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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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, SOUTH TOWER, 5TH FLOOR
NEW YORK, NEW YORK 10080
(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 __
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 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)
================================================================================
March 31, December 31,
ASSETS 2003 2002
- ------ ------------ ------------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2003 - $178,273; 2002 - $161,708) $ 182,382 $ 165,467
Equity securities, at estimated fair value
(cost: 2003 - $5,896; 2002 - $5,896) 5,888 5,625
Policy loans on insurance contracts 83,905 86,603
---------- ----------
Total Investments 272,175 257,695
CASH AND CASH EQUIVALENTS 6,324 23,092
ACCRUED INVESTMENT INCOME 5,065 4,845
DEFERRED POLICY ACQUISITION COSTS 26,963 27,522
FEDERAL INCOME TAXES - CURRENT 969 1,504
REINSURANCE RECEIVABLES 476 649
OTHER ASSETS 3,312 3,494
SEPARATE ACCOUNTS ASSETS 786,551 810,384
---------- ----------
TOTAL ASSETS $1,101,835 $1,129,185
========== ==========
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)
================================================================================
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2003 2002
- ------------------------------------ ----------- ------------
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 226,891 $ 232,908
Claims and claims settlement expenses 2,789 3,289
----------- -----------
Total policyholder liabilities and accruals 229,680 236,197
OTHER POLICYHOLDER FUNDS 669 787
FEDERAL INCOME TAXES - DEFERRED 7,569 6,890
AFFILIATED PAYABLES - NET 2,436 2,103
OTHER LIABILITIES 349 498
SEPARATE ACCOUNTS LIABILITIES 786,551 810,384
----------- -----------
Total Liabilities 1,027,254 1,056,859
----------- -----------
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 18,779 17,627
Accumulated other comprehensive income 1,292 189
----------- -----------
Total Stockholder's Equity 74,581 72,326
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,101,835 $ 1,129,185
=========== ===========
See accompanying notes to financial statements.
2
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
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STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
March 31,
--------------------------
2003 2002
-------- --------
REVENUES:
Policy charge revenue $ 4,040 $ 4,660
Net investment income 3,501 3,633
Net realized investment gains 244 263
-------- --------
Total Revenues 7,785 8,556
-------- --------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 2,528 2,606
Market value adjustment expense 204 12
Policy benefits (net of reinsurance recoveries: 2003 - $61;
2002 - $314) 1,179 709
Reinsurance premium ceded 423 505
Amortization of deferred policy acquisition costs 955 917
Insurance expenses and taxes 724 803
-------- --------
Total Benefits and Expenses 6,013 5,552
-------- --------
Earnings Before Federal Income Tax Provision 1,772 3,004
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 535 1,994
Deferred 85 (942)
-------- --------
Total Federal Income Tax Provision 620 1,052
-------- --------
NET EARNINGS $ 1,152 $ 1,952
======== ========
See accompanying notes to financial statements.
3
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
March 31,
---------------------------
2003 2002
-------- --------
NET EARNINGS $ 1,152 $ 1,952
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 857 (2,827)
Reclassification adjustment for gains included in net earnings (244) (263)
-------- --------
Net unrealized gains (losses) on investment securities 613 (3,090)
Adjustments for:
Policyholder liabilities 1,084 476
Deferred federal income taxes (594) 915
-------- --------
Total other comprehensive income (loss), net of taxes 1,103 (1,699)
-------- --------
COMPREHENSIVE INCOME $ 2,255 $ 253
======== ========
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 STOCKHOLDER'S EQUITY
(Dollars in thousands) (Unaudited)
================================================================================
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings income (loss) equity
-------- ---------- -------- ------------- -------------
BALANCE JANUARY 1, 2002 $ 2,200 $ 52,310 $ 14,476 $ (1,139) $ 67,847
Net earnings 3,151 3,151
Other comprehensive income, net of tax 1,328 1,328
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 2,200 52,310 17,627 189 72,326
Net earnings 1,152 1,152
Other comprehensive income, net of tax 1,103 1,103
-------- -------- -------- -------- --------
BALANCE, MARCH 31, 2003 $ 2,200 $ 52,310 $ 18,779 $ 1,292 $ 74,581
======== ======== ======== ======== ========
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 CASH FLOWS
(Dollars in thousands) (Unaudited)
================================================================================
Three Months Ended
March 31,
-----------------------------
2003 2002
--------- ---------
Cash Flows From Operating Activities:
Net earnings $ 1,152 $ 1,952
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 955 917
Capitalization of policy acquisition costs (396) (378)
Amortization of investments 191 184
Interest credited to policyholders' account balances 2,528 2,606
Provision (benefit) for deferred Federal income tax 85 (942)
(Increase) decrease in operating assets:
Accrued investment income (220) (793)
Federal income taxes - current 535 -
Reinsurance receivables 173 (166)
Other 182 (278)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses (500) 864
Other policyholder funds (118) 546
Federal income taxes - current - 1,699
Affiliated payables 333 2,028
Other (149) (953)
Other operating activities:
Net realized investment gains (244) (263)
--------- ---------
Net cash and cash equivalents provided by operating activities 4,507 7,023
--------- ---------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 4,241 8,584
Maturities of available-for-sale securities 16,310 3,775
Purchases of available-for-sale securities (37,063) (11,338)
Policy loans on insurance contracts 2,698 1,930
--------- ---------
Net cash and cash equivalents provided (used) by investing activities $ (13,814) $ 2,951
--------- ---------
See accompanying notes to financial statements. (Continued)
6
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)
================================================================================
Three Months Ended
March 31,
-----------------------------
2003 2002
--------- ---------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 9,884 $ 15,641
Policyholder withdrawals (including transfers to / from separate accounts) (17,345) (21,918)
--------- ---------
Net cash and cash equivalents used by financing activities (7,461) (6,277)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,768) 3,697
CASH AND CASH EQUIVALENTS:
Beginning of year 23,092 20,524
--------- ---------
End of period $ 6,324 $ 24,221
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ - $ 295
Intercompany interest 9 2
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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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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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 annuity products, including 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 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 ("2002 10K") for the year ended December 31, 2002. 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. Certain reclassifications
have also been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
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, as a component of
prescribed or permitted accounting practices by the State of New York.
Statutory capital and surplus at March 31, 2003 and December 31, 2002 were
$22,336 and $21,411, respectively. For the three month periods ended March 31,
2003 and 2002, statutory net income was $949 and $4,055, respectively.
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 income, 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
income, net of taxes. The components of net unrealized gains (losses) included
in accumulated other comprehensive income were as follows:
March 31, December 31,
2003 2002
---------- ------------
Assets:
Fixed maturity securities $ 4,109 $ 3,759
Equity securities (8) (271)
-------- --------
4,101 3,488
-------- --------
Liabilities:
Policyholders' account balances 2,114 3,198
Federal income taxes - deferred 695 101
-------- --------
2,809 3,299
-------- --------
Stockholder's equity:
Accumulated other comprehensive income $ 1,292 $ 189
======== ========
NOTE 4. ACCOUNTING PRONOUNCEMENTS
8
On July 31, 2002, the American Institute of Certified Public Accountants issued
Proposed Statement of Position ("SOP") "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts." The proposed SOP provides guidance on accounting and reporting by
insurance companies for certain nontraditional long-duration contracts and for
separate accounts. A final SOP would be effective for financial statements for
the Company beginning in 2004. The SOP would require the establishment of a
liability for contracts that contain death or other insurance benefits using a
specified reserve methodology that is different from the methodology the Company
currently employs. Depending on market conditions at the time of adoption the
impact of implementing this reserve methodology may have a material effect on
earnings in the year of adoption.
NOTE 5. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Annuities and Life Insurance. The Company's Annuity
segment consists of variable annuities and interest-sensitive annuities. The
Company's Life Insurance segment consists of variable life insurance products
and interest-sensitive life insurance products. The accounting policies of the
business segments are the same as those for the Company's financial statements
included herein. All revenue and expense transactions are recorded at the
product level and accumulated at the business segment level for review by
management. The "Other" category, presented in the following segment financial
information, represents net revenues and net earnings on assets that do not
support annuity or life insurance contract owner liabilities.
The following table summarizes each business segment's contribution to the
consolidated net revenues and net earnings for the three month periods ended
March 31:
Three Months Ended
March 31,
----------------------------
2003 2002
--------- ---------
NET REVENUES (a):
Annuities $ 3,071 $ 3,662
Life Insurance 2,058 2,443
Other 128 (155)
--------- ---------
Total Net Revenues $ 5,257 $ 5,950
========= =========
NET EARNINGS:
Annuities $ 634 $ 1,433
Life Insurance 434 619
Other 84 (100)
--------- ---------
Total Net Earnings $ 1,152 $ 1,952
========= =========
(a) Net revenues include investment income net of interest credited to
policyholders' account balances.
9
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
This Management's Narrative Analysis of the Results of Operations addresses
changes in revenues and expenses for the three month periods ended March 31,
2003 and 2002. This discussion should be read in conjunction with the
accompanying unaudited financial statements and notes thereto, in addition to
the audited 2002 Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the 2002 10K.
Certain statements contained in this Report may be considered forward-looking,
including statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. These forward-looking statements are not statements of historical fact
and represent only management's beliefs regarding future events, which are
inherently uncertain. There are a variety of factors, many of which are beyond
the Company's control, which affect its operations, performance, business
strategy, financial condition, and results and could cause its actual results
and experience to differ materially from the expectations and objectives
expressed in any forward-looking statements. These factors include, but are not
limited to, the factors listed in the Economic Environment section listed below,
as well as actions and initiatives taken by both current and potential
competitors, the effect of current, pending, and future legislation and
regulation, and the other risks and uncertainties detailed in the Company's
Financial Statements and Notes to Financial Statements. Accordingly, readers are
cautioned not to place undue reliance on forward-looking statements, which speak
only as of the dates on which they are made. The Company does not undertake to
update or revise forward-looking statements to reflect the impact of
circumstances or events that arise after the dates the forward-looking
statements are made. The reader should, however, consult any further disclosures
the Company may make in its Quarterly Reports on Form 10-Q.
DISCONTINUANCE OF VARIABLE LIFE INSURANCE
During the first quarter 2003, the Company discontinued manufacturing its single
premium variable life insurance product. As a result, the Company currently does
not manufacture, market, or sell life insurance products. However, the Company
remains committed to servicing all life insurance contracts inforce.
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 inforce variable contracts represent 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 impact the Company's exposure to guaranteed minimum death benefit
("GMDB") provisions contained in the variable annuities it manufactures.
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.
10
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) in performance for each equity
market index for the three month periods ended March 31, 2003 and 2002,
respectively:
First Quarter First Quarter
2003 2002
------------- -------------
Dow -4.2% 3.8%
NASDAQ 0.4% -5.4%
S&P Index -3.6% -0.1%
The investment performance of the underlying U.S. equity-based mutual funds
supporting the Company's variable products do not replicate the returns of any
specific U.S. equity market index. However, investment performance of the
underlying U.S. equity-based mutual funds will generally increase or decrease
with corresponding increases or decreases of 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. Also, since the
Company has certain fixed products that contain guaranteed minimum crediting
rates, decreases in interest rates can decrease the amount of interest spread
earned by the Company.
The Company defines medium term interest rates as the average interest rate on
U.S. Treasury securities with terms of 1 to 10 years. During the current three
month period ended March 31, 2003, medium term interest rates decreased
approximately 11 basis points, to yield, on average, 2.43%. During the three
month period ended March 31, 2002, medium term interest rates increased
approximately 44 basis points, to yield, on average, 4.09%.
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.
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 month period ended
March 31, 2003, credit spreads contracted approximately 48 basis points and
ended the period at 150 basis points. During the three month period ended March
31, 2002, credit spreads widened approximately 1 basis point and ended the
period at 179 basis points. Contracting credit spreads increase the value of
investments.
11
NEW BUSINESS
Annuity and life insurance premiums decreased $4.7 million (or 30%) to $11.2
million during the first three months of 2003 as compared to the same period in
2002. Annuity and life insurance premiums by type of product were as follows:
($ In Millions) Change
------------------------------ -------------------------
First Quarter First Quarter
2003 2002 $ %
------------- ------------- -------- --------
Variable Annuities:
C-Share $ 4.8 $ 6.3 $ -1.5 -24%
B-Share 3.4 5.9 -2.5 -42%
L-Share 2.6 2.9 -0.3 -10%
-------- -------- -------- --------
10.8 15.1 -4.3 -28%
-------- -------- -------- --------
Variable Life Insurance 0.3 0.2 0.1 50%
Modified Guaranteed Annuities 0.1 0.6 -0.5 -83%
-------- -------- -------- --------
Total Direct Premiums $ 11.2 $ 15.9 $ -4.7 -30%
======== ======== ======== ========
During the first three months of 2003, variable annuity premiums decreased $4.3
million (or 28%) as compared to the same period in 2002. Management attributes
the decrease in variable annuity premiums to increasing customer demand for
annuity products that offer various types of 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 three months of 2003, 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 a guaranteed minimum
income benefit provision for placement in certain of its existing variable
annuity products and anticipates offering this feature during 2003.
Management believes that the increasing volatility and general negative
performance in the equity markets, occurring over the past three years, has lead
to increasing demand for annuity products with guarantee provisions. As such,
future variable annuity sales for products without these guarantees will
continue to be negatively impacted if this trend continues. Conversely,
management believes that a stabilizing equity market may shift future variable
annuity sales away from products with guarantees.
Modified guaranteed annuity premiums decreased $0.5 million (or 83%) primarily
due to the lower interest rate environment during the first three months of 2003
as compared to 2002.
WITHDRAWALS
Policy and contract withdrawals decreased $4.1 million (or 18%) to $19.0 million
during the first three months of 2003 as compared to the same period in 2002.
During the first three months of 2003, variable annuity withdrawals decreased
$7.2 million (or 42%) as compared to the first three months of 2002. Management
attributes the decrease in variable annuity withdrawals to the general decline
and volatility in the equity markets, which has resulted in decreased asset
balances. Partially offsetting the decrease in variable annuity withdrawals was
an increase in variable life withdrawals, which increased $2.4 million (or 55%)
during the first three months of 2003 as compared to same period in 2002.
12
FINANCIAL CONDITION
At March 31, 2003, the Company's assets were $1,101.8 million, or $27.4 million
lower than the $1,129.2 million at December 31, 2002 primarily due to a decrease
in separate accounts assets. Separate accounts assets decreased $23.8 million
(or 3%) to $786.6 million primarily due to unfavorable investment performance
and an increase in net cash outflow. Changes in separate accounts assets for the
first three months of 2003 were as follows:
First Quarter
2003
-------------
(In Millions)
Investment performance - variable products $ (14.8)
Net cash outflow - variable products (9.0)
-----------
$ (23.8)
===========
At March 31, 2003 and December 31, 2002, approximately $2.6 million (or 1%) and
$4.1 million (or 3%), respectively, of the Company's fixed maturity securities
were considered non-investment grade. The Company defines non-investment grade
securities as unsecured debt obligations that 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, at March 31, 2003, approximately $8.5
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 $10.9 million (or 7%) of the Company's fixed maturity securities at
December 31, 2002. The Company closely monitors such investments.
During the first three months of 2003, the Company experienced contract owner
withdrawals that exceeded deposits by $13.5 million. The components of contract
owner transactions were as follows:
March 31,
2003
-------------
(In Millions)
Premiums collected $ 11.2
Internal tax-free exchanges (1.3)
---------
Net contract owner deposits 9.9
Contract owner withdrawals 17.3
Net transfers (to)/from separate accounts 6.1
---------
Net contract owner withdrawals 23.4
---------
Net contract owner activity $ (13.5)
=========
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of March 31, 2003, the Company's assets included $186.9
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.
13
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2003 and 2002, the Company reported
net earnings of $1.2 million and $2.0 million, respectively.
Policy charge revenue decreased $0.6 million (or 13%) during the first three
months of 2003 as compared to the same period in 2002. The decrease in policy
charge revenue is attributable to the decrease in average variable account
balances. Average variable account balances decreased $181.0 million (or 19%)
during the first three months of 2003 as compared to the same period in 2002.
During the same comparative period, asset-based policy charge revenue decreased
$0.4 million (or 16%). In addition, non-asset based policy charge revenue
decreased $0.2 million (or 10%) during the first three months of 2003 as
compared to the same period in 2002 primarily due to a decrease in cost of
insurance charges.
Net earnings derived from interest spread decreased $0.1 million (or 5%) during
the first three months of 2003 as compared to the same period in 2002. The
decrease in interest spread is primarily due to reductions in invested asset
yields resulting from the lower interest rate environment during the first three
months of 2003 as compared to the same period in 2002.
The market value adjustment expense is attributable to the Company's modified
guaranteed annuity product. This contract provision results in a market value
adjustment to the cash surrender value of those contracts that are surrendered
before the expiration of their interest rate guarantee period. During the first
three months of 2003, the market value adjustment expense increased $0.2 million
as compared to the same period in 2002. The increase is primarily due to the
lower interest rate environment during the first three months of 2003 as
compared to the same period in 2002. The market value adjustment expense has an
inverse relationship to changes in interest rates.
Policy benefits increased $0.5 million (or 66%) during the first three months of
2003 as compared to the same period in 2002. The increase in policy benefits is
primarily due to increased variable annuity death benefit expense incurred under
guaranteed minimum death benefit provisions.
Reinsurance premium ceded decreased $0.1 million (or 16%) during the first three
months of 2003 as compared to the same period in 2002. The decrease in
reinsurance premium ceded is attributable to a decrease in life insurance
inforce.
Insurance expenses and taxes decreased $0.1 million (or 10%) during the first
three months of 2003 as compared to the same period in 2002. The decrease in
insurance expenses and taxes is primarily due to a decrease in system and
technology expenses related to new product development, as well as a decrease in
corporate overhead allocations.
SEGMENT INFORMATION
The products that comprise the Annuity and Life Insurance segments generally
possess similar economic characteristics. As such, the financial condition and
results of operations of each business segment are generally consistent with the
Company's consolidated financial condition and results of operations presented
herein.
14
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.
15
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/ JOSEPH E. JUSTICE
-----------------------------------------
Joseph E. Justice
Senior Vice President, Treasurer and
Chief Financial Officer
Date: May 12, 2003
Certification of Chief Executive Officer
I, Nikos K. 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 K. Kardassis
------------------------------------
Nikos K. Kardassis
President and Chief Executive Officer
Dated: May 14, 2003
Certification of Chief Financial Officer
I, Joseph E. Justice, 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/ Joseph E. Justice
------------------------------------
Joseph E. Justice
Senior Vice President and
Chief Financial Officer
Dated: May 14, 2003
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.