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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, 2002
COMMISSION FILE NUMBERS 33-34562; 33-60288; 333-48983
ML LIFE INSURANCE COMPANY OF NEW YORK
(Exact name of Registrant as specified in its charter)
NEW YORK 16-1020455
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
100 CHURCH STREET
NEW YORK, NEW YORK 10080-6511
(Address of Principal Executive Offices)
(800) 333-6524
(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 220,000
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
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in thousands) (Unaudited)
================================================================================
June 30, December 31,
ASSETS 2002 2001
- ------
----------------- ----------------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2002 - $147,838; 2001 - $142,945) $ 149,209 $ 143,731
Equity securities, at estimated fair value
(cost: 2002 - $11,670; 2001 - $11,871) 11,324 11,650
Policy loans on insurance contracts 91,172 92,967
----------------- ----------------
Total Investments 251,705 248,348
CASH AND CASH EQUIVALENTS 14,155 20,524
ACCRUED INVESTMENT INCOME 5,182 4,648
DEFERRED POLICY ACQUISITION COSTS 30,018 30,915
FEDERAL INCOME TAXES - CURRENT 949 -
REINSURANCE RECEIVABLES 306 305
OTHER ASSETS 3,047 3,844
SEPARATE ACCOUNTS ASSETS 904,436 993,056
----------------- ----------------
TOTAL ASSETS $ 1,209,798 $ 1,301,640
================= ================
See accompanying notes to financial statements. (Continued)
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in thousands) (Unaudited)
================================================================================
June 30, December 31,
ASSETS 2002 2001
- ------
----------------- ----------------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2002 - $147,838; 2001 - $142,945) $ 149,209 $ 143,731
Equity securities, at estimated fair value
(cost: 2002 - $11,670; 2001 - $11,871) 11,324 11,650
Policy loans on insurance contracts 91,172 92,967
----------------- ----------------
Total Investments 251,705 248,348
CASH AND CASH EQUIVALENTS 14,155 20,524
ACCRUED INVESTMENT INCOME 5,182 4,648
DEFERRED POLICY ACQUISITION COSTS 30,018 30,915
FEDERAL INCOME TAXES - CURRENT 949 -
REINSURANCE RECEIVABLES 306 305
OTHER ASSETS 3,047 3,844
SEPARATE ACCOUNTS ASSETS 904,436 993,056
----------------- ----------------
TOTAL ASSETS $ 1,209,798 $ 1,301,640
================= ================
See accompanying notes to financial statements. (Continued)
ML LIFE INSURANCE COMPANY OF NEW YORK
(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,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------
----------------- ----------------
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 228,030 $ 231,016
Claims and claims settlement expenses 2,338 4,109
----------------- ----------------
Total policyholder liabilities and accruals 230,368 235,125
OTHER POLICYHOLDER FUNDS 834 1,125
FEDERAL INCOME TAXES - DEFERRED 2,131 2,752
FEDERAL INCOME TAXES - CURRENT - 295
AFFILIATED PAYABLES - NET 2,904 459
OTHER LIABILITIES 492 981
SEPARATE ACCOUNTS LIABILITIES 904,436 993,056
----------------- ----------------
Total Liabilities 1,141,165 1,233,793
----------------- ----------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 220,000 shares
authorized, issued and outstanding 2,200 2,200
Additional paid-in capital 52,310 52,310
Retained earnings 15,647 14,476
Accumulated other comprehensive loss (1,524) (1,139)
----------------- ----------------
Total Stockholder's Equity 68,633 67,847
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,209,798 $ 1,301,640
================= ================
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
June 30,
-------------------------------------
2002 2001
----------------- ----------------
REVENUES:
Policy charge revenue $ 4,728 $ 4,646
Net investment income 3,626 4,023
Net realized investment gains (losses) (3,734) 85
----------------- ----------------
Total Revenues 4,620 8,754
----------------- ----------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 2,728 2,693
Policy benefits (net of reinsurance recoveries: 2002 - $177;
2001 - $83) 618 580
Reinsurance premium ceded 557 483
Amortization of deferred policy acquisition costs 1,026 1,170
Insurance expenses and taxes 894 1,264
----------------- ----------------
Total Benefits and Expenses 5,823 6,190
----------------- ----------------
Earnings (Loss) Before Federal Income Tax
Provision (1,203) 2,564
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current (950) 868
Deferred 528 48
----------------- ----------------
Total Federal Income Tax Provision (Benefit) (422) 916
----------------- ----------------
NET EARNINGS (LOSS) $ (781) $ 1,648
================= ================
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
================================================================================
Six Months Ended
June 30,
-------------------------------------
2002 2001
----------------- ----------------
REVENUES:
Policy charge revenue $ 9,376 $ 9,437
Net investment income 7,259 7,997
Net realized investment gains (losses) (3,471) 61
----------------- ----------------
Total Revenues 13,164 17,495
----------------- ----------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 5,334 5,515
Policy benefits (net of reinsurance recoveries: 2002 - $491;
2001 - $320) 1,327 1,551
Reinsurance premium ceded 1,062 984
Amortization of deferred policy acquisition costs 1,943 2,131
Insurance expenses and taxes 1,697 2,144
----------------- ----------------
Total Benefits and Expenses 11,363 12,325
----------------- ----------------
Earnings Before Federal Income Tax Provision 1,801 5,170
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 1,044 1,157
Deferred (414) 558
----------------- ----------------
Total Federal Income Tax Provision 630 1,715
----------------- ----------------
NET EARNINGS $ 1,171 $ 3,455
================= ================
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
June 30,
-------------------------------------
2002 2001
----------------- ----------------
NET EARNINGS (LOSS) $ (781) $ 1,648
----------------- ----------------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding losses arising during the period (184) (836)
Reclassification adjustment for (gains) losses included in net earnings 3,734 (86)
----------------- ----------------
Net unrealized gains (losses) on investment securities 3,550 (922)
Adjustments for:
Policyholder liabilities (1,528) 175
Deferred federal income taxes (708) 261
----------------- ----------------
Total other comprehensive income (loss), net of taxes 1,314 (486)
----------------- ----------------
COMPREHENSIVE INCOME $ 533 $ 1,162
================= ================
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
================================================================================
Six Months Ended
June 30,
-------------------------------------
2002 2001
----------------- ----------------
NET EARNINGS $ 1,171 $ 3,455
----------------- ----------------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (3,011) 1,707
Reclassification adjustment for (gains) losses included in net earnings 3,471 (62)
----------------- ----------------
Net unrealized gains on investment securities 460 1,645
Adjustments for:
Policyholder liabilities (1,052) (624)
Deferred federal income taxes 207 (358)
----------------- ----------------
Total other comprehensive income (loss), net of taxes (385) 663
----------------- ----------------
COMPREHENSIVE INCOME $ 786 $ 4,118
================= ================
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(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 loss equity
------------ ------------ ------------ ------------ ------------
BALANCE JANUARY 1, 2001 $ 2,200 $ 52,310 $ 10,147 $ (3,054) $ 61,603
Net earnings 4,329 4,329
Other comprehensive income, net of tax
1,915 1,915
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 2,200 52,310 14,476 (1,139) 67,847
Net earnings 1,171 1,171
Other comprehensive loss, net of tax
(385) (385)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2002 $ 2,200 $ 52,310 $ 15,647 $ (1,524) $ 68,633
============ ============ ============ ============ ============
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
================================================================================
Six Months Ended
June 30,
----------------------------------
2002 2001
--------------- --------------
Cash Flows From Operating Activities:
Net earnings $ 1,171 $ 3,455
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 1,943 2,131
Capitalization of policy acquisition costs (1,046) (2,138)
Amortization of investments 403 138
Interest credited to policyholders' account balances 5,334 5,515
Provision for deferred Federal income tax (414) 558
(Increase) decrease in operating assets:
Accrued investment income (534) (665)
Federal income taxes - current (949) 62
Reinsurance receivables (1) 1,871
Affiliated receivables - (232)
Other 797 1,048
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses (1,771) (2,333)
Other policyholder funds (291) 350
Federal income taxes - current (295) 288
Affiliated payables 2,445 (926)
Other (489) (720)
Other operating activities:
Net realized investment (gains) losses 3,471 (61)
--------------- --------------
Net cash and cash equivalents provided by operating activities 9,774 8,341
--------------- --------------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 18,224 7,449
Maturities of available-for-sale securities 9,069 16,681
Purchases of available-for-sale securities (35,859) (33,321)
Policy loans on insurance contracts 1,795 (189)
--------------- --------------
Net cash and cash equivalents used by investing activities $ (6,771) $ (9,380)
--------------- --------------
See accompanying notes to financial statements. (Continued)
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in thousands) (Unaudited)
================================================================================
Six Months Ended
June 30,
-----------------------------------
2002 2001
-------------- ---------------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 31,595 $ 51,734
Policyholder withdrawals (including transfers to / from separate accounts)
(40,967) (61,526)
-------------- ---------------
Net cash and cash equivalents used by financing activities (9,372) (9,792)
-------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,369) (10,831)
CASH AND CASH EQUIVALENTS:
Beginning of year 20,524 19,514
-------------- ---------------
End of period $ 14,155 $ 8,683
============== ===============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 2,288 $ 807
Intercompany interest 5 62
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
NOTE 1. BASIS OF PRESENTATION
ML Life Insurance Company of New York (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 life insurance and annuity products,
including variable life insurance, variable annuities, modified guaranteed
annuities, and immediate annuities. The Company is domiciled in the State of New
York.
The interim financial statements for the three and six month periods are
unaudited. In the opinion of management, these unaudited financial statements
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 accounting principles generally accepted in the United States
of America. These unaudited financial statements should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K ("2001 10K") for the year ended December 31, 2001. 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.
NOTE 2. STATUTORY ACCOUNTING PRACTICES
The Company's statutory financial statements are presented on the basis of
accounting practices prescribed or permitted by the New York Insurance
Department. The State of New York has adopted the National Association of
Insurance Commissioner's statutory accounting practices, ("NAIC SAP") as a
component of prescribed or permitted practices by the State of New York. The
State of New York has adopted certain prescribed accounting practices, ("NY
SAP"), which differ from those found in NAIC SAP. Specifically, deferred tax
assets and deferred tax liabilities are not recognized by the State of New York.
Other differences in accounting practices between NAIC SAP and NY SAP were not
applicable to the Company.
At June 30, 2002, statutory capital and surplus on a NY SAP basis and an NAIC
SAP basis were $34,834 and $35,426, respectively. The difference between
statutory capital and surplus on a NY SAP basis versus an NAIC SAP basis is the
recognition of a $592 deferred tax asset in accordance with NAIC SAP. At
December 31, 2001, statutory capital and surplus on a New York basis and an NAIC
SAP basis were $34,265 and $34,880, respectively. For the six month periods
ended June 30, 2002 and 2001, statutory net income was $728 and $1,362
respectively. There was no difference in net income on a NY SAP basis versus an
NAIC SAP basis at June 30, 2002.
NOTE 3. INVESTMENTS
The Company's investments in fixed maturity and equity securities are classified
as available-for-sale and are carried at estimated fair value with unrealized
gains and losses included in stockholder's equity as a component of accumulated
other comprehensive loss, net of tax. 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 policyholders' account balances
in conjunction with unrealized holding gains or losses on investments classified
as available-for-sale. The Company adjusts those liabilities as if the
unrealized holding gains or losses had actually been realized, with
corresponding credits or charges reported in accumulated other comprehensive
loss, net of taxes. The components of net unrealized gains (losses) included in
accumulated other comprehensive loss were as follows:
June 30, December 31,
2002 2001
---------------- ----------------
Assets:
Fixed maturity securities $ 1,371 $ 786
Equity securities (346) (221)
---------------- ----------------
1,025 565
---------------- ----------------
Liabilities:
Policyholders' account balances 3,370 2,318
Federal income taxes - deferred (821) (614)
---------------- ----------------
2,549 1,704
---------------- ----------------
Stockholder's equity:
Accumulated other comprehensive loss $ (1,524) $ (1,139)
================ ================
NOTE 4. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Life Insurance and Annuities. The Company's Life
Insurance segment consists of variable life insurance products and
interest-sensitive life insurance products. The Company's Annuity segment
consists of variable annuities and interest-sensitive annuities. 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 life insurance or annuity contract owner liabilities.
The following table summarizes each business segment's contribution to the
consolidated net revenues and net earnings (loss) for the three and six month
periods ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
NET REVENUES (a):
Life Insurance $ 2,307 $ 2,537 $ 4,750 $ 5,229
Annuities (652) 3,263 2,998 6,172
Other 237 261 82 579
--------------- --------------- --------------- ---------------
Total Net Revenues $ 1,892 $ 6,061 $ 7,830 $ 11,980
=============== =============== =============== ===============
NET EARNINGS (LOSS):
Life Insurance $ 320 $ 463 $ 939 $ 1,008
Annuities (1,256) 1,015 177 2,071
Other 155 170 55 376
--------------- --------------- --------------- ---------------
Total Net Earnings (Loss) $ (781) $ 1,648 $ 1,171 $ 3,455
=============== =============== =============== ===============
(a) Management considers investment income net of interest credited to
policyholders' account balances in evaluating results.
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 and six month periods ended June
30, 2002 and 2001. This discussion should be read in conjunction with the
accompanying unaudited financial statements and notes thereto, in addition to
the 2001 Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the 2001 10K.
In addition to providing historical information, the Company may make or publish
forward-looking statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. A variety of factors, many of which are beyond the Company's control,
affect the operations, performance, business strategy, financial condition, and
results of the Company and could cause actual results and experience to differ
materially from the expectations expressed in these statements. These factors
include, but are not limited to, the factors listed in the Economic Environment
section below, as well as actions and initiatives taken by both current and
potential competitors and the effect of current, pending, and future legislation
and regulation. THE COMPANY UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
BUSINESS OVERVIEW
The Company's gross earnings are principally derived from two sources:
- - the charges imposed on variable life insurance and variable annuity
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. Deferred policy acquisition costs are
principally commissions and a portion of certain other expenses relating to
policy acquisition, underwriting and issuance that are primarily related to and
vary with the production of new business. 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:
- - fluctuations in medium term interest rates
- - fluctuations in credit spreads
- - equity market performance
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 current three
and six month periods ended June 30, 2002, medium term interest rates decreased
approximately 80 basis points and 36 basis points, respectively, to yield, on
average, for the current six month period 3.30%. During the three and six month
periods ended June 30, 2001, medium term interest rates increased approximately
12 basis points and decreased approximately 36 basis points, respectively, to
yield, on average, for the six month period 4.56%.
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
current three and six month periods ended June 30, 2002, credit spreads widened
approximately 13 basis points and 14 basis points, respectively, and ended the
current six month period at 192 basis points. During the three and six month
periods ended June 30, 2001, credit spreads contracted approximately 20 basis
points and 36 basis points, respectively, and ended the six month period at 151
basis points.
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 Index"). The
following table provides the increase (decrease) for each equity market index
for the current three and six month periods ended June 30, 2002 and 2001,
respectively:
2002 2001
------------------------------ -------------------------------
Second Quarter Six Months Second Quarter Six Months
2002 2002 2001 2001
-------------- ------------ --------------- ------------
Dow -11.2 % -7.8 % 6.3 % -2.6 %
NASDAQ -20.7 % -25.0 % 17.4 % -12.5 %
S&P Index -13.7 % -13.8 % 5.5 % -7.3 %
The investment performance in the underlying mutual funds supporting the
Company's variable products do not replicate the returns on 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.
NEW BUSINESS
Life insurance and annuity premiums decreased $19.8 million (or 55%) to $16.2
million and $23.3 million (or 42%) to $32.1 million during the current three and
six month periods ended June 30, 2002, respectively, as compared to the same
periods in 2001. Life insurance and annuity premiums by type of product were as
follows:
($ In Millions) % Change
--------------------------------- -------------------------------
Second Quarter Six Months Second Quarter Six Months
2002 2002 2001 2001
-------------- --------------- --------------- -------------
Variable Annuities:
C-Share $ 6.0 $ 12.3 -76 % -56 %
B-Share 4.9 10.8 -47 -54
L-Share 3.8 6.7 100 100
-------------- --------------- --------------- -------------
14.7 29.8 -57 -42
-------------- --------------- --------------- -------------
Modified Guaranteed Annuities 0.9 1.5 -36 -48
Variable Life Insurance 0.6 0.8 500 14
-------------- --------------- --------------- -------------
Total Direct Premiums $ 16.2 32.1 -55 % -42 %
============== =============== =============== =============
During the current three and six month periods, variable annuity premiums
decreased $19.8 million (or 57%) and $22.0 million (or 42%), respectively, as
compared to the same periods in 2001. Management attributes the decrease in
variable annuity premiums to increasing customer demand for annuity products
that offer guarantee provisions, such as fixed rate products, variable products
with fixed account options, variable products with guaranteed minimum income
benefits, or variable products with guaranteed minimum account values. With the
exception of the Company's modified guaranteed annuity product, which offers a
fixed interest crediting rate, the Company currently does not offer these types
of guarantees in its products. During the first six months of 2002, sales of
annuity products with these types of guarantee features have recorded strong
sales within the Merrill Lynch & Co. distribution system. The Company is
currently developing certain of these guarantee provisions for placement in its
existing variable products and anticipates offering these features during the
fourth quarter of 2002.
Management believes that the increasing demand for annuity products with
guarantee provisions has been fueled by the increasing volatility and general
negative performance of the equity markets that has occurred over the past two
years. As such, future variable annuity sales could be negatively impacted if
this trend continues.
The Company's L-Share variable annuity product was introduced in the fourth
quarter 2001.
FINANCIAL CONDITION
At June 30, 2002, the Company's assets were $1.2 billion, or $91.8 million lower
than the $1.3 billion in assets at December 31, 2001 primarily due to a decrease
in separate accounts assets. Separate accounts assets decreased $88.6 million
(or 9%) to $904.4 million
primarily due to unfavorable investment performance and an increase in net cash
outflow. Changes in separate accounts assets for the first and second quarter of
2002 were as follows:
(In Millions) 1Q02 2Q02 Total
------------ ------------ --------------
Investment performance - variable products $ 7.4 $ (74.5) $ (67.1)
Net cash outflow - variable products (12.4) (9.1) (21.5)
------------ ------------ --------------
$ (5.0) $ (83.6) $ (88.6)
============ ============ ==============
The continuing decline in overall credit quality among corporate bonds has
placed added pressure on the Company's fixed income portfolio. As of June 30,
2002 and December 31, 2001, approximately $4.5 million (or 3%) and $4.8 million
(or 3%), respectively, of the Company's fixed maturity securities were
considered non-investment grade. The Company defines non-investment grade as
unsecured debt obligations that 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. 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, as of June 30, 2002, approximately $11.6
million (or 8%) 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
$12.8 million (or 9%) of the Company's fixed maturity securities as of December
31, 2001. The Company closely monitors such investments.
During the first six months of 2002, the Company experienced contract owner
withdrawals that exceeded deposits by $21.2 million. The components of contract
owner transactions were as follows:
June 30,
(In Millions) 2002
-------------
Premiums collected $ 32.1
Internal tax-free exchanges (0.5)
-------------
Net contract owner deposits 31.6
Contract owner withdrawals 41.0
Net transfers to/from separate accounts 11.8
-------------
Net contract owner withdrawals 52.8
-------------
Net contract owner activity $ (21.2)
=============
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of June 30, 2002, the Company's assets included $165.2
million of cash, short-term investments and investment grade publicly traded
available-for-sale securities that could be liquidated if funds were required.
MANAGEMENT ESTIMATES
The Company amortizes deferred policy acquisition costs based on the expected
future gross profits for each group of contracts. In estimating future gross
profits, management makes assumptions regarding such factors as policy charge
revenue, investment performance, policy lapse rates, mortality, and expenses for
the expected life of each group of contracts. Actual gross profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates and evaluates the
recoverability of deferred policy acquisition costs. The impact of revisions to
estimates on cumulative amortization is recorded as a charge or credit to
current operations.
RESULTS OF OPERATIONS
For the three month periods ended June 30, 2002 and 2001, the Company reported
net earnings (loss) of ($0.8) million and $1.6 million, respectively. For the
six month periods ended June 30, 2002 and 2001, the Company reported net
earnings of $1.2 million and $3.5 million, respectively.
Policy charge revenue increased $0.1 million (or 2%) and decreased $0.1 million
(or 1%) during the current three and six month periods ended June 30, 2002,
respectively, as compared to the same periods in 2001. Despite decreasing
average variable account
balances, policy charge revenue was favorably impacted by increases in rates
charged to non-proprietary investment managers for administrative services.
Net earnings derived from interest spread decreased $0.4 million (or 32%) and
$0.6 million (or 22%) during the current three and six month periods ended June
30, 2002, respectively, as compared to the same periods in 2001. The decreases
in interest spread are primarily a result of the reduction in invested assets
resulting from the decline in fixed rate contracts inforce.
Net realized investment losses increased $3.8 million and $3.5 million during
the current three and six month periods ended June 30, 2002, respectively, as
compared to the same periods in 2001. The increases in net realized losses are
primarily due to book value writedowns of $3.5 million on investments in fixed
maturity securities issued by WorldCom Inc. that occurred during the second
quarter 2002.
Policy benefits decreased $0.2 million (or 14%) during the first six months of
2002 as compared to the same period in 2001. The decrease in policy benefits is
primarily due to decreased variable annuity death benefit expense incurred under
guaranteed minimum death benefit provisions. During the current three month
period, policy benefits were relatively flat as compared to the same period in
2001.
Amortization of deferred policy acquisition costs decreased $0.1 million (or
12%) and $0.2 million (or 9%) during the current three and six month periods
ended June 30, 2002, as compared to the same periods in 2001. The decreases in
amortization of deferred policy acquisition costs are primarily due to the
decrease in asset based variable annuity policy charge revenue during 2002.
Insurance expenses and taxes decreased $0.4 million (or 29%) and $0.4 million
(or 21%) during the current three and six month periods ended June 30, 2002, as
compared to the same periods in 2001. The decreases are primarily due to cost
savings resulting from the Company's consolidation of its life and annuity
policy administration service centers. The consolidation was completed during
the third quarter 2001.
The Company's effective federal income tax rate was 35% during the current three
and six month periods as compared to 36% and 33%, respectively, during the
equivalent periods in 2001. The changes in the effective federal income tax
rate during the respective periods are primarily due to certain permanent
adjustments recorded in 2001.
SEGMENT INFORMATION
The products that comprise the Life Insurance and Annuity 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.
The decrease in other net revenues and other net earnings during the first six
months of 2002 is primarily due to realized losses incurred during 2002.
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.
3.1 Certificate of Amendment of the Charter of ML Life Insurance
Company of New York. (Incorporated by reference to Exhibit
6(a)(ii) to Post-Effective Amendment No. 10 to ML of New York
Variable Annuity Account A's registration statement on Form N-4,
File No. 33-43654, filed December 9, 1996.)
3.2 By-Laws of ML Life Insurance Company of New York. (Incorporated
by reference to Exhibit 6(b) to Post-Effective Amendment No. 10
to ML of New York Variable Annuity Account A's registration
statement on Form N-4, File No. 33-43654, filed December 9,
1996.)
4.1 Modified Guaranteed Annuity Contract. (Incorporated by reference
to Exhibit 4(a) to Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1, File No.
33-34562, filed October 16, 1990.)
4.2 Modified Guaranteed Annuity Contract Application. (Incorporated
by reference to Exhibit 4(b) to Pre-Effective Amendment No. 1 to
the Registrant's registration statement on Form S-1, File No.
33-34562, filed October 16, 1990.)
4.3 Qualified Retirement Plan Endorsement. (Incorporated by
reference to Exhibit 4(c) to Pre-Effective Amendment No. 1 to
the Registrant's registration statement on Form S-1, File No.
33-34562, filed October 16, 1990.)
4.4 IRA Endorsement. (Incorporated by reference to Exhibit 4(d) to
Pre-Effective Amendment No. 1 to the Registrant's registration statement
on Form S-1, File No. 33-34562, filed October 16, 1990.)
4.5 Company Name Change Endorsement. (Incorporated by reference to Exhibit
4(e) to Post-Effective Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed March 30, 1992.)
4.6 IRA Endorsement, MLNY009 (Incorporated by reference to Exhibit 4(d)(2)
to Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60288, filed March 31, 1994).
4.7 Modified Guaranteed Annuity Contract MLNY-AY-991/94. (Incorporated by
reference to Exhibit 4(a)(2) to Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S-1, File No. 33-60288,
filed December 7, 1994).
4.8 Qualified Retirement Plan Endorsement MLNY-AYQ-991/94. (Incorporation by
reference to Exhibit 4(c)(2) to Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S-1, File No. 33-60288,
filed December 7, 1994).
10.1 General Agency Agreement between Royal Tandem Life Insurance Company and
Merrill Lynch Life Agency Inc. (Incorporated by reference to Exhibit
10(a) to Pre-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed October 16, 1990.)
10.2 Investment Management Agreement by and between Royal Tandem Life
Insurance Company and Equitable Capital Management Corporation.
(Incorporated by reference to Exhibit 10(b) to Pre-Effective Amendment
No. 1 to the Registrant's registration statement on Form S-1, File No.
33-34562, filed October 16, 1990.)
10.3 Shareholders' Agreement by and among The Equitable Life Assurance
Society of the United States and Merrill Lynch & Co., Inc. and Tandem
Financial Group, Inc. (Incorporated by reference to Exhibit 10(c) to
Pre-Effective Amendment No. 1 to the Registrant's registration statement
on Form S-1, File No. 33-34562, filed October 16, 1990.)
10.4 Service Agreement by and between Royal Tandem Life Insurance Company and
Tandem Financial Group, Inc. (Incorporated by reference to Exhibit 10(d)
to Pre-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed October 16, 1990.)
10.5 Service Agreement by and between Tandem Financial Group, Inc. and
Merrill Lynch & Co., Inc. (Incorporated by reference to Exhibit 10(e) to
Pre-Effective
Amendment No. 1 to the Registrant's registration statement on
Form S-1, File No. 33-34562, filed October 16, 1990.)
10.6 Form of Investment Management Agreement by and between Royal
Tandem Life Insurance Company and Merrill Lynch Asset
Management, Inc. (Incorporated by reference to Exhibit 10(f) to
Post-Effective Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed March 7, 1991.)
10.7 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(g) to Post-Effective
Amendment No. 3 to the Registrant's registration statement on
Form S-1, File No. 33-34562, filed March 30, 1992.)
10.8 Indemnity Agreement between ML Life Insurance Company of New
York and Merrill Lynch Life Agency, Inc. (Incorporated by
reference to Exhibit 10(h) to Post-Effective Amendment No. 3 to
the Registrant's registration statement on Form S-1, File No.
33-34562, filed March 30, 1992.)
10.9 Amended General Agency Agreement between ML Life Insurance
Company of New York and Merrill Lynch Life Agency, Inc.
(Incorporated by reference to Exhibit 10(i) to Post-Effective
Amendment No. 3 to the Registrant's registration statement on
Form S-1, File No. 33-34562, filed March 30, 1992.)
10.10 Amended Management Agreement between ML Life Insurance Company
of New York and Merrill Lynch Asset Management, Inc.
(Incorporated by reference to Exhibit 10(j) to the Registrant's
registration statement on Form S-1, File No. 33-60288, filed
March 30, 1993.)
10.11 Mortgage Loan Servicing Agreement between ML Life Insurance
Company of New York and Merrill Lynch & Co., Inc. (Incorporated
by reference to Exhibit 10(k) to Post-Effective Amendment No. 4
to the Registrant's registration statement on Form S-1, File No.
33-60288, filed March 29, 1995.)
99.1 Certification by the Chief Executive Officer of the Registrant
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer of the Registrant
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.
No reports on Form 8-K have been filed during the last quarter.
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.
ML LIFE INSURANCE COMPANY OF NEW YORK
/s/ MATTHEW J. RIDER
-----------------------------------------
Matthew J. Rider
Senior Vice President,
Chief Financial Officer and Treasurer
Date: August 13, 2002
EXHIBIT INDEX
99.1 Certification by the Chief Executive Officer of the Registrant pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer of the Registrant pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.