 1996
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the 1996 Report.
Changes in revenues and expenses in most cases are similar for
the three month and nine month periods. Therefore, the discussion
emphasizes the comparison between the nine months of 1997 and
1996, with additional information on the three month periods
presented where appropriate.
Business Overview
The Company's earnings are principally derived from two sources:
the net investment income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. The costs associated with acquiring contract owner
deposits are deferred and amortized over the period in which the
Company anticipates holding those funds. In addition, the Company
incurs expenses associated with the maintenance of in-force
contracts.
Life insurance premiums and annuity deposits received in the
first nine months of 1997 and 1996 were $902 million and $513
million, respectively. New variable annuity sales increased $412
million (or 137%) during 1997, as a result of enhanced sales
efforts related to the Company's introduction of five new
investment options managed by entities not affiliated with
Merrill Lynch & Co. and an index fund managed by Merrill Lynch
Asset Management, LP. Management also attributes the increase in
variable annuity sales to the generally rising equity markets
during the past two and a half years. New variable life sales as
measured by premiums increased $21 million (or 42%) during the
first nine months of 1997 as compared to the same period in 1996.
Management attributes this increase to Merrill Lynch & Co.'s
planning based financial management program for individual
investors. The financial plans developed from this program
include an analysis of financial needs which may include
identification of a need which can be addressed through the
purchase of life insurance. The implementation of these plans
has, in management's view, contributed to the growth in variable
life premiums. Partially offsetting the increase in new variable
life and annuity sales was the anticipated reduction of $35
million (or 32%) in internal tax free exchanges from maturing
fixed products during the first nine months of 1997 compared to
the same period in 1996.
During the third quarter 1997, the Company entered into an
indemnity reinsurance agreement with an unaffiliated insurer
whereby the Company coinsures, on a modified coinsurance basis,
50% of the unaffiliated insurer's variable annuity premiums sold
through the Merrill Lynch & Co. distribution system. The agreement
is effective January 1, 1997. The Company's quota share of variable
annuity premiums related to this agreement was $7 million.
During the first nine months of 1997, separate account assets
increased $1.6 billion (or 22%) to $9.3 billion. The increase is
attributable to two factors. First, the separate accounts
benefited from strong underlying fund performance associated with the
generally rising equity markets. During the first nine months of
1997, the separate accounts increased $1.3 billion due to price
appreciation in the underlying funds supporting the variable
products. Second, net cash inflow to the variable products
contributed $352 million to the growth in separate account
assets. Partially offsetting these increases was a $10 million
repayment of the general account's seed money investment in the
separate account.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 30,
1997, the Company's assets included $2.7 billion of cash, short-
term investments and investment grade publicly traded fixed
maturity securities that could be liquidated if funds were
required.
As of September 30, 1997, approximately $213 million (or 6.8%) of
the Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured corporate debt obligations which do not have a rating
equivalent to Standard and Poor's BBB- or higher (or similar
rating agency), and are not guaranteed by an agency of the
federal government. Non-investment grade securities are
speculative and are subject to significantly greater risks
related to the creditworthiness of the issuers and the liquidity
of the market for such securities. The Company carefully selects,
and closely monitors, such investments.
During the first nine months of 1997, mortgages with outstanding
principal balances of $40 million were repaid in full. Also, the
Company foreclosed on one mortgage loan and transferred the
acquired property, with a then current estimated fair value of $8
million, to real estate.
Results of Operations
For each of the nine month periods ended September 30, 1997 and 1996,
the Company reported net earnings of $62 million. For each of the three
month periods ended September 30, 1997 and 1996, the Company reported
net earnings of $22 million.
Net investment income and interest credited to policyholders'
account balances for the nine months ended September 30, 1997 as
compared to the same period in 1996 have declined by
approximately $21 million and $22 million, respectively,
resulting in a $1 million increase in interest spread. The
reduction in net investment income is primarily a result of the
fourth quarter 1996 stockholder dividend payments and the
declining fixed rate contracts in-force. The reduction in
interest credited to policyholders' account balances is
primarily attributable to the declining fixed rate contracts in-
force. Additionally, certain policyholder reserves were
determined to be in excess of amounts required, resulting in a $9
million reduction to policyholders' account balances during the
first nine months of 1997.
Net realized investment gains increased approximately $1.7
million and $2.5 million during the current nine month and three
month periods, respectively, as compared to the same periods
during 1996. During the third quarter 1997, greater sales
activity due to increased modified guaranteed annuity surrender
activity resulted in a $1 million increase in net realized
investment gains as compared to the third quarter 1996.
Management attributes the increase in surrender activity to
interest rates being, on average, 75 basis points lower during
the current three month period as compared to the same period in
1996. Also, the Company commenced trading in a new investment
portfolio on July 1, 1997. The Company classifies this portfolio
as trading account securities and recognized $0.8 million of
unrealized trading gains and $0.1 million of realized trading gains
for the three and nine month periods ended September 30, 1997.
Policy charge revenue increased $12 million (or 11%) during the
current nine month period as compared to the same period during
1996. The increase in policy charge revenue is primarily
attributable to the increase in policyholders' variable account
balances. Asset based charges increased $14 million (or 21%)
consistent with the growth in the separate account assets. Non-
asset based charges decreased $2 million (or -3%) primarily due
to an increase in the number of inforce variable life policies
reaching the end of their deferred premium load collection period.
Policy benefits increased approximately $5 million to $21 million
during the current nine month period from $16 million in the same
period during 1996. The increase is primarily due to the
increase in average mortality per claim during 1997.
The market value adjustment expense is attributable to the
Company's modified guaranteed annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts which are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense has decreased $2 million during
the current nine month period as compared to the same period
during 1996 primarily as a result of decreased surrender
activity. However, during the third quarter 1997, the market
value adjustment expense increased $0.5 million to $1.1 million
reflecting the decrease in interest rates as compared to the same
period in 1996.
Reinsurance premium ceded increased $1.6 million during the
current nine month period as compared to the same period in 1996,
primarily as a result of an increase in aggregate net amount at
risk for the variable life products. Net amount at risk
increased due to a larger death benefits resulting from rising
policyholder account balances.
Amortization of deferred policy acquisition costs increased $10
million during the current nine month period as compared to the
same period during 1996. The increase in amortization is
primarily attributable to revised future gross profit assumptions
associated with management's decision to pay trail commissions on
certain in-force life insurance contracts during the first
quarter 1997. For the three months ended September 1997,
amortization of deferred policy acquisition costs increased $6.0
million as compared to the same period during 1996. Amortization
decreased in the third quarter 1996 as a result of revising the
assumptions of estimated future gross profits of certain variable
annuity products.
Insurance expenses and taxes increased $1.2 million during the
third quarter 1997, as compared to the third quarter 1996. This
is primarily attributable to an increase in non-capitalizable
commission expense paid on in-force life and annuity contracts.
I-1
3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
I-2
4
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. CROWNE, JR.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 13, 1997
I-3
5
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule