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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, 1998
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.
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PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
March 31, December 31,
1998 1997
--------------- ---------------
ASSETS
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INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,799,845; 1997 - $2,927,562) $ 2,874,689 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $114,564; 1997 - $72,599) 114,822 73,612
Trading account securities, at estimated fair value 16,923 15,625
Real estate held-for-sale 28,034 31,805
Policy loans on insurance contracts 1,121,627 1,118,139
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Total Investments 4,156,095 4,247,789
CASH AND CASH EQUIVALENTS 62,022 86,388
ACCRUED INVESTMENT INCOME 80,292 78,224
DEFERRED POLICY ACQUISITION COSTS 367,096 365,105
FEDERAL INCOME TAXES - DEFERRED 2,729 -
REINSURANCE RECEIVABLES 3,932 1,617
AFFILIATED RECEIVABLES - NET 115 166
RECEIVABLES FROM SECURITIES SOLD 5,685 75,820
OTHER ASSETS 45,433 49,353
SEPARATE ACCOUNTS ASSETS 9,990,628 9,149,119
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TOTAL ASSETS $ 14,714,027 $ 14,053,581
=============== ===============
See notes to finanical 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)
March 31, December 31,
1998 1997
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LIABILITIES AND STOCKHOLDER'S EQUITY
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LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,067,965 $ 4,188,110
Claims and claims settlement expenses 64,445 50,574
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Total policy liabilities and accruals 4,132,410 4,238,684
OTHER POLICYHOLDER FUNDS 19,064 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 14,230 15,734
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 15,248 24,438
PAYABLE FOR SECURITIES PURCHASED 11,556 95,135
OTHER LIABILITIES 57,655 54,434
SEPARATE ACCOUNTS LIABILITES 9,990,628 9,149,119
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Total Liabilities 14,240,791 13,605,527
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STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 107,689 80,735
Accumulated other comprehensive income 16,223 17,995
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Total Stockholder's Equity 473,236 448,054
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,714,027 $ 14,053,581
=============== ===============
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
March 31,
-----------------------------------
1998 1997
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REVENUES:
Investment revenue:
Net investment income $ 70,998 $ 79,638
Net realized investment gains 10,458 5,785
Policy charge revenue 48,045 41,116
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Total Revenues 129,501 126,538
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 50,319 53,106
Market value adjustment expense 1,392 943
Policy benefits (net of reinsurance recoveries: 1998 - $3,741
1997 - $2,937) 7,732 6,756
Reinsurance premium ceded 4,870 4,360
Amortization of deferred policy acquisition costs 16,673 21,924
Insurance expenses and taxes 12,272 11,777
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Total Benefits and Expenses 93,258 98,866
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Earnings Before Federal Income Tax Provision 36,243 27,673
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 12,248 9,934
Deferred (2,959) (1,879)
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Total Federal Income Tax Provision 9,289 8,055
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NET EARNINGS $ 26,954 $ 19,617
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See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
Three Months Ended
March 31,
-----------------------------------
1998 1997
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NET EARNINGS $ 26,954 $ 19,617
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period 3,447 (47,261)
Reclassification adjustment for gains included in net earnings (10,404) (5,451)
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Net unrealized losses on investment securities (6,957) (52,712)
Adjustments for:
Policyholder liabilities 4,148 30,993
Deferred policy acquisition costs 83 7,731
Income tax benefit related to items of
other comprehensive income 954 4,896
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Other comprehensive income, net of tax (1,772) (9,092)
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COMPREHENSIVE INCOME $ 25,182 $ 10,525
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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)
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings income equity
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BALANCE, JANUARY 1, 1997 $ 2,000 $ 402,937 $ 79,387 $ 5,496 $ 489,820
Dividend to Parent (55,613) (79,387) (135,000)
Net earnings 80,735 80,735
Other comprehensive income, net of tax 12,499 12,499
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BALANCE, DECEMBER 31, 1997 2,000 347,324 80,735 17,995 448,054
Net earnings 26,954 26,954
Other comprehensive income, net of tax (1,772) (1,772)
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BALANCE, MARCH 31, 1998 $ 2,000 $ 347,324 $ 107,689 $ 16,223 $ 473,236
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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)
Three Months Ended
March 31,
-----------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net earnings $ 26,954 $ 19,617
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 16,673 21,924
Capitalization of policy acquisition costs (18,581) (15,739)
Amortization, (accretion) and depreciation of investments (2,115) (681)
Net realized investment gains (10,458) (5,785)
Interest credited to policyholders' account balances 50,319 53,106
Benefit for deferred Federal income tax (2,959) (1,879)
Changes in operating assets and liabilities:
Accrued investment income (2,068) (544)
Affiliated receivables / payables 51 6,363
Claims and claims settlement expenses 13,871 4,978
Federal income taxes - current (9,190) (8,034)
Other policyholder funds (8,096) (1,952)
Liability for guaranty fund assessments (1,144) (563)
Policy loans on insurance contracts (3,488) (2,997)
Trading account securities (40) -
Other, net 4,826 (2,434)
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Net cash and cash equivalents provided by operating activities 54,555 65,380
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INVESTING ACTIVITIES:
Sales of available-for-sale securities 285,119 169,387
Maturities of available-for-sale securities 149,017 198,900
Purchases of available-for-sale securities (357,603) (271,883)
Mortgage loans principal payments received - 30,027
Sales of real estate held-for-sale 10,862 -
Recapture of investment in Separate Accounts - 9,221
Investment in Separate Accounts - (21)
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Net cash and cash equivalents provided by investing activities 87,395 135,631
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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)
Three Months Ended
March 31,
-----------------------------------
1998 1997
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FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 234,970 $ 216,319
Withdrawals (including transfers to/from Separate Accounts) (401,286) (328,760)
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Net cash and cash equivalents used by financing activities (166,316) (112,441)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,366) 88,570
CASH AND CASH EQUIVALENTS:
Beginning of year 86,388 94,991
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End of period $ 62,022 $ 183,561
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Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 21,438 $ 17,968
Intercompany interest 209 175
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 periods ended
March 31, 1998 and 1997 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 1997 Annual Report on Form 10-K ("1997
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 March 31, 1998 and December 31, 1997, was
$277 million and $245 million, respectively. For the three month
periods ended March 31, 1998 and 1997, statutory net income was
$33.0 million and $17.8 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 on available-
for-sale securities are included in accumulated other
comprehensive income, which is a component of stockholder's
equity. Unrealized gains and losses on trading account
securities are included in net realized investment gains.
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
the accumulated other comprehensive income component of
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 accumulated other comprehensive income at March 31, 1998 and
December 31, 1997:
March 31, December 31,
1998 1997
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(In Thousands)
Assets:
Fixed maturity securities $ 74,844 $ 81,046
Equity securities 258 1,013
Deferred policy acquisition costs (5,369) (5,452)
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69,733 76,607
Liabilities:
Policyholders' account balances 44,775 48,923
Federal income taxes - deferred 8,735 9,689
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53,510 58,612
Stockholder's equity: ----------- -----------
Accumlated other comprehensive income $ 16,223 $ 17,995
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NOTE 4: RECLASSIFICATIONS:
To facilitate comparisons with the current year, certain amounts
in the prior year have been reclassified.
During the third quarter 1997, the Company provided $15 million
initial funding for a trading portfolio, composed of convertible
debt and equity securities. The net unrealized holding gains on
trading account securities earned during the first quarter 1998,
and included in net realized investment gains was $764.
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 1997
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the 1997 Report.
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 three months of 1998 and 1997 were $273 million and $236
million, respectively. The increase is attributable to increased
sales of the Company's variable products. During the first
quarter 1998, variable annuity deposits increased $32.6 million
(or 17%) to $228 million and variable life insurance premiums
increased $9.7 million (or 33%) to $39.4 million. Management
attributes the increase in variable product sales to the
continued strength of the U.S. equity markets. During the first
quarter 1998, the Standard & Poor's 500 Composite Stock Price
Index rose 14%, ending the quarter near its historical high
point. Future variable product sales could be negatively impacted
if the equity markets enter a period of decline. Partially
offsetting the increases in variable product sales was the
reduction in modified guaranteed annuity sales which declined
$3.7 million (or 90%) to $4.1 million. Sales volume of this
product is reflective of the current interest rate environment
and will generally increase and decrease in a direct relationship
with changes in interest rates. During the first quarter 1998,
interest rates remained generally lower with medium term rates on
U.S. Treasury securities at approximately 5.6%. This represents a
97 basis point decrease from the first quarter 1997.
During the first three months of 1998, separate account assets
increased $842 million (or 9%) to $10 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 three
months of 1998, separate account assets increased $775 million
due to price appreciation in the underlying funds supporting the
variable products. Second, net cash inflow to the variable
products contributed $67 million to the growth in separate
account assets.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of March 31, 1998,
the Company's assets included $2.4 billion of cash, short-term
investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
As of March 31, 1998, approximately $176 million (or 6.1%) 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). 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.
Comprehensive Income
For the three month periods ended March 31, 1998 and 1997, the
Company reported comprehensive income of $25 million and $11
million, respectively. A discussion of the results of operations
and changes in other comprehensive income follows:
Results of Operations
For the three month periods ended March 31, 1998 and 1997, the
Company reported net earnings of $27 million and $20 million,
respectively.
During the first quarter 1998, net investment income and interest
credited to policyholders' account balances declined by
approximately $9 million and $3 million, respectively, resulting
in a $6 million decrease in interest spread when compared to the
first quarter 1997. The reduction in net investment income is
primarily a result of the Company's fourth quarter 1997 dividend
payment to its stockholder, declining fixed rate contracts in-
force and the declining yield on the company's fixed maturity
portfolio. The reduction in interest credited to policyholders'
account balances is primarily attributable to the declining fixed
rate contracts in-force and the declining crediting rate on newly
issued and renewal fixed rate contracts. The declines in
investment yield and crediting rate are a result of the current
lower interest rate environment.
Net realized investment gains increased approximately $5 million
during the current three month period as compared to the same
period during 1997. The increase is primarily due to the $7
million gain on the sale of one commercial real estate property.
Partially offsetting this gain was $1 million in credit-related
losses due to the sale of fixed maturity securities of Pacific
Rim issuers.
Policy charge revenue increased $7 million (or 17%) during the
first quarter 1998 as compared to the same period during 1997.
The increase in policy charge revenue is primarily attributable
to the increase in policyholders' variable account balances.
Average variable account balances increased $1.9 billion (or 25%)
during the first quarter 1998 as compared to the same period in
1997. Asset based policy charges increased $6 million (or 24%)
consistent with the growth in separate account assets. Non-asset
based policy charges increased $1 million (or 5%).
Policy benefits increased approximately $1 million to $8 million
during the current three month period from $7 million in the same
period during 1997. The increase is primarily due to the
increase in variable life death claims.
Reinsurance premium ceded increased $0.5 million (or 12%) to $5
million during 1998. This increase is attributable to the
combined effect of the increasing age of policyholders and
increased insurance in-force.
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 increased $0.4 million (or
48%) during the current three month period consistent with an
increase in surrender activity resulting from the lower interest
rate environment as compared to the same period in 1997.
Amortization of deferred policy acquisition costs decreased $5
million during the first quarter 1998 as compared to the same
period during 1997. During the first quarter 1997, management
decided to pay trail commissions on certain in-force life
insurance contracts. The revision to future gross profit
assumptions for that line of business resulted in a $6 million
increase in amortization.
Other Comprehensive Income
The Company reported a decrease in other comprehensive income of
$2 million during the first quarter 1998 as compared to a
decrease of $9 million during the first quarter 1997.
Other comprehensive income is impacted by the change in net
unrealized holding gains (losses) on investment securities and
the related adjustments to deferred policy acquisition costs,
policyholders' liabilities and deferred income taxes. Generally,
the most significant factor that impacts net unrealized holding
gains (losses) on investment securities is changes in interest
rates. At March 31, 1998, interest rates on medium term U.S.
Treasury securities remained relatively flat from December 31,
1997. This compares to the approximately 53 basis point increase
from December 31, 1996 to March 31, 1997. The change in net
unrealized holding gains (losses) has an inverse relationship to
changes in interest rates.
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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.
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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.
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Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: May 14, 1998
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EXHIBIT INDEX
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Exhibit
No. Description
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27 Financial Data Schedule