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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 JUNE 30, 2004
COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863; 333-34192
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.)
1300 Merrill Lynch Drive, 2nd Floor
Pennington, NJ 08534
(Address of Principal Executive Offices)
(609) 274-6900
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 250,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I Financial Information
Item 1. Financial Statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in thousands) (Unaudited)
June 30, December 31,
2004 2003 (1)
----------- ------------
ASSETS
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2004 - $1,948,257; 2003 - $2,108,310) $ 1,956,164 $ 2,157,127
Equity securities, at estimated fair value
(cost: 2004 - $72,513; 2003 - $78,816) 74,740 82,469
Trading account securities, at estimated fair value 27,310 26,186
Limited partnerships, at cost 13,970 11,880
Policy loans on insurance contracts 1,038,862 1,086,537
----------- -----------
Total Investments 3,111,046 3,364,199
CASH AND CASH EQUIVALENTS 199,086 75,429
ACCRUED INVESTMENT INCOME 61,422 63,565
DEFERRED POLICY ACQUISITION COSTS 360,894 364,414
REINSURANCE RECEIVABLES 5,917 6,004
RECEIVABLES FROM SECURITIES SOLD 1,557 1,349
OTHER ASSETS 41,839 36,245
SEPARATE ACCOUNTS ASSETS 10,767,451 10,736,343
----------- -----------
TOTAL ASSETS $14,549,212 $14,647,548
=========== ===========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
(Continued)
1
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS (Continued)
(Dollars in thousands, except common stock par value and shares) (Unaudited)
June 30, December 31,
2004 2003 (1)
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 2,864,986 $ 2,887,937
Claims and claims settlement expenses 37,263 101,718
------------ ------------
Total policyholder liabilities and accruals 2,902,249 2,989,655
OTHER POLICYHOLDER FUNDS 12,436 12,915
LIABILITY FOR GUARANTY FUND ASSESSMENTS 7,014 7,139
FEDERAL INCOME TAXES - DEFERRED 7,723 31,965
FEDERAL INCOME TAXES - CURRENT 7,541 20,146
PAYABLES FOR SECURITIES PURCHASED 1,175 683
AFFILIATED PAYABLES - NET 62 2,365
UNEARNED POLICY CHARGE REVENUE 111,419 107,761
OTHER LIABILITIES 2,942 3,480
SEPARATE ACCOUNTS LIABILITIES 10,767,451 10,730,601
------------ ------------
Total Liabilities 13,820,012 13,906,710
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock ($10 par value; authorized: 1,000,000 shares; issued and
outstanding: 250,000 shares) 2,500 2,500
Additional paid-in capital 397,324 397,324
Retained earnings 334,277 329,549
Accumulated other comprehensive income (loss) (4,901) 11,465
------------ ------------
Total Stockholder's Equity 729,200 740,838
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,549,212 $ 14,647,548
============ ============
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
2
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
June 30,
---------------------
2004 2003 (1)
--------- ---------
REVENUES:
Policy charge revenue $ 61,992 $ 52,616
Net investment income 39,239 45,362
Net realized investment gains 1,545 3,553
--------- ---------
Total Revenues 102,776 101,531
--------- ---------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 30,506 32,582
Market value adjustment expense 783 1,034
Policy benefits (net of reinsurance recoveries: 2004 - $2,974;
2003 - $5,196) 11,227 19,278
Reinsurance premium ceded 7,264 5,687
Amortization of deferred policy acquisition costs 14,179 11,540
Insurance expenses and taxes 14,083 12,924
--------- ---------
Total Benefits and Expenses 78,042 83,045
--------- ---------
Earnings Before Federal Income Tax Provision 24,734 18,486
--------- ---------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 4,541 28,918
Deferred 2,979 (22,448)
--------- ---------
Total Federal Income Tax Provision 7,520 6,470
--------- ---------
NET EARNINGS $ 17,214 $ 12,016
========= =========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
3
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
----------------------
2004 2003 (1)
--------- ---------
REVENUES:
Policy charge revenue $ 115,946 $ 104,433
Net investment income 79,146 89,817
Net realized investment gains 3,683 5,591
--------- ---------
Total Revenues 198,775 199,841
--------- ---------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 60,642 65,779
Market value adjustment expense 1,810 2,531
Policy benefits (net of reinsurance recoveries: 2004 - $10,084;
2003 - $10,549) 27,333 38,883
Reinsurance premium ceded 13,459 11,322
Amortization of deferred policy acquisition costs 20,535 24,037
Insurance expenses and taxes 27,317 23,909
--------- ---------
Total Benefits and Expenses 151,096 166,461
--------- ---------
Earnings Before Federal Income Tax Provision 47,679 33,380
--------- ---------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 16,226 37,049
Deferred (675) (25,366)
--------- ---------
Total Federal Income Tax Provision 15,551 11,683
--------- ---------
EARNINGS BEFORE CHANGE IN ACCOUNTING PRINCIPLE 32,128 21,697
--------- ---------
Change in Accounting Principle, Net of Tax (27,400) -
--------- ---------
NET EARNINGS $ 4,728 $ 21,697
========= =========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
4
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
June 30,
--------------------
2004 2003 (1)
-------- --------
NET EARNINGS $ 17,214 $ 12,016
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (71,005) 57,935
Reclassification adjustment for gains included in net earnings (2,149) (1,095)
-------- --------
Net unrealized gains (losses) on investment securities (73,154) 56,840
Adjustments for:
Policyholder liabilities 16,346 (18,527)
Deferred policy acquisition costs 801 (4,471)
Deferred federal income taxes 19,603 (11,845)
-------- --------
Total other comprehensive income (loss), net of taxes (36,404) 21,997
-------- --------
COMPREHENSIVE INCOME (LOSS) $(19,190) $ 34,013
======== ========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
5
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
--------------------
2004 2003 (1)
-------- --------
NET EARNINGS $ 4,728 $ 21,697
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (38,587) 75,153
Reclassification adjustment for gains included in net earnings (3,408) (3,236)
-------- --------
Net unrealized gains (losses) on investment securities (41,995) 71,917
Adjustments for:
Policyholder liabilities 16,128 (9,598)
Deferred policy acquisition costs 688 (6,682)
Deferred federal income taxes 8,813 (19,473)
-------- --------
Total other comprehensive income (loss), net of taxes (16,366) 36,164
-------- --------
COMPREHENSIVE INCOME (LOSS) $(11,638) $ 57,861
======== ========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
6
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands) (Unaudited)
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings (1) income (loss) equity (1)
--------- ---------- ------------ ------------- -------------
BALANCE, JANUARY 1, 2003 $ 2,500 $ 347,324 $ 290,092 $ (23,010) $ 616,906
Capital contribution from parent 50,000 50,000
Net earnings 39,457 39,457
Other comprehensive income, net of tax 34,475 34,475
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2003 2,500 397,324 329,549 11,465 740,838
Net earnings 4,728 4,728
Other comprehensive loss, net of tax (16,366) (16,366)
--------- --------- --------- --------- ---------
BALANCE, JUNE 30, 2004 $ 2,500 $ 397,324 $ 334,277 $ (4,901) $ 729,200
========= ========= ========= ========= =========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
7
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
----------------------
2004 2003 (1)
--------- ---------
Cash Flows From Operating Activities:
Net earnings (loss) $ 4,728 $ 21,697
Noncash items included in earnings:
Change in accounting principle, net of tax 27,400 -
Amortization of deferred policy acquisition costs 20,535 24,037
Capitalization of policy acquisition costs (17,177) (20,946)
Amortization of investments 5,595 3,998
Interest credited to policyholders' account balances 60,642 65,779
Change in variable contract reserves (859) -
Benefit for deferred Federal income tax (675) (25,366)
(Increase) decrease in operating assets:
Accrued investment income 2,143 (4,529)
Federal income taxes - current - 40,910
Reinsurance receivables 87 878
Affiliated receivables - net - 67
Other (5,594) (1,061)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 4,766 1,143
Other policyholder funds (479) 5,115
Liability for guaranty fund assessments (125) (410)
Federal income taxes - current (12,605) 30,906
Affiliated payables - net (2,303) 5,715
Unearned policy charge revenue 3,658 1,727
Other (538) 170
Other operating activities:
Net realized investment gains (3,683) (5,591)
--------- ---------
Net cash and cash equivalents provided by operating activities 85,516 144,239
--------- ---------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 110,755 171,038
Maturities of available-for-sale securities 148,812 346,104
Purchases of available-for-sale securities (89,032) (716,413)
Trading account securities (848) (544)
Sales of limited partnerships 410 -
Purchases of limited partnerships (2,500) -
Policy loans on insurance contracts 47,675 39,118
Recapture of investments in separate accounts - 1,204
Investment in separate accounts - (301)
--------- ---------
Net cash and cash equivalents provided by (used in) investing activities $ 215,272 $(159,794)
--------- ---------
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
(Continued)
8
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
----------------------
2004 2003 (1)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Capital contribution received from parent $ - $ 50,000
Policyholder deposits (excludes internal policy replacement deposits) 395,585 448,633
Policyholder withdrawals (including transfers from separate accounts) (572,716) (620,657)
--------- ---------
Net cash and cash equivalents used in financing activities (177,131) (122,024)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 123,657 (137,579)
CASH AND CASH EQUIVALENTS:
Beginning of year 75,429 312,217
--------- ---------
End of period $ 199,086 $ 174,638
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid to (received from) affiliates for:
Federal income taxes $ 28,831 $ (34,767)
Intercompany interest 67 (23)
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
9
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands)
NOTE 1. BASIS OF PRESENTATION
The Merrill Lynch Life Insurance Company (the "Company") is a wholly owned
subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG"). The Company is an
indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch &
Co."). The Company sells non-participating annuity products, including variable
annuities, modified guaranteed annuities, and immediate annuities. The Company
is domiciled in the State of Arkansas.
The interim Financial Statements for the three and six month periods are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair statement of the financial
statements have been included. These unaudited Financial Statements should be
read in conjunction with the audited financial statements included in the 2003
Annual Report on Form 10-K. The December 31, 2003 unaudited Balance Sheet was
derived from the audited 2003 financial statements and was adjusted for the
amounts included in Note 3. The nature of the Company's business is such that
the results of any interim period are not necessarily indicative of results for
a full year. In presenting the Financial Statements, management makes estimates
that affect the reported amounts and disclosures in the financial statements.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on the Financial Statements, and it is possible that such
changes could occur in the near term.
Certain reclassifications and format changes have been made to prior period
financial statements, where appropriate, to conform to the current period
presentation.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
On January 1, 2004, the Company adopted the provisions of Statement of Position
("SOP") 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts. SOP 03-1
requires the establishment of a liability for contracts that contain death or
other insurance benefits using a reserve methodology that is different from the
methodology that the Company previously employed. As a result, the Company
recorded a $41,304 increase in policyholder liabilities and a $850 decrease in
deferred policy acquisition costs resulting in a charge to earnings of $27,400,
net of a federal income tax benefit of $14,754, which was reported as a
cumulative effect of a change in accounting principle. For the three and six
months ended June 30, 2004, the changes in policyholder liabilities related to
SOP 03-1 did not have a material impact on the Company's Statements of Earnings.
SOP 03-1 also addresses the financial statement treatment of the Company's
investment in the Separate Accounts (i.e. seed money investments). SOP 03-1
requires seed money investments to be reported as a General Account asset rather
than as a component of Separate Accounts assets. Accordingly, the Company's seed
money investment at June 30, 2004 is reported as an available-for-sale equity
security. In addition, SOP 03-1 requires new disclosures regarding the Company's
Separate Accounts and insurance contracts containing guarantee provisions. See
Note 5 to the Financial Statements for these disclosures.
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". EITF 03-1 requires that when the fair value
of an investment security is less than its carrying value, an impairment exists
for which the determination must be made as to whether the impairment is
other-than-temporary. The EITF 03-1 impairment model applies to all investment
securities accounted for under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and to investment securities accounted for under the cost method to
the extent an impairment indicator exists. Under the guidance, the determination
of whether an impairment is other-than-temporary and therefore would result in a
recognized loss depends on market conditions and management's intent and ability
to hold the securities with unrealized losses. The Company is required to adopt
the impairment evaluation and recognition guidance in EITF 03-1 in the third
quarter 2004 and is currently assessing the impact on the financial statements.
10
NOTE 3. OTHER EVENTS
On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No.148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock Based
Compensation. Effective for the first quarter 2004, Merrill Lynch & Co. adopted
the fair value method of accounting for stock-based compensation under SFAS 123,
using the retroactive restatement method described in SFAS 148. Under the fair
value recognition provisions of SFAS 123, stock-based compensation cost is
measured at the grant date based on the value of the award and is recognized as
expense over the vesting period. The adoption of the fair value method of
accounting by Merrill Lynch & Co. resulted in additional allocated compensation
expense to the Company. The Company's December 31, 2003 Balance Sheet has been
restated to reflect such expenses. Accordingly, the December 31, 2003 Balance
Sheet reflects a $1,036 decrease in current federal income taxes payable, a
$3,061 increase in net affiliated payables, and a $2,025 decrease in retained
earnings. For the three and six months ended June 30, 2004 and 2003, the
allocation of additional compensation expense did not have a material impact on
the Company's Statements of Earnings.
NOTE 4. INVESTMENTS
The Company's investments in fixed maturity and equity securities are classified
as either available-for-sale or trading and are carried at estimated fair value.
Unrealized gains and losses on available-for-sale securities are included in
stockholder's equity as a component of accumulated other comprehensive income
(loss), net of tax. Unrealized gains and losses on trading account securities
are included in net realized investment gains (losses). If management determines
that a decline in the value of a security is other-than-temporary, the carrying
value is adjusted to estimated fair value and the decline in value is recorded
as a net realized investment loss.
The Company has recorded certain adjustments to deferred policy acquisition
costs and policyholders' account balances in connection with unrealized holding
gains or losses on investments classified as available-for-sale. The Company
adjusts those assets and liabilities as if the unrealized holdings gains or
losses had actually been realized, with corresponding credits or charges
reported in accumulated other comprehensive income (loss), net of taxes. The
components of net unrealized gains (losses) included in accumulated other
comprehensive income (loss) were as follows:
June 30, December 31,
2004 2003
-------- ------------
Assets:
Fixed maturity securities $ 7,907 $ 48,817
Equity securities 2,438 3,653
Deferred policy acquisition costs 948 260
Separate Accounts assets (211) (341)
-------- --------
11,082 52,389
-------- --------
Liabilities:
Policyholders' account balances 18,622 34,750
Federal income taxes - deferred (2,639) 6,174
-------- --------
15,983 40,924
-------- --------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ (4,901) $ 11,465
======== ========
11
Net realized investment gains (losses) for the three and six months ended June
30 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Available-for-sale securities $ 2,148 $ 1,247 $ 3,407 $ 3,400
Trading account securities:
Net realized investment gains 793 645 1,494 551
Net unrealized holding gains (losses) (1,396) 1,651 (1,218) 1,641
Investment in Separate Accounts - 10 - (1)
------- ------- ------- -------
Total net realized investment gains $ 1,545 $ 3,553 $ 3,683 $ 5,591
======= ======= ======= =======
NOTE 5. SEPARATE ACCOUNTS
The Company's Separate Accounts consist of variable annuities and variable life
contracts, of which the assets and liabilities are legally segregated and
reported as separate captions in the Balance Sheets. Separate Accounts are
established in conformity with Arkansas State Insurance Law and are generally
not chargeable with liabilities that arise from any other business of the
Company. Separate Accounts assets may be subject to claims of the Company only
to the extent the value of such assets exceeds Separate Accounts liabilities.
The assets of the Separate Accounts are carried at the daily net asset value of
the mutual funds in which they invest.
Absent any contract provision wherein the Company guarantees either a minimum
return or account value upon death or annuitization, the net investment income
and net realized and unrealized gains and losses attributable to Separate
Accounts assets supporting variable annuities and variable life contracts accrue
directly to the contract owner and are not reported as revenue in the Statements
of Earnings. Mortality, policy administration and surrender charges to all
Separate Accounts are included in revenue in the Statements of Earnings.
VARIABLE ANNUITY CONTRACTS CONTAINING GUARANTEES
The Company issues variable annuity contracts in which the Company may
contractually guarantee to the contract owner a guaranteed minimum death benefit
("GMDB"). In addition, some contracts include an optional guaranteed minimum
income benefit ("GMIB"). In general, contracts containing GMDB provisions
provide a death benefit equal to the greater of the GMDB or the contract value.
Depending on the type of contract, the GMDB may equal: i) contract premiums
accumulated at a specified interest rate, ii) the contract value on specified
contract anniversaries, iii) return of contract premiums, or iv) some
combination of these benefits. Each benefit type is reduced for contract
withdrawals. In general, contracts containing GMIB provisions provide the option
to receive a guaranteed future income stream upon annuitization. There is a
waiting period of ten years that must elapse before the GMIB provision can be
exercised. These guarantees include benefits that are payable in the event of
death or annuitization.
At June 30, 2004, the Company had the following variable annuity contracts
containing guarantees:
GMDB GMIB
------------ ---------
Net amount at risk $ 1,271,262 (1) $ - (2)
Average attained age of contract owners 67 58
Weighted average period remaining until expected annuitization n/a 9 yrs
(1) Net amount at risk for GMDB is defined as the current GMDB in excess
of the policyholders' current account balance at the balance sheet
date.
(2) Net amount at risk for GMIB is defined as the present value of the
minimum guaranteed annuity payments available to the policyholder
determined in accordance with the terms of the contract in excess of
the policyholders' current account balance at the balance sheet
date.
12
The Company has recorded liabilities for contracts containing guarantees as a
component of policyholder liabilities in the June 30, 2004 Balance Sheet. Prior
to the adoption of SOP 03-1, the Company's liability was $69,221 and was
included as a component of claims and claims settlement expenses in the December
31, 2003 Balance Sheet. Changes in these guarantee liabilities are included as a
component of policy benefits in the Statements of Earnings. The variable annuity
liability for each type of guarantee at June 30, 2004 was as follows:
GMDB GMIB
--------- ---------
Balance at January 1, 2004 $ 108,702 $ -
Incurred guarantee benefits 14,126 236
Paid guarantee benefits (15,065) -
--------- ---------
Balance at June 30, 2004 $ 107,763 $ 236
========= =========
The GMDB liability is determined by projecting future expected guaranteed
benefits under multiple scenarios for returns on Separate Accounts assets. The
Company uses estimates for mortality and surrender assumptions that are deemed
appropriate for each contract type. These estimates are consistent with the
estimates used in the calculation of deferred policy acquisition costs.
At June 30, 2004, policyholders' account balances by mutual fund class for
contracts containing each type of guarantee were distributed as follows:
Money
Market Bond Equity Balanced Total
---------- ---------- ---------- ---------- ----------
GMDB only $ 328,933 1,519,739 4,563,678 575,187 $6,987,537
GMDB and GMIB (3) $ 46,299 230,038 667,579 122,522 $1,066,438
---------- --------- --------- ------- ----------
Total $ 375,232 1,749,777 5,231,257 697,709 $8,053,975
========== ========= ========= ======= ==========
(3) All variable annuity contracts with GMIB provisions include a GMDB.
VARIABLE LIFE CONTRACTS CONTAINING GUARANTEES
The Company has issued variable life contracts in which the Company
contractually guarantees to the contract owner a GMDB. In general, contracts
containing GMDB provisions provide a death benefit equal to the amount specified
in the contract regardless of the level of the contract's account value.
The Company has recorded liabilities for contracts containing guarantees as a
component of policyholder liabilities in the Balance Sheets. Changes in the
guarantee liability are included as a component of policy benefits in the
Statements of Earnings. The variable life GMDB liability at June 30, 2004 was
$1,902. The variable life GMDB liability is set as a percentage of all
mortality, expense, and insurance charges deducted from contracts that include a
GMDB provision. The percentage is established based on the Company's estimate of
the likelihood of future GMDB claims.
At June 30, 2004, policyholders' account balances by mutual fund class for
contracts containing GMDB provisions were distributed as follows:
Money
Market Bond Equity Balanced Other Total
---------- ------- ------- -------- ----- ------------
GMDB $ 309,263 425,348 984,387 983,730 5,940 $ 2,708,668
13
NOTE 6. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income taxes based on
earnings before Federal income taxes, computed using the Federal statutory tax
rate, versus the reported provision for income taxes for the three and six month
periods ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Provision for income taxes computed at Federal statutory rate $ 8,657 $ 6,470 $ 16,688 $ 11,683
Increase (decrease) in income taxes resulting from:
Dividend received deduction (2,230) - (2,230) -
Foreign tax credit 1,093 - 1,093 -
-------- -------- -------- --------
Federal income tax provision $ 7,520 $ 6,470 $ 15,551 $ 11,683
======== ======== ======== ========
The Federal statutory rate for each of the three and six month periods ended
June 30 was 35%.
NOTE 7. STOCKHOLDER'S EQUITY AND STATUTORY ACCOUNTING PRACTICES
The Company's statutory financial statements are presented on the basis of
accounting practices prescribed or permitted by the Insurance Department of the
State of Arkansas. The State of Arkansas has adopted the National Association of
Insurance Commissioners' statutory accounting practices as the basis of its
statutory accounting practices.
Statutory capital and surplus at June 30, 2004 and December 31, 2003 were
$330,580 and $295,722, respectively. For the six month periods ended June 30,
2004 and 2003, statutory net income was $30,987 and $43,049, respectively.
NOTE 8. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Annuities and Life Insurance. The Company's Annuity
segment consists of variable annuities and interest sensitive annuities. The
Company's Life Insurance segment consists of variable life insurance products
and interest-sensitive life insurance products. The Company currently does not
manufacture, market, or issue life insurance products. The accounting policies
of the business segments are the same as those for the Company's financial
statements included herein. All revenue and expense transactions are recorded at
the product level and accumulated at the business segment level for review by
management. The "Other" category, presented in the following segment financial
information, represents net revenues and net earnings on assets that do not
support annuity or life insurance contract owner liabilities.
The following table summarizes each business segment's contribution to
consolidated net revenues and net earnings for the three and six month periods
ended June 30. The prior period amounts have been restated as discussed in Note
3 to the financial statements.
14
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net Revenues (1):
Annuities $ 42,767 $ 40,405 $ 84,532 $ 77,557
Life Insurance 26,686 25,194 46,560 53,773
Other 2,817 3,350 7,041 2,732
--------- --------- --------- ---------
Total Net Revenues $ 72,270 $ 68,949 $ 138,133 $ 134,062
========= ========= ========= =========
Net Earnings Before Change in Accounting Principle:
Annuities $ 5,175 $ 3,939 $ 13,590 $ 6,768
Life Insurance 10,208 5,904 13,962 13,154
Other 1,831 2,173 4,576 1,775
--------- --------- --------- ---------
Net Earnings Before Change in Accounting Principle 17,214 12,016 32,128 21,697
Change in Accounting Principle, Net of Tax:
Annuities - - (26,215) -
Life Insurance - - (1,185) -
--------- --------- --------- ---------
Change in Accounting Principle, Net of Tax - - (27,400) -
--------- --------- --------- ---------
Total Net Earnings $ 17,214 $ 12,016 $ 4,728 $ 21,697
========= ========= ========= =========
(1) Net revenues include total revenues net of interest credited to
policyholders' account balances.
15
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Certain statements contained in this Report may be considered forward-looking,
including statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. These forward-looking statements are not statements of historical fact
and represent only management's beliefs regarding future events, which are
inherently uncertain. There are a variety of factors, many of which are beyond
the Company's control, which affect its operations, performance, business
strategy, and results and could cause its actual results and experience to
differ materially from the expectations and objectives expressed in any
forward-looking statements. These factors include, but are not limited to, the
factors listed in the Economic Environment section listed below, as well as
actions and initiatives taken by both current and potential competitors, general
economic conditions, the effects of current, pending, and future legislation,
regulation and regulatory actions, and the other risks and uncertainties
detailed in the Company's Financial Statements and Notes to Financial
Statements. Accordingly, readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the dates on which they are
made. The Company does not undertake to update forward-looking statements to
reflect the impact of circumstances or events that arise after the dates the
forward-looking statements are made. The reader should, however, consult any
further disclosures the Company may make in future filings of its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
DISCONTINUANCE OF VARIABLE LIFE INSURANCE
During the first quarter 2003, the Company discontinued manufacturing its single
premium variable life insurance product. As a result, the Company currently does
not manufacture, market, or issue life insurance products. The Company continues
to support all life insurance contracts inforce.
TAX LEGISLATION
During May 2003, Congress passed the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (the "Act"). A key provision in the Act is reduced federal income
tax rates on dividends and capital gains paid to investors on stocks and mutual
funds held individually. Pending future Congressional action, these federal
income tax rate reductions are set to expire after 2008. These enacted tax rate
reductions may impact the relative attractiveness of annuities as compared to
stocks and mutual funds.
BUSINESS OVERVIEW
The Company's gross earnings are principally derived from two sources:
- - the charges imposed on variable annuity and variable life insurance
contracts, and
- - the net earnings from investment of fixed rate life insurance and annuity
contract owner deposits less interest credited to contract owners,
commonly known as interest spread
The costs associated with acquiring contract owner deposits (deferred policy
acquisition costs) are amortized over the period in which the Company
anticipates holding those funds, as noted in the Critical Accounting Policies
section below. Insurance expenses and taxes reported in the Statements of
Earnings are net of amounts deferred. In addition, the Company incurs expenses
associated with the maintenance of inforce contracts.
ECONOMIC ENVIRONMENT
The Company's financial position and/or results of operations are primarily
impacted by the following economic factors: equity market performance,
fluctuations in medium term interest rates, and the corporate credit environment
via credit quality and fluctuations in credit spreads. The following discusses
the impact of each economic factor.
Equity Market Performance
Changes in the U.S. equity market directly affect the values of the underlying
U.S. equity-based mutual funds supporting separate accounts assets and,
accordingly, the values of variable contract owner account balances. Since
asset-based fees collected on inforce variable contracts represent a significant
source of revenue, the Company's financial condition will be impacted by
fluctuations in investment performance of separate accounts assets. Fluctuations
in the U.S. equity market also directly impact the Company's exposure to
guaranteed minimum death benefit ("GMDB") provisions contained in the variable
contracts it manufactures. Negative investment performance generally results in
greater exposure to GMDB provisions, to the extent there is an increase in the
number of variable contracts (and amount per contract) in which the GMDB exceeds
the variable account balance. Prolonged periods of negative investment
performance may result in greater GMDB expense. Effective January 1, 2004, GMDB
expense represents the amount of
16
GMDB expense paid in excess of the variable account balance plus the change in
GMDB liabilities. GMDB expense is recorded as a component of policy benefits.
Prior to the adoption of Statement of Position ("SOP") 03-1 GMDB expense
represented the amount of GMDB expense paid in excess of the variable account
balance and was also recorded as a component of policy benefits.
Additionally, the Company is impacted by the U.S. equity markets through its
trading account investments. The Company's trading account is invested in
convertible debt and convertible preferred stocks. The valuations of these types
of securities are impacted by changes in value of the underlying equity
security. The trading account is carried at market value with changes in market
value included in earnings as a component of net realized investment gains
(losses).
There are several standard indices published on a daily basis that measure
performance of selected components of the U.S. equity market. Examples include
the Dow Jones Industrial Average ("Dow"), NASDAQ Composite Index ("NASDAQ") and
the Standard & Poor's 500 Composite Stock Price Index ("S&P"). The following
table provides the increase for each equity market index at June 30, 2004 as
compared to June 30, 2003.
June 30, 2004
vs.
June 30, 2003
-------------
Dow 16.1%
NASDAQ 26.2%
S&P 17.1%
The investment performance of the underlying U.S. equity-based mutual funds
supporting the Company's variable products do not replicate the returns of any
specific U.S. equity market index. However, investment performance will
generally increase or decrease with corresponding increases or decreases in the
overall U.S. equity market. During the first six months of 2004, positive
investment performance contributed to an increase in asset-based policy charge
revenue of $13.2 million and a decrease in GMDB expense of $15.0 million as
compared to the same period in 2003. Despite positive investment performance,
the Company's trading account incurred a decrease in net realized investment
gains of $1.9 million during the first six months of 2004 as compared to the
same period in 2003.
Medium Term Interest Rates
Changes in interest rates affect the value of investments, primarily fixed
maturity securities and preferred equity securities, as well as interest
sensitive liabilities. Changes in interest rates have an inverse relationship to
the value of investments and interest sensitive liabilities. Also, since the
Company has certain fixed products that contain guaranteed minimum crediting
rates, decreases in interest rates can decrease the amount of interest spread
earned by the Company.
The Company defines medium term interest rates as the average interest rate on
U.S. Treasury securities with terms of 1 to 10 years. During the three and six
month periods ended June 30, 2004, medium term interest rates increased
approximately 99 basis points and 71 basis points, respectively, to yield, on
average, 3.31% during the current six month period. During the three and six
month periods ended June 30, 2003, medium term interest rates decreased
approximately 63 basis points and 73 basis points, respectively, to yield, on
average, 1.80%.
Corporate Credit and Credit Spreads
Changes in the corporate credit environment directly impact the value of the
Company's investments, primarily fixed maturity securities. The Company
primarily invests in investment-grade corporate debt to support its fixed rate
product liabilities.
Credit spreads represent the credit risk premiums required by market
participants for a given credit quality, e.g. the additional yield that a debt
instrument issued by a AA-rated entity must produce over a risk-free alternative
(e.g., U.S. Treasury instruments). Changes in credit spreads have an inverse
relationship to the value of investments.
The Company defines credit spreads according to the Merrill Lynch U.S. Corporate
Bond Index for BBB-A Rated bonds with three to five year maturities. During the
three and six month periods ended June 30, 2004, credit spreads widened
approximately 7 basis points and 3 basis points, respectively, and ended the
current six month period at 88 basis points. During the three and six month
periods ended June 30, 2003, credit spreads contracted approximately 41 basis
points and 89 basis points, respectively, and ended the period at 109 basis
points.
17
The impact of changes in medium term interest rates, corporate credit and credit
spreads on market valuations for the three and six month periods ended June 30
were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
------- ------ ------ ------
Increase (decrease) in medium term interest rates (basis points) 99 -63 71 -73
Widening (contracting) of credit spreads (basis points) 7 -41 3 -89
Increase (decrease) on market valuations: (in millions)
Available-for-sale investment securities $ (73.2) $ 56.8 $(42.0) $ 71.9
Interest-sensitive policyholder liabilities 16.3 (18.5) 16.1 (9.6)
------- ------ ------ ------
Net increase (decrease) on market valuations $ (56.9) $ 38.3 $(25.9) $ 62.3
======= ====== ====== ======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ and could have a
material impact on the Financial Statements, and it is possible that such
changes could occur in the near term.
The Company's critical accounting policies and estimates are discussed below:
Deferred Policy Acquisition Costs for Variable Annuities and Variable Life
Insurance
The costs of acquiring business, principally commissions, certain expenses
related to policy issuance, and certain variable sales expenses that relate to
and vary with the production of new and renewal business, are deferred and
amortized in accordance with Statement of Financial Accounting Standards No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments.
Deferred policy acquisition costs ("DAC") are subject to recoverability testing
at the time of policy issuance and loss recognition testing at the end of each
reporting period. At June 30, 2004, variable annuities and variable life
insurance account for $171.7 million (or 48%) and $176.7 million (or 49%),
respectively, of the Company's DAC asset.
DAC for variable annuities is amortized with interest over the lives of the
policies in relation to the present values of estimated future gross profits
from asset-based fees, contract fees, and surrender charges, less a provision
for GMDB expenses, policy maintenance expenses, and non-capitalized commissions.
DAC for variable life insurance is amortized with interest over the lives of the
policies in relation to the present values of estimated future gross profits
from fees related to contract loans, asset-based fees, and cost of insurance
charges, less claims (net of reinsurance), cost of mortality reinsurance, policy
maintenance expenses, and non-capitalized commissions.
The most significant assumptions involved in the estimation of future gross
profits are future net separate accounts performance, surrender rates, and
mortality rates. The Company generally assumes a level long-term rate of net
separate accounts growth for all future years. The long-term rate may be
adjusted if the Company's long-term expectations change. Additionally, the
Company may modify the rate of net separate accounts growth over the short term
to reflect the Company's near-term expectations of the economy and financial
market performance in which separate accounts assets are invested.
Future gross profit estimates are subject to periodic evaluation by the Company,
with necessary revisions applied against amortization to date. The impact of
revisions to estimates on cumulative amortization is recorded as a charge or
benefit to current operations. Changes in assumptions can have a significant
impact on the amount of DAC reported for variable annuities and variable life
insurance products and their related amortization patterns. In general,
increases in the estimated separate accounts return and decreases in surrender
or mortality assumptions increase the expected future profitability of the
underlying business and may lower the rate of DAC amortization. Conversely,
decreases in the estimated separate accounts return and increases in surrender
or mortality assumptions reduce the expected future profitability of the
underlying business and may increase the rate of DAC amortization.
18
Unearned Revenue Liability for Variable Life Insurance
One of the Company's variable life insurance products includes a premium load
that is higher in early policy years than in later years. The excess of the
initial load over the ultimate load is recognized as income over time in the
same manner that DAC is amortized. In addition, the unearned revenue liability
is subject to the same periodic reassessment as DAC.
Other-Than-Temporary Impairment Losses on Investments
The Company regularly reviews each investment in its fixed maturity and equity
securities portfolio to evaluate the necessity of recording impairment losses
for other-than-temporary ("OTT") declines in the fair value of investments.
Management makes this determination through a series of discussions with the
Company's portfolio managers and credit analysts, as well as information
obtained from external sources (i.e. company announcements, ratings agency
announcements, or news wire services). The factors that give rise to potential
impairments include, but are not limited to, i) certain credit-related events
such as default of principal or interest payments, ii) bankruptcy of issuer, and
iii) certain security restructurings. In the absence of a readily ascertainable
market value, the estimated fair value on these securities represents
management's best estimate and is based on comparable securities and other
assumptions as appropriate. OTT impairment losses result in a permanent
reduction of the cost basis of the underlying investment. There were no OTT
impairments on investments in fixed maturity securities for the three and six
month periods ended June 30, 2004. For the three and six month periods ended
June 30, 2003, OTT impairments on investments in fixed maturity securities were
$1.8 million.
Federal Income Taxes
The Company uses the asset and liability method in providing income taxes on all
transactions that have been recognized in the financial statements. The asset
and liability method requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or realized. The Company
provides for federal income taxes based on amounts the Company believes it will
ultimately owe. Inherent in the provision for federal income taxes are estimates
regarding the realization of certain tax deductions and credits.
Specific estimates include the realization of the dividend-received deduction
("DRD") and the foreign tax credit ("FTC"). A portion of the Company's
investment income related to separate accounts business qualifies for the DRD
and FTC. Information necessary to calculate these tax adjustments is typically
not available until the following year. However, during the current year's
provision, management makes estimates regarding the future deductibility of
these items. These estimates are primarily based on recent historic experience.
During the three and six month periods ended June 30, 2004, the Company reduced
its provision for federal income taxes by $1.1 million due to DRD and FTC
adjustments. There were no DRD and FTC adjustments during the three and six
month periods ended June 30, 2003.
RECENT DEVELOPMENTS
New Accounting Pronouncements
On January 1, 2004, the Company adopted the provisions of SOP 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts. SOP 03-1 requires the establishment of a
liability for contracts that contain death or other insurance benefits using a
reserve methodology that is different from the methodology that the Company
previously employed. As a result, the Company recorded a $41.3 million increase
in policyholder liabilities and a $0.9 million decrease in deferred policy
acquisition costs resulting in a charge to earnings of $27.4 million, net of a
federal income tax benefit of $14.8 million, which was reported as a cumulative
effect of a change in accounting principle. For the three and six months ended
June 30, 2004, changes in policyholder liabilities did not have a material
impact on the Company's Statements of Earnings.
NEW BUSINESS
The Company has strategically placed its marketing emphasis on the sale of
variable annuity products. These products are designed to address the retirement
planning needs of Merrill Lynch & Co.'s clients. The Company issues three types
of variable annuity products. These products are differentiated by the
availability of guaranteed living benefits and the degree of liquidity afforded
to the contract owner. The B-Share variable annuities offer a guaranteed minimum
income benefit ("GMIB") provision and contain a seven year surrender charge
period, L-Share variable annuities do not offer a GMIB provision and contain a
three year surrender charge period, and C-Share variable annuities do not offer
a GMIB provision and have no surrender charge period. Each variable annuity
product provides tax-deferred retirement savings with the opportunity for
diversified investing in a wide selection of underlying mutual fund
19
portfolios. In addition, the Company also issues modified guaranteed annuity
products. The modified guaranteed annuity products also provide tax-deferred
retirement savings through guaranteed fixed interest rates for a period selected
by the contract owner, but impose a market value adjustment for withdrawals
prior to the expiration of the guarantee period.
Annuity and life insurance premiums decreased $67.2 million (or 25%) to $199.6
million and $43.8 million (or 9%) to $417.4 million during the current three and
six month periods ended June 30, 2004, respectively, as compared to the same
period in 2003. Annuity and life insurance premiums by type of product were as
follows:
($ In Millions) % Change
--------------------------- ----------------------------
Second Quarter Six Months Second Quarter Six Months
2004 2004 2004 vs. 2003 2004 vs. 2003
-------------- ---------- -------------- -------------
Variable Annuities:
B-Share $ 173.0 $ 360.0 -22% -%
C-Share 14.5 29.4 -36 -48
L-Share 4.3 8.3 -12 -5
-------- -------- --- ---
191.8 397.7 -23 -7
-------- -------- --- ---
Variable Life Insurance 6.3 15.3 -21 -17
Modified Guaranteed Annuities 1.4 4.0 -62 -34
Other 0.1 0.4 -99 -96
-------- -------- --- ---
Total Direct Premiums $ 199.6 $ 417.4 -25% -9%
======== ======== === ===
During the current three and six month periods, variable annuity premiums
decreased $56.4 million (or 23%) to $191.8 million and $28.7 million (or 7%) to
$397.7 million, respectively, as compared to the same periods in 2003.
Management attributes the decrease in variable annuity premiums during the
current three month period to general economic conditions. As financial markets
improve, variable annuities may be viewed as less attractive as compared to
other investment products available within the Merrill Lynch & Co. retail
network. Management attributes the decrease in variable annuity premiums during
the current six month period to the decreases in C-Share and L-Share variable
annuity premiums. During the current six month periods, C-Share and L-Share
variable annuity premiums decreased $26.9 million (or 48%) and $0.4 million (or
5%), respectively, as compared to the same periods in 2003. As mentioned above,
the C-Share and L-Share variable annuity products do not contain GMIB
provisions. GMIB provisions have increased in popularity due to consumers'
increasing demand for guaranteed living benefits. Management believes that the
volatility in the equity markets over the past three years has been the catalyst
for this demand. The Company's B-Share variable annuity products include GMIB
provisions.
During the current three and six month periods, variable life insurance premiums
decreased $1.7 million (or 21%) to $6.3 million and $3.2 million (or 17%) to
$15.3 million as compared to the same period in 2003. The decreases in variable
life insurance premiums are primarily due to the discontinuation of
manufacturing variable life insurance products during the first quarter 2003.
Variable life insurance premiums displayed above generally represent renewal
premiums on existing life insurance contracts.
SURRENDERS
Policy and contract surrenders increased $59.4 million (or 23%) to $316.2
million and $91.6 million (or 18%) to $613.3 million during the three and six
month periods ended June 30, 2004, respectively, as compared to the same periods
in 2003. During the current three and six month periods, variable annuity
surrenders increased $39.2 million (or 25%) to $195.3 million and $78.2 million
(or 25%) to $396.4 million, respectively, as compared to the same periods in
2003. Management attributes the increases in variable annuity surrenders to the
increasing consumer demand for variable annuity products containing guaranteed
living benefit provisions. As contracts reach the end of their surrender charge
period, contract owners are more willing to surrender variable annuities without
guaranteed living benefit provisions in favor of variable annuities with
guaranteed living benefit provisions. In addition, during the current three and
six month periods, variable life surrenders increased $19.0 million (or 31%) to
$81.1 million and $22.0 million (or 17%) to $149.5 million, respectively, as
compared to the same periods in 2003. The increases in variable life surrenders
primarily represent movement by contract owners to other insurance products
issued by insurance companies unaffiliated with the Company. As previously
noted, the Company no longer manufactures variable life insurance products.
20
FINANCIAL CONDITION
At June 30, 2004, the Company's assets were $14.5 billion, or $98.3 million
lower than the $14.6 billion in assets at December 31, 2003. Assets excluding
separate accounts assets decreased $129.4 million (or 3%) primarily due to a
reduction in the number of fixed rate contracts inforce and a decrease in market
values on investment securities as a result of the rising interest rate
environment during the first six months of 2004. Separate accounts assets, which
represent 74% of total assets, increased $31.1 million to $10.8 billion. Changes
in separate accounts assets for the first two quarters of 2004 were as follows:
1Q04 2Q04 Total
---- ---- -----
(In Millions)
Investment performance - variable products $ 304.8 $ 29.0 $ 333.8
Net cash outflow - variable products (132.3) (170.4) (302.7)
-------- -------- --------
Net increase (decrease) $ 172.5 $ (141.4) $ 31.1
======== ======== ========
At June 30, 2004 and December 31, 2003, approximately $57.0 million (or 3%) and
$97.9 million (or 5%), respectively, of the Company's fixed maturity securities
were considered non-investment grade. The Company defines non-investment grade
securities as unsecured debt obligations that have a rating equivalent to
Standard and Poor's BB+ or lower (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. Current non-investment grade holdings are the result of
ratings downgrades on the Company's portfolio as the Company does not purchase
non-investment grade securities. Also, at June 30, 2004, approximately $142.9
million (or 7%) of the Company's fixed maturity securities were rated BBB-,
which is the lowest investment grade rating given by Standard and Poor's,
compared to $177.0 million (or 8%) of the Company's fixed maturity securities at
December 31, 2003. The Company closely monitors such investments.
During the first six months of 2004, the Company experienced contract owner
withdrawals that exceeded deposits by $388.5 million. The components of contract
owner transactions for all products were as follows:
June 30,
2004
-------------
(In Millions)
Premiums collected $ 417.4
Internal tax-free exchanges (21.8)
---------
Net contract owner deposits 395.6
Contract owner withdrawals 572.7
Net transfers from separate accounts 211.4
---------
Net contract owner withdrawals 784.1
---------
Net contract owner activity $ (388.5)
=========
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of June 30, 2004, the Company's assets included $2.1
billion of cash, short-term investments and investment grade publicly traded
available-for-sale securities that could be liquidated if funds were required.
During June 2003, the Company and Merrill Lynch & Co. executed a "keepwell"
agreement. The agreement obligates Merrill Lynch & Co. to maintain a level of
capital in the Company in excess of minimum regulatory capital requirements.
CONTRACTUAL OBLIGATIONS
During 2000, the Company committed to participate in a limited partnership. As
of June 30, 2004, $6.8 million had been advanced towards the Company's $10.0
million commitment to the limited partnership.
21
RESULTS OF OPERATIONS
For the three month periods ended June 30, 2004 and 2003, the Company recorded
net earnings of $17.2 million and $12.0 million, respectively. For the six month
periods ended June 30, 2004 and 2003, the Company reported net earnings of $4.7
million and $21.7 million, respectively.
Policy charge revenue increased $9.4 million (or 18%) and $11.5 million (or 11%)
during the current three and six month periods ended June 30, 2004,
respectively, as compared to the same periods in 2003. The following table
provides the changes in policy charge revenue by type for each respective
period:
Three Months Six Months
Policy charge revenue 2004 vs. 2003 2004 vs. 2003
--------------------- ------------- -------------
(In Millions)
Asset-based policy charge revenue $ 5.1 (1) $ 13.2 (1)
Non-asset based policy charge revenue 4.3 (2) (1.7) (3)
----- ------
$ 9.4 $ 11.5
===== ======
(1) The increases are primarily due to increases in average variable
account balances. During the current three and six month periods,
average variable account balances increased $1.2 billion (or 13%)
and $1.6 billion (or 18%), respectively, as compared to the same
periods in 2003.
(2) Primarily due to increases in deferred policy load amortization and
variable annuity contract fees during the current three month period
as compared to the same period in 2003.
(3) Primarily due to a decrease in deferred policy load amortization
resulting from increased mortality during the current six month
period as compared to the same period in 2003. The decrease in
deferred policy load amortization is partially offset by an increase
in variable annuity contract fees resulting from an increase in
contracts containing GMIB provisions inforce during the current six
month period as compared to the same period in 2003.
Net earnings derived from interest spread decreased $4.0 million (or 32%) and
$5.5 million (or 23%) during the current three and six month periods ended June
30, 2004, respectively, as compared to the same periods in 2003. The decreases
in interest spread are primarily due to the reduction in fixed rate contracts
inforce, as well as, reductions in invested asset yields resulting from the
increase in credit quality of the portfolio and a higher level of call activity.
Net realized investment gains decreased $2.0 million and $1.9 million during the
current three and six month periods ended June 30, 2004, respectively, as
compared to the same periods in 2003. The following table provides the changes
in net realized investment gains by type for each respective period:
Three Months Six Months
Net Realized Gains 2004 vs. 2003 2004 vs. 2003
- ------------------ ------------- -------------
(In Millions)
Credit related $ 2.1 $ 1.8 (1)
Trading account (3.2) (2.2) (2)
Interest related (0.9) (1.5) (3)
-------- ------
$ (2.0) $ (1.9)
======== ======
(1) Primarily due to other-than-temporary ("OTT") declines in the
carrying value of fixed maturity securities. OTT declines on
investments in fixed maturity securities were $1.8 million during
the second quarter 2003. There were no OTT declines on investments
in fixed maturity securities during the current three and six month
periods ended June 30, 2004.
(2) The trading account is comprised of convertible debt and convertible
preferred equity securities. The valuations of these securities
generally fluctuate in a direct relationship to changes in the
valuations of the underlying common equity.
(3) The decreases are primarily due to decreased invested asset sales
and the increasing interest rate environment during the current
three and six month periods as compared to the same periods in 2003.
22
The market value adjustment expense is attributable to the Company's modified
guaranteed annuity products. 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. During the
current three and six month periods ended June 30, 2004, the market value
adjustment expense decreased $0.3 million (or 24%) and $0.7 million (or 28%),
respectively, as compared to the same periods in 2003. The decreases are
primarily due to decreases in surrender volume as a result of the declining
number of inforce contracts.
Policy benefits decreased $8.1 million (or 42%) and $11.6 million (or 30%)
during the current three and six month periods ended June 30, 2004,
respectively, as compared to the same periods in 2003. The following table
provides the changes in policy benefits by type for each respective period:
Three Months Six Months
Policy benefits 2004 vs. 2003 2004 vs. 2003
--------------- ------------- -------------
(In Millions)
Variable annuity mortality expense $ (7.5) $ (15.0) (1)
Life insurance mortality expense (0.6) 3.4 (2)
------ --------
$ (8.1) $ (11.6)
====== ========
(1) The decreases in variable annuity mortality expense are due to
decreased death benefit expense incurred under GMDB provisions due
to improving equity markets.
(2) Primarily due to period-to-period mortality fluctuations.
Reinsurance premium ceded increased $1.6 million (or 28%) and $2.1 million (or
19%) during the current three and six month periods ended June 30, 2004,
respectively, as compared to the same periods in 2003. Reinsurance premium ceded
related to the Company's annuity products increased $1.8 million and $2.7
million, respectively, during the current three and six month periods as
compared to the same periods in 2003. These increases are attributable to the
Company's effort to reinsure variable annuity products containing GMIB
provisions. Reinsurance premium ceded related to the Company's life insurance
products decreased $0.2 million and $0.6 million, respectively, during the
current three and six month periods as compared to the same periods in 2003.
These decreases are attributable to a decrease in life insurance inforce.
Amortization of deferred policy acquisition costs increased $2.6 million (or
23%) and decreased $3.5 million (or 15%) during the current three and six month
periods ended June 30, 2004, respectively, as compared to the same periods in
2003. The increase during the current three month period is primarily due to the
increase in policy charge revenue. The decrease during the current six month
period is primarily due to fluctuations in interest-related realized gains on
certain fixed annuity portfolios.
Insurance expenses and taxes increased $1.2 million (or 9%) and $3.4 million (or
14%) during the current three and six month periods ended June 30, 2004,
respectively, as compared to the same periods in 2003. The following table
provides the changes in insurance expenses and taxes by type for each respective
period:
Three Months Six Months
Insurance expenses and taxes - net of capitalization 2004 vs. 2003 2004 vs. 2003
- ---------------------------------------------------- ------------- -------------
(In Millions)
Commissions $ 1.7 $ 3.9 (1)
General insurance expenses (0.6) (0.5) (2)
Taxes, licenses, and fees 0.1 -
------ ------
$ 1.2 $ 3.4
====== ======
(1) The increases in commissions are primarily due to increases in
variable annuity asset-based commissions.
(2) The decreases in general insurance expenses are primarily due to
reductions in corporate overhead allocations.
The Company's effective federal income tax rate was 30% and 33% during the
current three and six month periods ended June 30, 2004, respectively, as
compared to 35% during the equivalent periods in 2003. The changes in the
effective federal income tax rate during the respective periods are primarily
due to DRD and FTC adjustments recorded in the second quarter 2004.
As noted in the Recent Developments section above, effective January 1, 2004,
the Company adopted SOP 03-1 and recorded a cumulative change in accounting
principle of $27.4 million, net of a federal income tax benefit of $14.8
million.
23
SEGMENT INFORMATION
The products that comprise the Annuity and Life Insurance segments generally
possess similar economic characteristics. As such, the financial condition and
results of operations of each business segment are generally consistent with the
Company's consolidated financial condition and results of operations presented
herein.
24
ITEM 4. Controls and Procedures
In 2002, the Company formed a Disclosure Committee to assist with the monitoring
and evaluation of its disclosure controls and procedures. The Company's Chief
Executive Officer, Chief Financial Officer, and Disclosure Committee have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this Report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are effective.
In addition, no change in the Company's internal control over financial
reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of
1934) occurred during the period covered by this quarterly report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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.
2.1 Merrill Lynch Life Insurance Company Board of Directors
Resolution in Connection with the Merger between Merrill Lynch
Life Insurance Company and Tandem Insurance Group, Inc.
(Incorporated by reference to Exhibit 2.1, filed September 5,
1991, as part of Post-Effective Amendment No. 4 to the
Registrant's registration statement on Form S-1, File No.
33-26322.)
2.2 Plan and Agreement of Merger between Merrill Lynch Life
Insurance Company and Tandem Insurance Group, Inc. (Incorporated
by reference to Exhibit 2.1a, filed September 5, 1991, as part
of Post-Effective Amendment No. 4 to the Registrant's
registration statement on Form S-1, File No. 33-26322.)
3.1 Articles of Amendment, Restatement and Redomestication of the
Articles of Incorporation of Merrill Lynch Life Insurance
Company. (Incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 10 to Merrill Lynch Life Variable
Annuity Separate Account A's registration statement on Form N-4,
File No. 33-43773, filed December 10, 1996.)
3.2 Amended and Restated By-Laws of Merrill Lynch Life Insurance
Company. (Incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 10 to Merrill Lynch Life Variable
Annuity Separate Account A's registration statement on Form N-4,
File No. 33-43773, filed December 10, 1996.)
4.1 Group Modified Guaranteed Annuity Contract, ML-AY-361.
(Incorporated by reference to Exhibit 4.1, filed February 23,
1989, as part of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No.
33-26322.)
4.2 Individual Certificate, ML-AY-362. (Incorporated by reference to
Exhibit 4.2, filed February 23, 1989, as part of Pre-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
4.2a Individual Certificate, ML-AY-362 KS. (Incorporated by reference
to Exhibit 4.2a, filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
4.2b Individual Certificate, ML-AY-378. (Incorporated by reference to
Exhibit 4.2b, filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
4.2c Modified Guaranteed Annuity Contract. (Incorporated by reference
to Exhibit 4(a), filed August 18, 1997, as part of the
Registrant's registration statement on Form S-3, File No.
333-33863.)
4.3 Individual Tax-Sheltered Annuity Certificate, ML-AY-372. (Incorporated
by reference to Exhibit 4.3, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the Registrant's registration statement
on Form S-1, File No. 33-26322.)
4.3a Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS.
(Incorporated by reference to Exhibit 4.3a, filed March 9, 1990, as part
of Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.4 Qualified Retirement Plan Certificate, ML-AY-373. (Incorporated by
reference to Exhibit 4.4 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.4a Qualified Retirement Plan Certificate, ML-AY-373 KS. (Incorporated by
reference to Exhibit 4.4a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.5 Individual Retirement Annuity Certificate, ML-AY-374. (Incorporated by
reference to Exhibit 4.5 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.5a Individual Retirement Annuity Certificate, ML-AY-374 KS. (Incorporated
by reference to Exhibit 4.5a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.5b Individual Retirement Annuity Certificate, ML-AY-375 KS. (Incorporated
by reference to Exhibit 4.5b, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.5c Individual Retirement Annuity Certificate, ML-AY-379. (Incorporated by
reference to Exhibit 4.5c, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.6 Individual Retirement Account Certificate, ML-AY-375. (Incorporated by
reference to Exhibit 4.6, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the Registrant's registration statement
on Form S-1, File No. 33-26322.)
4.6a Individual Retirement Account Certificate, ML-AY-380. (Incorporated by
reference to Exhibit 4.6a, filed March 9, 1990, as part of
Post-Effective
Amendment No. 1 to the Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.7 Section 457 Deferred Compensation Plan Certificate, ML-AY-376.
(Incorporated by reference to Exhibit 4.7 to the Registrant's
registration statement on Form S-1, File No. 33-26322, filed January 3,
1989.)
4.7a Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS.
(Incorporated by reference to Exhibit 4.7a, filed March 9, 1990, as part
of Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.8 Tax-Sheltered Annuity Endorsement, ML-AY-366. (Incorporated by reference
to Exhibit 4.8 to the Registrant's registration statement on Form S-1,
File No. 33- 26322, filed January 3, 1989.)
4.8a Tax-Sheltered Annuity Endorsement, ML-AY-366 190. (Incorporated by
reference to Exhibit 4.8a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.8b Tax-Sheltered Annuity Endorsement, ML-AY-366 1096. (Incorporated by
reference to Exhibit 4(h)(3), filed March 27, 1997, as part of
Post-Effective Amendment No. 2 to the Registrant's registration
statement on Form S-1, File No. 33-58303.)
4.9 Qualified Retirement Plan Endorsement, ML-AY-364. (Incorporated by
reference to Exhibit 4.9 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.10 Individual Retirement Annuity Endorsement, ML-AY-368. (Incorporated by
reference to Exhibit 4.10 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.10a Individual Retirement Annuity Endorsement, ML-AY-368 190. (Incorporated
by reference to Exhibit 4.10a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.10b Individual Retirement Annuity Endorsement, ML009. (Incorporated by
reference to Exhibit 4(j)(3) to Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No. 33-60290,
filed March 31, 1994.)
4.10c Individual Retirement Annuity Endorsement. (Incorporated by reference to
Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-3, File No. 333-33863, filed October
31, 1997.)
4.11 Individual Retirement Account Endorsement, ML-AY-365. (Incorporated by
reference to Exhibit 4.11 to the Registrant's registration statement on
Form S-1, File No. 33-26322, filed January 3, 1989.)
4.11a Individual Retirement Account Endorsement, ML- AY-365 190. (Incorporated
by reference to Exhibit 4.11a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.12 Section 457 Deferred Compensation Plan Endorsement, ML-AY-367.
(Incorporated by reference to Exhibit 4.12 to the Registrant's
registration statement on Form S-1, File No. 33-26322, filed January 3,
1989.)
4.12a Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190.
(Incorporated by reference to Exhibit 4.12a, filed March 9, 1990, as
part of Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.13 Qualified Plan Endorsement, ML-AY-369. (Incorporated by reference to
Exhibit 4.13 to the Registrant's registration statement on Form S-1,
File No. 33-26322, filed January 3, 1989.)
4.13a Qualified Plan Endorsement, ML-AY-448. (Incorporated by reference to
Exhibit 4.13a, filed March 9, 1990, as part of Post-Effective Amendment
No. 1 to the Registrant's registration statement on Form S-1, File No.
33-26322.)
4.13b Qualified Plan Endorsement. (Incorporated by reference to Exhibit 4(c),
filed October 31, 1997, as part of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-3, File No. 333-33863.)
4.14 Application for Group Modified Guaranteed Annuity Contract.
(Incorporated by reference to Exhibit 4.14 to the Registrant's
registration statement on Form S-1, File No. 33-26322, filed January 3,
1989.)
4.15 Annuity Application for Individual Certificate Under Modified Guaranteed
Annuity Contract. (Incorporated by reference to Exhibit 4.15 to the
Registrant's registration statement on Form S-1, File No. 33-26322,
filed January 3, 1989.)
4.15a Application for Modified Guaranteed Annuity Contract. (Incorporated by
reference to Exhibit 4(d), filed August 18, 1997, as part of the
Registrant's registration statement on Form S-3, File No. 333-33863.)
4.16 Form of Company Name Change Endorsement. (Incorporated by reference to
Exhibit 4.16, filed September 5, 1991, as part of Post-Effective
Amendment No. 4 to the Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.17 Group Modified Guaranteed Annuity Contract, ML-AY-361/94. (Incorporated
by reference to Exhibit 4(a)(2), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.18 Individual Certificate, ML-AY-362/94. (Incorporated by reference to
Exhibit 4(b)(4), filed December 7, 1994, as part of Post-Effective
Amendment No. 3 to the Registrant's registration statement on Form S-1,
File No. 33-60290.)
4.19 Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94.
(Incorporated by reference to Exhibit 4(c)(3), filed December 7, 1994,
as part of Post-Effective Amendment No. 3 to the Registrant's
registration statement on Form S-1, File No. 33-60290.)
4.20 Qualified Retirement Plan Certificate, ML-AY-373/94. (Incorporated by
reference to Exhibit 4(d)(3), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.21 Individual Retirement Annuity Certificate, ML-AY-374/94. (Incorporated
by reference to Exhibit 4(e)(5), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.22 Individual Retirement Account Certificate, ML-AY-375/94. (Incorporated
by reference to Exhibit 4(f)(3), filed December 7, 1994, as part of
Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.23 Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94.
(Incorporated by reference to Exhibit 4(g)(3), filed December 7, 1994,
as part of Post-Effective Amendment No. 3 to the Registrant's
registration statement on Form S-1, File No. 33-60290.)
4.24 Qualified Plan Endorsement, ML-AY-448/94. (Incorporated by reference to
Exhibit 4(m)(3), filed December 7, 1994, as part of Post-Effective
Amendment No. 3 to the Registrant's registration statement on Form S-1,
File No. 33-60290.)
10.1 Management Services Agreement between Family Life Insurance Company and
Merrill Lynch Life Insurance Company. (Incorporated by reference to
Exhibit 10.1 to the Registrant's registration statement on Form S-1,
File No. 33-26322, filed January 3, 1989.)
10.2 General Agency Agreement between Merrill Lynch Life Insurance Company
and Merrill Lynch Life Agency, Inc. (Incorporated by reference to
Exhibit 10.2, filed
February 23, 1989, as part of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No. 33-26322.)
10.3 Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life
Insurance Company and Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10.3, filed March 13, 1991, as
part of Post-Effective Amendment No. 2 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
10.3a Amendment to Service Agreement among Merrill Lynch Insurance Group,
Inc., Family Life Insurance Company and Merrill Lynch Life Insurance
Company. (Incorporated by reference to Exhibit 10(c)(2) to
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60290, filed March 31, 1994.)
10.4 Indemnity Reinsurance Agreement between Merrill Lynch Life Insurance
Company and Family Life Insurance Company. (Incorporated by reference to
Exhibit 10.4, filed March 13, 1991, as part of Post-Effective Amendment
No. 2 to the Registrant's registration statement on Form S-1, File No.
33-26322.)
10.5 Assumption Reinsurance Agreement between Merrill Lynch Life Insurance
Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance
Company and Family Life Insurance Company. (Incorporated by reference to
Exhibit 10.6, filed April 24, 1991, as part of Post-Effective Amendment
No. 3 to the Registrant's registration statement on Form S-1, File No.
33-26322.)
10.6 Amended General Agency Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference
to Exhibit 10(g) to the Registrant's registration statement on Form S-1,
File No. 33-46827, filed March 30, 1992.)
10.7 Indemnity Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit
10(h) to the Registrant's registration statement on Form S-1, File No.
33-46827, filed March 30, 1992.)
10.8 Management Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch Asset Management, Inc. (Incorporated by reference to
Exhibit 10(i) to the Registrant's registration statement on Form S-1,
File No. 33-46827, filed March 30, 1992.)
10.9 Amendment No. 1 to Indemnity Reinsurance Agreement between Family Life
Insurance Company and Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10.5, filed April 24, 1991, as
part of Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
The Registrant filed the following Current Report on Form 8-K with
the Commission during the second quarter of 2004, under the caption
"Item 5. Other Events":
Current Report on Form 8-K dated May 18, 2004 for the purpose of
reporting that in the first quarter of 2004, Merrill Lynch & Co.
Inc. ("Merrill Lynch & Co.") adopted the fair value method of
accounting for stock-based compensation under Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, using the retroactive restatement method permitted
under SFAS No.148, Accounting for Stock-Based Compensation --
Transition and Disclosure. The adoption of the fair value method of
accounting by Merrill Lynch & Co. resulted in additional allocated
compensation expense to the Registrant. As a result, the Registrant's
Financial Statements and Notes thereto filed as Item 15 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003, and the Registrant's Management's Narrative
Analysis of Results of Operations filed as Item 7 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2003, were
restated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ Joseph E. Justice
-----------------------------------------
Joseph E. Justice
Senior Vice President, Treasurer and
Chief Financial Officer
Date: August 13, 2004
EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.