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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.)
2 WORLD FINANCIAL CENTER, 5TH FLOOR
NEW YORK, NEW YORK 10281-6100
(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.)
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BALANCE SHEETS
(Dollars in thousands) (Unaudited)
================================================================================
September 30, December 31,
ASSETS 2002 2001
- ------ ------------- ------------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2002 - $156,136; 2001 - $142,945) $ 159,676 $ 143,731
Equity securities, at estimated fair value
(cost: 2002 - $9,595; 2001 - $11,871) 9,122 11,650
Policy loans on insurance contracts 90,973 92,967
---------- ----------
Total Investments 259,771 248,348
CASH AND CASH EQUIVALENTS 14,106 20,524
ACCRUED INVESTMENT INCOME 5,726 4,648
DEFERRED POLICY ACQUISITION COSTS 29,732 30,915
FEDERAL INCOME TAXES - CURRENT 3,323 -
REINSURANCE RECEIVABLES 262 305
RECEIVABLES FROM SECURITIES SOLD 1,016 -
OTHER ASSETS 3,512 3,844
SEPARATE ACCOUNTS ASSETS 792,541 993,056
---------- ----------
TOTAL ASSETS $1,109,989 $1,301,640
========== ==========
See accompanying notes to financial statements. (Continued)
1
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)
================================================================================
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------ ------------- ------------
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 233,280 $ 231,016
Claims and claims settlement expenses 3,380 4,109
----------- -----------
Total policyholder liabilities and accruals 236,660 235,125
OTHER POLICYHOLDER FUNDS 1,440 1,125
FEDERAL INCOME TAXES - DEFERRED 5,467 2,752
FEDERAL INCOME TAXES - CURRENT - 295
AFFILIATED PAYABLES - NET 2,301 459
OTHER LIABILITIES 485 981
SEPARATE ACCOUNTS LIABILITIES 792,541 993,056
----------- -----------
Total Liabilities 1,038,894 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 17,190 14,476
Accumulated other comprehensive loss (605) (1,139)
----------- -----------
Total Stockholder's Equity 71,095 67,847
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,109,989 $ 1,301,640
=========== ===========
See accompanying notes to financial statements.
2
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
September 30,
------------------------
2002 2001
------- -------
REVENUES:
Policy charge revenue $ 4,392 $ 4,677
Net investment income 3,725 4,009
Net realized investment gains (losses) 235 (241)
------- -------
Total Revenues 8,352 8,445
------- -------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 2,659 2,801
Policy benefits (net of reinsurance recoveries: 2002 - $163;
2001 - $217) 1,528 837
Reinsurance premium ceded 542 447
Amortization of deferred policy acquisition costs 818 999
Insurance expenses and taxes 794 1,514
------- -------
Total Benefits and Expenses 6,341 6,598
------- -------
Earnings Before Federal Income Tax Provision 2,011 1,847
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current (2,374) (673)
Deferred 2,842 1,320
------- -------
Total Federal Income Tax Provision 468 647
------- -------
NET EARNINGS $ 1,543 $ 1,200
======= =======
See accompanying notes to financial statements.
3
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
================================================================================
Nine Months Ended
September 30,
----------------------------
2002 2001
--------- ---------
REVENUES:
Policy charge revenue $ 13,768 $ 14,114
Net investment income 10,984 12,006
Net realized investment losses (3,236) (180)
--------- ---------
Total Revenues 21,516 25,940
--------- ---------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 7,993 8,316
Policy benefits (net of reinsurance recoveries: 2002 - $654;
2001 - $537) 2,855 2,388
Reinsurance premium ceded 1,604 1,431
Amortization of deferred policy acquisition costs 2,761 3,130
Insurance expenses and taxes 2,491 3,658
--------- ---------
Total Benefits and Expenses 17,704 18,923
--------- ---------
Earnings Before Federal Income Tax Provision 3,812 7,017
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current (1,330) 484
Deferred 2,428 1,878
--------- ---------
Total Federal Income Tax Provision 1,098 2,362
--------- ---------
NET EARNINGS $ 2,714 $ 4,655
========= =========
See accompanying notes to financial statements.
4
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
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STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
September 30,
--------------------------
2002 2001
-------- --------
NET EARNINGS $ 1,543 $ 1,200
-------- --------
OTHER COMPREHENSIVE INCOME:
Net unrealized gains on available-for-sale securities:
Net unrealized holding gains arising during the period 2,270 3,364
Reclassification adjustment for gains included in net earnings (228) (9)
-------- --------
Net unrealized gains on investment securities 2,042 3,355
Adjustments for:
Policyholder liabilities (629) (2,138)
Deferred federal income taxes (494) (425)
-------- --------
Total other comprehensive income, net of taxes 919 792
-------- --------
COMPREHENSIVE INCOME $ 2,462 $ 1,992
======== ========
See accompanying notes to financial statements.
5
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)
================================================================================
Nine Months Ended
September 30,
--------------------------
2002 2001
-------- --------
NET EARNINGS $ 2,714 $ 4,655
-------- --------
OTHER COMPREHENSIVE INCOME:
Net unrealized gains on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (741) 5,071
Reclassification adjustment for (gains) losses included in net earnings 3,243 (71)
-------- --------
Net unrealized gains on investment securities 2,502 5,000
Adjustments for:
Policyholder liabilities (1,681) (2,762)
Deferred federal income taxes (287) (783)
-------- --------
Total other comprehensive income, net of taxes 534 1,455
-------- --------
COMPREHENSIVE INCOME $ 3,248 $ 6,110
======== ========
See accompanying notes to financial statements.
6
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
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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 2,714 2,714
Other comprehensive income, net of tax 534 534
------- ------- ------- ------- -------
BALANCE, SEPTEMBER 30, 2002 $ 2,200 $52,310 $17,190 $ (605) $71,095
======= ======= ======= ======= =======
See accompanying notes to financial statements.
7
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
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STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
================================================================================
Nine Months Ended
September 30,
------------------------
2002 2001
-------- --------
Cash Flows From Operating Activities:
Net earnings $ 2,714 $ 4,655
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 2,761 3,130
Capitalization of policy acquisition costs (1,578) (3,074)
Amortization of investments 606 180
Interest credited to policyholders' account balances 7,993 8,316
Provision for deferred Federal income tax 2,428 1,878
(Increase) decrease in operating assets:
Accrued investment income (1,078) (1,279)
Federal income taxes - current (3,323) (611)
Reinsurance receivables 43 1,747
Other 332 130
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses (729) (1,112)
Other policyholder funds 315 1,124
Federal income taxes - current (295) -
Affiliated payables 1,842 (539)
Other (496) (915)
Other operating activities:
Net realized investment losses 3,236 180
-------- --------
Net cash and cash equivalents provided by operating activities 14,771 13,810
-------- --------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 21,475 10,687
Maturities of available-for-sale securities 12,832 24,478
Purchases of available-for-sale securities (50,080) (35,315)
Policy loans on insurance contracts 1,994 (850)
-------- --------
Net cash and cash equivalents used by investing activities $(13,779) $ (1,000)
-------- --------
See accompanying notes to financial statements. (Continued)
8
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)
================================================================================
Nine Months Ended
September 30,
--------------------------
2002 2001
--------- ---------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 45,725 $ 76,194
Policyholder withdrawals (including transfers to / from separate accounts) (53,135) (91,449)
--------- ---------
Net cash and cash equivalents used by financing activities (7,410) (15,255)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,418) (2,445)
CASH AND CASH EQUIVALENTS:
Beginning of year 20,524 19,514
--------- ---------
End of period $ 14,106 $ 17,069
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 2,288 $ 1,095
Intercompany interest 4 65
See accompanying notes to financial statements.
9
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 nine 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
until December 31, 2002, as described below. Other differences in accounting
practices between NAIC SAP and NY SAP were not applicable to the Company.
In September 2002, the State of New York adopted the admissibility of deferred
tax assets and liabilities, as prescribed by NAIC SAP. The new law applies to
financial statements filed on or after December 31, 2002. The impact of
recording deferred tax assets and deferred tax liabilities is not expected to
have a material impact on the Company's statutory financial statements.
At September 30, 2002, statutory capital and surplus on a NY SAP basis and an
NAIC SAP basis were $35,971 and $36,553, respectively. The difference between
statutory capital and surplus on a NY SAP basis versus an NAIC SAP basis is the
recognition of a $582 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 nine month periods
ended September 30, 2002 and 2001, statutory net income (loss) was $1,737 and
($1,852) respectively. There was no difference in net income on a NY SAP basis
versus an NAIC SAP basis at September 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:
10
September 30, December 31,
2002 2001
------------- ------------
Assets:
Fixed maturity securities $ 3,540 $ 786
Equity securities (473) (221)
-------- --------
3,067 565
-------- --------
Liabilities:
Policyholders' account balances 3,999 2,318
Federal income taxes - deferred (327) (614)
-------- --------
3,672 1,704
-------- --------
Stockholder's equity:
Accumulated other comprehensive loss $ (605) $ (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 for the three and nine month periods
ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
NET REVENUES (a):
Life Insurance $ 2,187 $ 2,330 $ 6,937 $ 7,559
Annuities 3,235 2,573 6,233 8,745
Other 271 741 353 1,320
------- ------- ------- -------
Total Net Revenues $ 5,693 $ 5,644 $13,523 $17,624
======= ======= ======= =======
NET EARNINGS:
Life Insurance $ 374 $ 181 $ 1,313 $ 1,189
Annuities 995 537 1,172 2,608
Other 174 482 229 858
------- ------- ------- -------
Total Net Earnings $ 1,543 $ 1,200 $ 2,714 $ 4,655
======= ======= ======= =======
(a) Net revenues include investment income net of interest credited to
policyholders' account balances.
NOTE 5. SUBSEQUENT EVENTS
Management finalized their periodic review of the amortization of deferred
policy acquisition costs during the fourth quarter of 2002 and recorded a
reduction in the carrying value of $1.5 million.
11
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 nine month periods ended
September 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 Audited 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: 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, as such,
the values of variable contract owner account balances. Since asset-based fees
collected on in force variable contracts represents a significant source of
revenue, the Company's earnings will be impacted by fluctuations in investment
performance of separate accounts assets. Fluctuations in the U.S. equity market
also directly impacts the Company's exposure to guaranteed minimum death benefit
("GMDB") provisions. Negative investment performance generally results in
greater exposure to GMDB provisions, as 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 claims. GMDB claims are recorded as a component of
policy benefits.
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 decrease for each equity market index for the
current three and nine month periods ended September 30, 2002 and 2001,
respectively:
12
2002 2001
-------------------------------------- ---------------------------------------
Third Quarter Nine Months Third Quarter Nine Months
2002 2002 2001 2001
------------- ------------- --------------- ------------
Dow -17.9 % -24.2 % -15.8 % -18.0 %
NASDAQ -19.9 % -39.9 % -30.7 % -39.3 %
S&P Index -17.6 % -29.0 % -15.0 % -21.2 %
The investment performance in the underlying U.S. equity-based 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.
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.
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 nine month periods ended September 30, 2002, medium term interest rates
decreased approximately 82 basis points and 118 basis points, respectively, to
yield, on average, for the current nine month period 2.48%. During the three and
nine month periods ended September 30, 2001, medium term interest rates
decreased approximately 112 basis points and 170 basis points, respectively, to
yield, on average, for the nine month period 3.44%.
Corporate Credit
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. During 2002, corporate debt defaults increased
significantly as a result of continuing weakness in the economy, as well as
several large high-profile defaults. The Company holds corporate debt of certain
of these companies and has adjusted its carrying value in these investments to
reflect amounts anticipated to ultimately be recovered. The decrease in book
value is recorded as a component of net realized investment losses.
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
(for example, U.S. Treasury instruments). 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 nine month
periods ended September 30, 2002, credit spreads widened approximately 59 basis
points and 73 basis points, respectively, and ended the current nine month
period at 251 basis points. During the three and nine month periods ended
September 30, 2001, credit spreads widened approximately 35 basis points and
contracted approximately 1 basis point, respectively, and ended the nine month
period at 186 basis points. Widening credit spreads have a negative impact on
the value of investments.
NEW BUSINESS
Life insurance and annuity premiums decreased $12.2 million (or 45%) to $14.8
million and $35.5 million (or 43%) to $46.9 million during the current three and
nine month periods ended September 30, 2002, respectively, as compared to the
same periods in 2001. Life insurance and annuity premiums by type of product
were as follows:
13
($ In Millions) % Change
------------------------------- --------------------------------
Third Quarter Nine Months Third Quarter Nine Months
2002 2002 2002-2001 2002-2001
------------- ----------- ------------- -----------
Variable Annuities:
C-Share $ 4.9 $ 17.2 -75 % -64 %
B-Share 3.0 13.8 -54 -54
L-Share (a) 1.8 8.5 100 100
------- ------- ------- -------
9.7 39.5 -62 -49
------- ------- ------- -------
Modified Guaranteed Annuities 4.9 6.4 100 814
Variable Life Insurance 0.2 1.0 -75 -73
------- ------- ------- -------
Total Direct Premiums $ 14.8 $ 46.9 -45 % -43 %
======= ======= ======= =======
(a) The Company's L-Share variable annuity product was introduced in the
fourth quarter 2001.
During the current three and nine month periods, variable annuity premiums
decreased $16.1 million (or 62%) to $9.7 million and $38.1 million (or 49%) to
$39.5 million, 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 nine
months of 2002, sales of non-proprietary products with these types of guarantee
features have been strong within the Merrill Lynch & Co. distribution system.
The Company is currently developing a guaranteed minimum income benefit
provision for placement in certain of its existing variable annuity products and
anticipates offering these features in 2003.
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.
During the current three and nine month periods, modified guaranteed annuity
premiums increased $4.9 million (or 100%) to $4.9 million and $5.7 million (or
814%) to $6.4 million, respectively, as compared to the same periods in 2001.
The increases are primarily due to increasing demand for products with guarantee
features, as noted above.
WITHDRAWALS
Policy and contract surrenders increased $1.2 million (or 7%) to $17.4 million
and $4.8 million (or 9%) to $57.7 million during the current three and nine
month periods, respectively, as compared to the same periods in 2001. During the
current three and nine month periods ended September 30, 2002, variable annuity
surrenders increased $1.9 million (or 19%) and $7.0 million (or 22%) as compared
to the same periods in 2001. The increases are primarily a result of the
anticipated increase in lapse rates on variable annuity contracts reaching the
end of their surrender charge period. In addition, variable life surrenders
increased $2.5 million (or 116%) and $3.5 million (or 38%) during the current
three and nine month periods as compared to the same periods in 2001. Partially
offsetting the increases in variable annuity and variable life surrenders was a
decrease in modified guaranteed annuity surrenders, which decreased $3.0 million
(or 72%) and $5.4 million (or 48%) during the current three and nine month
periods as compared to the same periods in 2001. Management attributes these
decreases to volatility in the equity markets, whereby modified guaranteed
annuity contract owners have less incentive to abdicate guaranteed income.
FINANCIAL CONDITION
At September 30, 2002, the Company's assets were $1.1 billion, or $0.2 billion
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 $200.5
million (or 20%) to $792.5 million primarily due to unfavorable investment
performance and an increase in net cash outflow. Changes in separate accounts
assets for the first three quarters of 2002 were as follows:
14
(In Millions) 1Q02 2Q02 3Q02 Total
--------- --------- --------- ---------
Investment performance - variable products $ 7.4 $ (74.5) $ (98.1) $ (165.2)
Net cash outflow - variable products (12.4) (9.1) (13.8) (35.3)
--------- --------- --------- ---------
$ (5.0) $ (83.6) $ (111.9) $ (200.5)
========= ========= ========= =========
The continuing decline in overall credit quality among corporate bonds has
placed added pressure on the Company's fixed income portfolio. As of September
30, 2002 and December 31, 2001, approximately $3.9 million (or 2%) 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 September 30, 2002, approximately
$8.8 million (or 5%) 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 nine months of 2002, the Company experienced contract owner
withdrawals that exceeded deposits by $29.4 million. The components of contract
owner transactions were as follows:
September 30,
(In Millions) 2002
-------------
Premiums collected $ 46.9
Internal tax-free exchanges (1.2)
-------
Net contract owner deposits 45.7
Contract owner withdrawals 53.1
Net transfers to/from separate accounts 22.0
-------
Net contract owner withdrawals 75.1
-------
Net contract owner activity $ (29.4)
=======
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of September 30, 2002, the Company's assets included
$174.2 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 September 30, 2002 and 2001, the Company
reported net earnings of $1.5 million and $1.2 million, respectively. For the
nine month periods ended September 30, 2002 and 2001, the Company reported net
earnings of $2.7 million and $4.7 million, respectively.
Policy charge revenue decreased $0.3 million (or 6%) and $0.3 million (or 2%)
during the current three and nine month periods ended September 30, 2002,
respectively, as compared to the same periods in 2001. The decreases in policy
charge revenue are primarily attributable to the decrease in average variable
account balances. Average variable account balances decreased $120.2 million (or
15
13%) and $66.6 million (or 7%) during the current three and nine month periods
as compared to the same periods in 2001. During the same periods, asset based
policy charges decreased $0.2 million (or 9%) and $0.3 million (or 4%). Asset
based policy charges were favorably impacted by increases in rates charged to
unaffiliated fund investment managers for administrative services.
Net earnings derived from interest spread decreased $0.1 million (or 12%) and
$0.7 million (or 19%) during the current three and nine month periods ended
September 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 decreased $0.5 million and increased $3.1 million
during the current three and nine month periods ended September 30, 2002,
respectively, as compared to the same periods in 2001. The decrease in net
realized investment losses during the current three month period is primarily
due to a decrease in interest related losses as compared to the same period in
2001. The increase in net realized losses during the current nine month period
is primarily due to book value writedowns and sales of $3.4 million on
investments in fixed maturity securities issued by WorldCom Inc.
Policy benefits increased $0.7 million (or 83%) and $0.5 million (or 20%) during
the current three and nine month periods ended September 30, 2002, respectively,
as compared to the same periods in 2001. During the current three and nine month
periods variable annuity death benefit expense incurred under guaranteed minimum
death benefit provisions increased $0.8 million and $0.2 million, respectively,
as compared to the same periods in 2001.
Reinsurance premium ceded increased $0.1 million (or 21%) and $0.2 million (or
12%) during the current three and nine month periods ended September 30, 2002,
respectively, as compared to the same periods in 2001. The increase is
attributable to the combined effect of the increasing age of contract owners and
increased insurance inforce.
Amortization of deferred policy acquisition costs decreased $0.2 million (or
18%) and $0.4 million (or 12%) during the current three and nine month periods
ended September 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 policy charge revenue during 2002.
Insurance expenses and taxes decreased $0.7 million (or 48%) and $1.2 million
(or 32%) during the current three and nine month periods ended September 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 23% and 29% during the
current three and nine month periods ended September 30, 2002 as compared to 35%
and 34%, 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 the third quarter 2002. During
the current three and nine month periods ended September 30, 2002, the Company's
current and deferred tax components have been significantly impacted by
fluctuations in tax reserves for guaranteed minimum death benefits. The reserve
fluctuations have resulted in an increased current tax benefit and an increased
deferred tax expense during the current three and nine month periods as compared
to the same periods 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.
16
ITEM 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of a date within 90 days of the filing
of this Form 10-Q, that its disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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, Treasurer and
Chief Financial Officer
Date: November 12, 2002
Certification of Chief Executive Officer
I, Nikos Kardassis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ML Life Insurance
Company of New York;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Nikos Kardassis
------------------------------------
Nikos Kardassis
President and Chief Executive Officer
Dated: November 12, 2002
Certification of Chief Financial Officer
I, Matthew Rider, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ML Life Insurance
Company of New York;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Matthew Rider
------------------------------------
Matthew Rider
Senior Vice President and
Chief Financial Officer
Dated: November 12, 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.