1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863
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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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)
ASSETS September 30, December 31,
1998 1997
-------------- --------------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,617,166; 1997 - $2,927,562) $ 2,690,782 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $118,833; 1997 - $72,599) 116,730 73,612
Trading account securities, at estimated fair value 15,218 15,625
Real estate held-for-sale 28,034 31,805
Policy loans on insurance contracts 1,127,160 1,118,139
-------------- --------------
Total Investments 3,977,924 4,247,789
CASH AND CASH EQUIVALENTS 83,050 86,388
ACCRUED INVESTMENT INCOME 80,030 78,224
DEFERRED POLICY ACQUISITION COSTS 368,292 365,105
FEDERAL INCOME TAXES - DEFERRED 6,413 -
REINSURANCE RECEIVABLES 2,775 1,617
AFFILIATED RECEIVABLES - NET - 166
RECEIVABLES FROM SECURITIES SOLD 1,703 75,820
OTHER ASSETS 43,764 49,353
SEPARATE ACCOUNTS ASSETS 9,373,778 9,149,119
------------- -------------
TOTAL ASSETS $ 13,937,729 $ 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)
LIABILITIES AND STOCKHOLDER'S EQUITY September 30, December 31,
1998 1997
-------------- --------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,894,122 $ 4,188,110
Claims and claims settlement expenses 65,201 50,574
-------------- --------------
Total policy liabilities and accruals 3,959,323 4,238,684
OTHER POLICYHOLDER FUNDS 19,488 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 14,357 15,374
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 7,711 24,438
AFFILIATED PAYABLES - NET 2,352 -
PAYABLE FOR SECURITIES PURCHASED 553 95,135
OTHER LIABILITIES 74,978 54,434
SEPARATE ACCOUNTS LIABILITIES 9,363,251 9,149,119
-------------- --------------
Total Liabilities 13,442,013 13,605,527
-------------- --------------
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 139,325 80,735
Accumulated other comprehensive income 7,067 17,995
-------------- --------------
Total Stockholder's Equity 495,716 448,054
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 13,937,729 $ 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)
Nine Months Ended
September 30,
-----------------------------------
1998 1997
------------- -------------
REVENUES:
Investment revenue:
Net investment income $ 205,466 $ 234,348
Net realized investment gains 10,694 9,602
Policy charge revenue 152,655 129,854
------------- -------------
Total Revenues 368,815 373,804
------------- -------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 148,885 156,256
Market value adjustment expense 4,381 2,737
Policy benefits (net of reinsurance recoveries: 1998 - $7,706
1997 - $8,876) 23,326 20,776
Reinsurance premium ceded 14,957 13,198
Amortization of deferred policy acquisition costs 54,046 53,035
Insurance expenses and taxes 38,648 36,088
------------- -------------
Total Benefits and Expenses 284,243 282,090
------------- -------------
Earnings Before Federal Income Tax Provision 84,572 91,714
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 27,695 42,957
Deferred (1,713) (12,773)
------------- -------------
Total Federal Income Tax Provision 25,982 30,184
------------- -------------
NET EARNINGS $ 58,590 $ 61,530
============= =============
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,
-----------------------------------
1998 1997
------------- -------------
REVENUES:
Investment revenue:
Net investment income $ 66,057 $ 76,266
Net realized investment gains (losses) (2,606) 2,682
Policy charge revenue 51,994 46,509
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Total Revenues 115,445 125,457
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 48,568 50,481
Market value adjustment expense 1,462 1,082
Policy benefits (net of reinsurance recoveries: 1998 - $2,647
1997 - $1,613) 7,888 7,074
Reinsurance premium ceded 5,102 4,357
Amortization of deferred policy acquisition costs 18,831 16,467
Insurance expenses and taxes 13,838 12,396
------------- -------------
Total Benefits and Expenses 95,689 91,857
------------- -------------
Earnings Before Federal Income Tax Provision 19,756 33,600
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 4,711 11,690
Deferred 2,048 (141)
------------- -------------
Total Federal Income Tax Provision 6,759 11,549
------------- -------------
NET EARNINGS $ 12,997 $ 22,051
============= =============
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)
Nine Months Ended
September 30,
-----------------------------------
1998 1997
------------- -------------
NET EARNINGS $ 58,590 $ 61,530
------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (722) 21,708
Reclassification adjustment for gains included in net earnings (11,297) (9,283)
------------- -------------
Net unrealized gains (losses) on investment securities (12,019) 12,425
Adjustments for:
Policyholder liabilities (2,684) 9,614
Deferred policy acquisition costs (2,109) (3,318)
Income tax (expense) benefit related to items of
other comprehensive income 5,884 (6,553)
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Other comprehensive income (loss), net of tax (10,928) 12,168
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COMPREHENSIVE INCOME $ 47,662 $ 73,698
============= =============
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
September 30,
-----------------------------------
1998 1997
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NET EARNINGS $ 12,997 $ 22,051
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (565) 29,084
Reclassification adjustment for gains included in net earnings 1,911 (2,697)
------------- -------------
Net unrealized gains on investment securities 1,346 26,387
Adjustments for:
Policyholder liabilities (7,607) (10,654)
Deferred policy acquisition costs (1,701) (3,909)
Income tax (expense) benefit related to items of
other comprehensive income 2,787 (4,139)
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Other comprehensive income (loss), net of tax (5,175) 7,685
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COMPREHENSIVE INCOME $ 7,822 $ 29,736
============= =============
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
----------- ------------ ------------ ------------- -------------
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
----------- ------------ ------------ ------------- -------------
BALANCE, DECEMBER 31, 1997 2,000 347,324 80,735 17,995 448,054
Net earnings 58,590 58,590
Other comprehensive loss, net of tax (10,928) (10,928)
----------- ------------ ------------ -------------- -------------
BALANCE, SEPTEMBER 30, 1998 $ 2,000 $ 347,324 $ 139,325 $ 7,067 $ 495,716
=========== ============ ============ ============== =============
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,
-----------------------------------
1998 1997
------------- -------------
Cash Flows From Operating Activities:
Net earnings $ 58,590 $ 61,530
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 54,046 53,035
Capitalization of policy acquisition costs (59,342) (51,385)
Amortization (accretion) of investments (5,576) (2,861)
Net realized investment gains (10,694) (9,602)
Interest credited to policyholders' account balances 148,885 156,256
Benefit for deferred Federal income tax (1,713) (12,773)
Changes in operating assets and liabilities:
Accrued investment income (1,806) (1,982)
Affiliated receivables / payables 2,518 (2,516)
Claims and claims settlement expenses 14,627 14,281
Federal income taxes - current (16,727) (6,278)
Other policyholder funds (7,672) 385
Liability for guaranty fund assessments (1,017) (2,725)
Policy loans on insurance contracts (9,021) (9,138)
Trading account securities (240) (14,843)
Other, net 24,975 (8,816)
------------- -------------
Net cash and cash equivalents provided by operating activities 189,833 162,568
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Cash Flows From Investing Activities:
Sales of available-for-sale securities 692,002 450,512
Maturities of available-for-sale securities 358,204 476,909
Purchases of available-for-sale securities (796,682) (742,919)
Mortgage loans principal payments received - 40,019
Sales of real estate held-for-sale 10,862 -
Recapture of investment in separate accounts - 11,026
Investment in separate accounts (12,000) (21)
------------- -------------
Net cash and cash equivalents provided by investing activities 252,386 235,526
------------- -------------
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,
-----------------------------------
1998 1997
------------- -------------
Cash Flows From Financing Activities:
Policyholders' account balances:
Deposits $ 812,094 $ 826,953
Withdrawals (including transfers to/from separate accounts) (1,257,651) (1,185,694)
------------- -------------
Net cash and cash equivalents used by financing activities (445,557) (358,741)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,338) 39,353
CASH AND CASH EQUIVALENTS:
Beginning of year 86,388 94,991
------------- -------------
End of period $ 83,050 $ 134,344
============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 44,422 $ 49,235
Intercompany interest 705 695
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, 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 September 30, 1998 and December 31, 1997,
was $279 million and $245 million, respectively. For the nine
month periods ended September 30, 1998 and 1997, statutory net
income was $35 million and $68 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 net unrealized investment gain recorded
in accumulated other comprehensive income at September 30, 1998
and December 31, 1997:
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
Assets:
Fixed maturity securities $ 73,616 $ 81,046
Equity securities (2,103) 1,013
Deferred policy acquisition costs (7,561) (5,452)
Separate Accounts assets (1,473) -
---------- ----------
62,479 76,607
Liabilities:
Policyholders' account balances 51,607 48,923
Federal income taxes - deferred 3,805 9,689
---------- ----------
55,412 58,612
---------- ----------
Stockholder's equity:
Accumlated other comprehensive income $ 7,067 $ 17,995
========== ==========
The net unrealized holding gains (losses) on trading account
securities included in net realized investment gains was ($947)
and $757 for the nine month periods ended September 30, 1998 and
1997, respectively.
NOTE 4. ACCOUNTING PRONOUNCEMENTS:
During 1997, the Company early adopted SFAS No. 130, "Reporting
Comprehensive Income". This pronouncement establishes standards
for reporting comprehensive income and its components within the
financial statements. Comprehensive income is defined as all non-
owner changes in equity during a period and is reported in the
Statements of Comprehensive Income included herein for the three
month and nine month periods ended September 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". This pronouncement requires a Company
to present disaggregated information based on the internal
segments used in managing its business. This pronouncement is
effective for annual periods beginning after December 31, 1997,
and for interim periods beginning in the following year.
Adoption will not impact the Company's financial position or
results of operations, but it will may affect the presentation of
the Company's disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities". This
pronouncement will be effective for annual periods beginning after
June 15, 1999. Adoption of this pronouncement is not expected to
have a material impact on the Company's financial position or results
of operations.
NOTE 5. RECLASSIFICATIONS:
To facilitate comparison with the current year, certain amounts
in the prior year have been reclassified.
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
addresses changes in revenues and expenses for the three month
and nine month periods ended September 30, 1998 and 1997. This
discussion 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 Narrative Analysis of the 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.
During the third quarter 1998, the global economic crisis
intensified as the financial problems in Asia spread to the
emerging market economies of Eastern Europe and Latin America.
Domestically, investor concerns regarding the impact of expanding
global economic instability resulted in the emergence of
two important economic factors during the quarter. First, the
continued flight to quality to the U.S Treasury market widened
credit spreads to historically unprecedented levels, relative to
the current yields on U.S. Treasury securities. During the third
quarter, the interest rate on the 30 year U.S Treasury Bond
dropped 66 basis points to yield 4.97%. During the same time
period, rates on medium term Treasury securities, defined as 1 to
10 year terms, decreased on average 112 basis points. In the
corporate bond market, the combined effects of record levels of
debt issuance, investor concern regarding corporate earnings and
the disappearance of liquidity in certain markets increased that
market's overall credit risk. The second factor was the sharp
decline in the equity markets. During the third quarter, the
Standard & Poor's 500 Composite Stock Price Index decreased 10.3%
eliminating most of the gains of the first six months of 1998.
Life insurance and annuity deposits decreased $12 million (or 4%)
to $323 million and increased $12 million (or 1%) to $914 million
in the third quarter and nine month periods ended September 30,
1998, respectively, as compared to the same periods in 1997.
Excluding internal tax-free exchanges the current three month and
nine month periods both decreased $15 million. The following
discussion includes internal tax-free exchanges.
Variable annuity deposits remained generally flat compared to
prior year periods. Total deposits decreased $6 million (or 2%)
to $287 million and increased $18 million (or 2%) to $796 million
in the third quarter and nine month periods ended September 30, 1998,
respectively, as compared to the same periods in 1997. Current
quarter sales, although modestly lower than the third quarter
1997, represented the highest quarterly sales level during 1998
despite increased volatility in the equity markets. Management
attributes this increase to the commencement of its variable
annuity marketing focus program to its sales divisions. This
focus program is designed to promote awareness of the Company's
new product enhancements to its variable annuity product. At
quarter end, one of the three sales divisions completed the focus
program, while one began in September. The last sales division
is scheduled to commence during the fourth quarter.
Variable life insurance premiums increased $2 million (or 6%) to
$34 million and increased $17 million (or 19%) to $106 million in
the third quarter and nine month periods ended September 30,
1998, respectively, as compared to the same periods in 1997. This
increase is due to the combined effects of implementing a
marketing focus program utilizing the Company's Estate Planning
and Business Insurance Specialists and the generally favorable
equity markets during the first six months of 1998.
During 1997, the Company changed its distribution structure.
Previously, specialists supporting the sales force were
responsible for both life and annuity products. Beginning in
1997 and culminating during the second quarter 1998, the Company
created two specialist positions within each district where it
was geographically feasible. One specialized in estate planning
life insurance products while the other specialized in annuity
and single premium life products. This increase in the number of
product specialists has resulted in a greater and more focused
coverage of the Company's sales force and has, in management's
view, contributed to the continued strength in variable product
sales. Additionally, the Company is beginning to realize the
benefits from its sales force training programs implemented over
the past two years. Future variable product sales, however,
could be negatively impacted due to continued volatility in the
equity markets.
Modified guaranteed annuity sales decreased $7 million (or 82%)
to $2 million and $20 million (or 69%) to $9 million in the third
quarter and nine month periods ended September 30, 1998,
respectively, as compared to the same periods in 1997. Sales
volume of this product is reflective of the current interest rate
environment and will generally increase or decrease in a direct
relationship with changes in interest rates. During the current
three month and nine month periods, interest rates on medium term
U.S Treasury securities decreased approximately 92 basis points
and 80 basis points, respectively, as compared to the comparable
1997 periods.
On June 5, 1998, the Company introduced five new investment
options for its variable annuity product designed to complement
the investment objectives of the twenty-one pre-existing fund
options. Three of the new investment options are managed by
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliated
investment advisor, one is managed by Hotchkis & Wiley, an
affiliated investment advisor, and one is managed by an
unaffiliated investment advisor. The Company contributed $12
million in seed money among two of the new MLAM funds. Also,
during 1998, the Company closed two pre-existing funds to new
allocations.
Policy and contract surrenders increased $13 million (or 7%) to
$204 million and $125 million (or 23%) to $679 million for the
three month and nine month periods ended September 30, 1998,
respectively, compared to the equivalent periods in 1997. During
the current nine month period, variable annuity surrenders
increased $76 million (or 53%) to $221 million primarily due to
growth of that block of business. During the same period,
modified guaranteed annuity surrenders increased $91 million (or
73%) to $215 million due to the generally lower interest rate
environment during the first nine months of 1998 as compared to
the same period in 1997. During periods of lower interest rates,
modified guaranteed annuity contractholders are more inclined to
surrender their contracts for two reasons. First,
contractholders can lock-in gains resulting from the market value
adjustment, which is applied to withdrawals made prior to the
expiration of the stated guarantee period. The market value
adjustment has an inverse relationship to changes in interest
rates. Second, interest crediting rates offered upon renewal
are generally lower than the rates that had been credited prior
to the renewal date.
During the first nine months of 1998, separate account assets
increased $225 million (or 2.5%) to $9.4 billion as strong
investment performance during the first half of 1998 reversed
during the volatile third quarter. The following table compares
the movement in separate account assets during the first three
quarters of 1998:
1st 2nd 3rd Year-
(In Millions) Qtr Qtr Qtr to-date
- ------------- ----- ----- -------- --------
Variable product investment performance $775 $176 ($1,030) ($79)
Variable product net cash inflow 67 108 118 293
Seed money investment - 12 (1) 11
----- ----- -------- --------
Total increase (decrease) in separate
account assets $842 $296 ($913) $225
Percentage increase (decrease) 9.2% 3.0% (8.9%) 2.5%
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 30,
1998, the Company's assets included $2.2 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, 1998, approximately $191 million (or 7.1%) 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.
The Company has exposure to selected emerging markets that
include securities issued by sovereigns or corporations of Asia
(excluding Japan), Eastern Europe, Latin America and Mexico. At
September 30, 1998, the Company held $138 million in emerging
market securities with an approximate unrealized loss of $15
million. Additionally, the Company has modest exposure in
certain fixed maturity securities issued by companies affiliated
with the Japanese banking sector. At September 30, 1998, the
Company held $23 million of these securities with an approximate
unrealized loss of $7 million.
Year 2000 Compliance
As the millenium approaches, the Company has undertaken initiatives
to address the Year 2000 problem (the "Y2K problem") in conjunction
with the Merrill Lynch & Co. Year 2000 Compliance Initiative. The
Y2K problem is the result of a widespread programming technique
that causes computer systems to identify a date based on the
last two numbers of a year, with the assumption that the first
two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the Y2K problem
may cause information technology systems (e.g., computer databases)
and non-information technology systems (e.g., elevators) to
produce incorrect data or cease operating completely.
The Company believes that it has identified and evaluated its
internal Y2K problem and is devoting sufficient resources to
renovating technology systems that are not already Year 2000
compliant. The Company expects the renovation phase (as
discussed below) of its Year 2000 efforts to be substantially
completed by December 31, 1998, thereby allowing it to focus on
additional testing efforts and integration of the Year 2000
programs during 1999. In order to focus attention on the Y2K
problem, management has deferred certain other technology
projects; however this deferral is not expected to have a material
adverse effect on the Company's business, results of operations,
or financial condition.
The failure of the Company's technology systems relating to a
Y2K problem would likely have a material adverse effect on the
company's business, results of operations, or financial condition.
This effect could include disruption of normal business transactions,
such as the processing of contractholder transactions, the
valuation of contractholder liabilities and the recording and
valuation of assets. The Y2K problem could also increase the
Company's exposure to risk and its need for liquidity.
In 1995, Merrill Lynch & Co. established the Year 2000 Compliance
Initiative, which is an enterprisewide effort to address the risks
associated with the Y2K problem, both internal and external. The
Year 2000 Compliance Initiative's efforts to address the risks
associated with the Y2K problem have been organized into six segments
or phases: planning, pre-renovation, renovation, production testing,
certification, and integration testing.
The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and
determining the level of expert knowledge available within Merrill
Lynch & Co. regarding particular systems or application. The
pre-renovation phase involved developing a detailed enterprisewide
inventory of applications and systems, identifying the scope of necessary
renovations to each application or system, and establishing a conversion
schedule. During the renovation phase, source codes are actually
converted, date fields are expanded or windowed (windowing is used on
an exception basis only), test data is prepared, and each system or
application is tested using a variety of Year 2000 scenarios. The
production testing phase validates that a renovated system is funtionally
the same as the existing production version, that renovation has not
introduced defects, and that expanded or windowed date fields continue
to handle current dates properly. The certification phase validates
that a system can run successfully in a Year 2000 environment. Finally,
the integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal
and external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All
plans for both mission-critical and non-mission-critical systems are
tracked and monitored. The work associated with the Year 2000 Compliance
Initiative has been accomplished by Merrill Lynch & Co. employees, with
the assistance of consultants where necessary.
As part of the production testing and certification phases, the Company
has performed and will continue to perform, both internal and external
Year 2000 testing intended to address the risks from the Y2K problem.
The Company is in the process of developing its contingency plans, with
the particular choice of contingency action dependent on the severity
of the problem being addressed, the availability of alternative products
and the level of importance of the business activity supported by the
problematic system. As part of the Year 2000 Compliance Initiative,
Merrill Lynch & Co. has undertaken a business readiness/risk management
effort in which each line of business will identify scenarios in order
to develop plans to reduce risks associated with a Y2K problem.
The Company continues to survey and communicate with parties with whom
it has important relationships that may be associated with information
technology Y2K problems, as well as parties that may be associated
with non-information technology Y2K problems. Management is unable,
at this point, to ascertain whether all such third parties will
successfully address the Y2K problem. The Company will continue to
monitor third parties' Year 2000 readiness to determine whether
additional or alternative measures are necessary. Such measures may
include the selection of alternate third parties or other efforts
designed to mitigate some of the effects of a third party's noncompliance.
However, there can be no assurance that all Y2K problems will be identified
and remediated on a timely basis or that all remediation efforts will be
successfull. The failure of third parties to resolve their own processing
issues in a timely manner could have a material adverse effect on the
Company's business, results of operations, or financial condition.
The primary costs associated with the Year 2000 Compliance Initiative
are incurred by Merrill Lynch & Co. and are not directly allocated
to the various business units. These costs include planning and
oversight of the Year 2000 Compliance Initiative, as well as certain
Information Systems personnel costs involved in implementation and
testing. All other costs incurred by the Company, primarily non-
Information Systems personnel costs, system upgrades and replacement
of desk-top software, have not been material to the Company's financial
condition or results of operations and are not anticipated to be
material in future periods.
Results of Operations
For the nine month periods ended September 30, 1998 and 1997, the
Company reported net earnings of $59 million and $62 million,
respectively. For the three month periods ended September 30,
1998 and 1997, the Company reported net earnings of $13 million
and $22 million respectively.
Interest spread on fixed rate contracts decreased $8.3 million
and $21.5 million for the three month and nine month periods
ended September 30, 1998, respectively, compared to the same
periods in 1997. During the first nine months of 1997, the
Company determined that certain policyholder reserves exceeded
amounts required resulting in reductions to those policyholders'
account balances. Excluding these reductions, interest spread
decreased $5.0 million and $12.7 million for the three month and
nine month periods ended September 30, 1998, respectively,
compared to the same periods in 1997. The reduction in interest
spread is primarily a result of the Company's $135 million
dividend payment to its stockholder during the fourth quarter
1997 and the declining number of fixed rate contracts in-force.
Net realized investment gains (losses) decreased $5.3 million and
increased $1.1 million for the three month and nine month periods
ended September 30, 1998, respectively, compared to the
equivalent periods in 1997. During the third quarter 1998, the
Company incurred $2.4 million in credit-related losses from the
sale of emerging market securities as well as $1.8 million in
losses in its trading account portfolio. This portfolio invests
in convertible securities, and the current quarter losses are
primarily due to the decline in the equity market during that
same period. The current nine month period gain is primarily
due to a $7 million gain on the sale of one commercial real estate
property during the first quarter 1998.
Policy charge revenue increased $5.5 million (or 12%) and $22.8
million (or 18%) during the third quarter and nine month periods
ended September 30, 1998, respectively, compared to the same
periods in 1997. The increase in policy charge revenue is
primarily attributable to the increase in policyholders' variable
account balances. Average variable account balances increased $1
billion (or 11%) and $1.6 billion (or 19%) during the current
three month and nine month periods, respectively, as compared to
the same periods in 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 that are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense increased $0.4 million (or 35%)
and $1.6 million (or 60%) during the current three month and nine
month periods consistent with an increase in surrender activity
resulting from the lower interest rate environment in 1998.
Policy benefits increased 12% during the current three and nine
month periods due to normal reserve increases for the mortality
component of the Company's variable annuity product reflecting
the growth in contracts inforce.
Reinsurance premium ceded increased $0.8 million (or 17%) and
$1.8 million (or 13%) for the three month and nine month periods
ended September 30, 1998, respectively, compared to the same
periods in 1997. This increase is attributable to the combined
effect of the increasing age of policyholders and increased
insurance in-force.
Amortization of deferred policy acquisition costs increased $2.4
million (or 14%) and $1.0 million (or 2%) for the three month and
nine month periods ended September 30, 1998, respectively,
compared to the equivalent periods in 1997. During the first
quarter 1997, amortization increased $6.5 million due to revised
future gross profit assumptions associated with management's
decision to pay trail commissions on certain in-force life
insurance contracts. Excluding this adjustment, amortization for
the current nine month period increased $7.5 million (or 16%)
over 1997. The respective three month and nine month period
increases over 1997 are primarily attributable to the increase in
variable contracts inforce.
Insurance expenses and taxes increased $1.4 million (or 12%) and
$2.6 million (or 7%) during the third quarter and nine month
periods ended September 30, 1998, respectively, compared to the
same periods in 1997. The current quarter increase is primarily
due to a $1 million increase in certain employee compensation
related expense allocations from Merrill Lynch & Co. The current
year increase is primarily due to an increase in non-capitalizable
asset-based commissions paid on in-force life and annuity contracts.
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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.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 12, 1998
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EXHIBIT INDEX
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Exhibit
No. Description
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27 Financial Data Schedule