Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 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 10281
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2003 2002
- ------ ------------- ------------
(Unaudited)
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2003 - $173,498; 2002 - $161,708) $ 179,324 $ 165,467
Equity securities, at estimated fair value
(cost: 2003 - $0; 2002 - $5,896) -- 5,625
Policy loans on insurance contracts 82,356 86,603
---------- ----------
Total Investments 261,680 257,695
CASH AND CASH EQUIVALENTS 24,878 23,092
ACCRUED INVESTMENT INCOME 4,702 4,845
DEFERRED POLICY ACQUISITION COSTS 25,867 27,522
FEDERAL INCOME TAXES - CURRENT -- 1,504
RECEIVABLES FROM SECURITIES SOLD 1,522 --
OTHER ASSETS 4,418 4,143
SEPARATE ACCOUNTS ASSETS 873,833 810,384
---------- ----------
TOTAL ASSETS $1,196,900 $1,129,185
========== ==========
See accompanying notes to financial statements. (Continued)
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
BALANCE SHEETS
(Continued) (Dollars in thousands, except common stock par value and shares)
- --------------------------------------------------------------------------------
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2003 2002
- ------------------------------------ ------------- ------------
(Unaudited)
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 222,613 $ 232,908
Claims and claims settlement expenses 5,110 3,289
---------- ----------
Total policyholder liabilities and accruals 227,723 236,197
OTHER POLICYHOLDER FUNDS 1,004 787
FEDERAL INCOME TAXES - DEFERRED 6,360 6,890
FEDERAL INCOME TAXES - CURRENT 581 --
PAYABLES FOR SECURITIES PURCHASED 3,999 --
AFFILIATED PAYABLES - NET 5,483 2,103
OTHER LIABILITIES 222 498
SEPARATE ACCOUNTS LIABILITIES 873,833 810,384
---------- ----------
Total Liabilities 1,119,205 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 21,002 17,627
Accumulated other comprehensive income 2,183 189
---------- ----------
Total Stockholder's Equity 77,695 72,326
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,196,900 $1,129,185
========== ==========
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
------------------
2003 2002
---- ----
REVENUES:
Policy charge revenue $ 4,181 $ 4,392
Net investment income 2,916 3,725
Net realized investment gains (losses) (1,138) 235
----- -----
Total Revenues 5,959 8,352
----- -----
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 2,404 2,659
Policy benefits (net of reinsurance recoveries: 2003- $74;
2002- $163) 507 1,528
Reinsurance premium ceded 366 542
Amortization of deferred policy acquisition costs 453 818
Insurance expenses and taxes 956 794
----- -----
Total Benefits and Expenses 4,686 6,341
----- -----
Earnings Before Federal Income Tax Provision 1,273 2,011
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 581 (2,374)
Deferred (135) 2,842
----- -----
Total Federal Income Tax Provision 446 468
----- -----
NET EARNINGS $ 827 $ 1,543
===== =====
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------
2003 2002
------ ------
REVENUES:
Policy charge revenue $ 12,056 $ 13,768
Net investment income 9,751 10,984
Net realized investment gains (losses) 544 (3,236)
------ ------
Total Revenues 22,351 21,516
------ ------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 7,393 7,993
Policy benefits (net of reinsurance recoveries: 2003 - $299;
2002 - $654) 2,849 2,855
Reinsurance premium ceded 1,179 1,604
Amortization of deferred policy acquisition costs 3,031 2,761
Insurance expenses and taxes 2,706 2,491
------ ------
Total Benefits and Expenses 17,158 17,704
------ ------
Earnings Before Federal Income Tax Provision 5,193 3,812
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 3,421 (1,330)
Deferred (1,603) 2,428
------ ------
Total Federal Income Tax Provision 1,818 1,098
------ ------
NET EARNINGS $ 3,375 $ 2,714
====== ======
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
--------------------
2003 2002
------- -------
NET EARNINGS $ 827 $ 1,543
------- -------
OTHER COMPREHENSIVE INCOME:
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (1,167) 2,270
Reclassification adjustment for (gains) losses included in net earnings 1,187 (228)
------- -------
Net unrealized gains on investment securities 20 2,042
Adjustments for:
Policyholder liabilities 315 (629)
Deferred federal income taxes (117) (494)
------- -------
Total other comprehensive income, net of taxes 218 919
------- -------
COMPREHENSIVE INCOME $ 1,045 $ 2,462
======= =======
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------
2003 2002
------- -------
NET EARNINGS $ 3,375 $ 2,714
------- -------
OTHER COMPREHENSIVE INCOME:
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 2,570 (741)
Reclassification adjustment for (gains) losses included in net earnings (232) 3,243
------- -------
Net unrealized gains on investment securities 2,338 2,502
Adjustments for:
Policyholder liabilities 729 (1,681)
Deferred federal income taxes (1,073) (287)
------- -------
Total other comprehensive income, net of taxes 1,994 534
------- -------
COMPREHENSIVE INCOME $ 5,369 $ 3,248
======= =======
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings 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 3,375 3,375
Other comprehensive income, net of tax 1,994 1,994
------ ------- ------- ------- -------
BALANCE, SEPTEMBER 30, 2003 $2,200 $52,310 $21,002 $ 2,183 $77,695
====== ======= ======= ======= =======
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------
2003 2002
------- -------
Cash Flows From Operating Activities:
Net earnings $ 3,375 $ 2,714
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 3,031 2,761
Capitalization of policy acquisition costs (1,376) (1,578)
Amortization of investments 532 606
Interest credited to policyholders' account balances 7,393 7,993
Provision (benefit) for deferred Federal income tax (1,603) 2,428
(Increase) decrease in operating assets:
Accrued investment income 143 (1,078)
Federal income taxes - current 1,504 (3,323)
Other (275) 375
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 1,821 (729)
Other policyholder funds 217 315
Federal income taxes - current 581 (295)
Affiliated payables 3,380 1,842
Other (276) (496)
Other operating activities:
Net realized investment (gains) losses (544) 3,236
------- -------
Net cash and cash equivalents provided by operating activities 17,903 14,771
------- -------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 35,650 21,475
Maturities of available-for-sale securities 50,390 12,832
Purchases of available-for-sale securities (89,445) (50,080)
Policy loans on insurance contracts 4,247 1,994
------- -------
Net cash and cash equivalents provided (used) by investing activities $ 842 $(13,779)
------- -------
See accompanying notes to financial statements. (Continued)
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------
2003 2002
-------- --------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 35,209 $ 45,725
Policyholder withdrawals (including transfers from separate accounts) (52,168) (53,135)
-------- --------
Net cash and cash equivalents used by financing activities (16,959) (7,410)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,786 (6,418)
CASH AND CASH EQUIVALENTS:
Beginning of year 23,092 20,524
-------- --------
End of period $ 24,878 $ 14,106
======== ========
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 1,336 $ 2,288
Intercompany interest 8 4
See accompanying notes to financial statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
ML Life Insurance Company of New York (the "Company") is a wholly owned
subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG"). The Company is an
indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch &
Co."). The Company sells non-participating 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 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 ("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 September 30, 2003 and December 31, 2002 were
$27,475 and $21,411, respectively. For the nine month periods ended September
30, 2003 and 2002, statutory net income was $5,734 and $1,737, 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 taxes. 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:
September 30, December 31,
2003 2002
------ ------
Assets:
Fixed maturity securities $5,826 $ 3,759
Equity securities -- (271)
----- -----
5,826 3,488
----- -----
Liabilities:
Policyholders' account balances 2,469 3,198
Federal income taxes - deferred 1,174 101
----- -----
3,643 3,299
----- -----
Stockholder's equity:
Accumulated other comprehensive income $2,183 $ 189
===== =====
NOTE 4. ACCOUNTING PRONOUNCEMENTS
On April 30, 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. The
new guidance amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS No.
133, and decisions made in connection with other FASB projects dealing with
financial instruments and in connection with implementation issues raised in
relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In addition,
it clarifies when a derivative contains a financing component that warrants
special reporting in the statements of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The Company does not have any
derivatives or hedging activities that qualify for hedge accounting. The
adoption of SFAS No. 149 did not have a material impact on the Financial
Statements.
On July 7, 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts. The SOP provides guidance on accounting and reporting by insurance
companies for certain nontraditional long-duration contracts and for separate
accounts. The SOP is effective for financial statements for the Company
beginning in 2004. The SOP requires 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 that the Company
currently employs. Had the Company adopted SOP 03-1 at September 30, 2003, the
estimated pre-tax decrease to the Company's Statements of Earnings would be
between $4.0 million and $6.0 million; however, the ultimate impact of adoption
in 2004 will depend on market conditions at that time.
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 Company currently does not
manufacture, market, or sell 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 and nine month periods
ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2003 2002 2003 2002
------ ------ ------- -------
Net Revenues (a):
Annuities $1,449 $3,238 $ 8,680 $ 6,268
Life Insurance 1,925 2,187 6,041 6,937
Other 206 271 527 353
------ ------ ------- -------
Total Net Revenues $3,580 $5,696 $15,248 $13,558
====== ====== ======= =======
Net Earnings:
Annuities $ 293 $ 995 $ 2,013 $ 1,172
Life Insurance 401 374 1,020 1,313
Other 133 174 342 229
------ ------ ------- -------
Total Net Earnings $ 827 $1,543 $ 3,375 $ 2,714
====== ====== ======= =======
(a) Net revenues include investment income net of interest credited to
policyholders' account balances.
NOTE 6. SUBSEQUENT EVENTS
Management finalized the periodic review of the amortization of deferred policy
acquisition costs ("DAC") during the fourth quarter of 2003 and recorded a
reduction in the DAC carrying value of $1.0 million.
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, 2003 and 2002. This discussion should be read in conjunction with
the accompanying unaudited financial statements and notes thereto, in addition
to the December 31, 2002 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 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 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.
TAX LEGISLATION
During May 2003, Congress passed the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (the "Act"). A key provision in the Act is reduced federal income
tax rates on dividends and capital gains paid to investors on stocks and mutual
funds held individually. Pending future Congressional action, these federal
income tax rate reductions are set to expire after 2008. These recently enacted
tax rate reductions may impact the relative attractiveness of life annuitization
and systematic withdrawals using non-qualified annuities.
BUSINESS OVERVIEW
The Company's gross earnings are principally derived from two sources:
- - the charges imposed on variable annuity and variable life insurance
contracts, and
- - the net earnings from investment of fixed rate life insurance and annuity
contract owner deposits less interest credited to contract owners,
commonly known as interest spread
The costs associated with acquiring contract owner deposits (deferred policy
acquisition costs) are amortized over the period in which the Company
anticipates holding those funds. 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 policy
charge revenue
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.
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 in performance for each equity market
index for the current three and nine month periods ended September 30, 2003:
2003
----------------------------
Third Quarter Nine Months
2003 2003
------------- -----------
Dow 3.2 % 11.2 %
NASDAQ 10.1 % 33.8 %
S&P Index 2.2 % 13.2 %
Despite positive equity market performance during the current nine month period
ended September 30, 2003, average separate accounts assets, and in turn, average
variable contract owner account balances remained at lower levels as compared to
the same period in 2002. Conversely, during the current three month period,
average variable contract owner account balances were at slightly higher levels
as compared to the same period in 2002. The following table provides the average
increase (decrease) in performance for each equity market index for the three
and nine month periods ended September 30, 2003 as compared to the same periods
in 2002:
2003
----------------------------
Third Quarter Nine Months
2003 2003
------------- -----------
Dow 11.7 % -7.5 %
NASDAQ 39.8 % -0.6 %
S&P Index 13.3 % -8.4 %
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 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. Also, since the
Company has certain fixed products that contain guaranteed minimum crediting
rates, decreases in interest rates can decrease the amount of interest spread
earned by the Company.
The Company defines medium term interest rates as the average interest rate on
U.S. Treasury securities with terms of 1 to 10 years. During the three and nine
month periods ended September 30, 2003, average medium term interest rates
increased approximately 53 basis points and decreased approximately 83 basis
points, respectively, to yield, on average, 2.36% during the current nine month
period. During the three and nine month periods ended September 30, 2002,
average medium term interest rates decreased approximately 84 basis points and
48 basis points, respectively, to yield, on average, 3.39% during the nine month
period.
Corporate Credit and Credit Spreads
Changes in the corporate credit environment directly impact the value of the
Company's investments, primarily fixed maturity securities. The Company
primarily invests in investment-grade corporate debt to support its fixed rate
product liabilities.
Credit spreads represent the credit risk premiums required by market
participants for a given credit quality, e.g. the additional yield that a debt
instrument issued by a AA-rated entity must produce over a risk-free alternative
(for example, U.S. Treasury instruments). Changes in credit spreads have an
inverse relationship to the value of investments.
The Company defines credit spreads according to the Merrill Lynch U.S. Corporate
Bond Index for BBB-A Rated bonds with three to five year maturities. During the
three and nine month periods ended September 30, 2003, credit spreads contracted
approximately 11 basis points and 100 basis points, respectively, and ended the
current nine month period at 98 basis points. During the three and nine month
periods ended September 30, 2002, credit spreads widened approximately 59 basis
points and 73 basis points, respectively, and ended the nine month period at 251
basis points.
NEW BUSINESS
Annuity and life insurance premiums increased $4.6 million (or 31%) to $19.4
million and decreased $9.8 million (or 21%) to $37.1 million during the current
three and nine month periods ended September 30, 2003, respectively, as compared
to the same periods in 2002. Annuity and life insurance premiums by type of
product were as follows:
($ In Millions) % Change
---------------------------- -----------------------------
Third Quarter Nine Months Third Quarter Nine Months
2003 2003 2003-2002 2003-2002
------------- ----------- ------------- -----------
Variable Annuities:
B-Share $ 14.5 $ 20.1 383 % 46 %
C-Share 1.4 8.3 -71 -52
L-Share 2.4 6.8 33 -20
------- -------- -------- --------
18.3 35.2 89 -11
------- -------- -------- --------
Variable Life Insurance 0.1 0.5 -50 -50
Modified Guaranteed Annuities - 0.2 -100 -97
Other 1.0 1.2 100 100
------- -------- -------- --------
Total Direct Premiums $ 19.4 $ 37.1 31 % -21 %
======= ======== ======== ========
During the current three and nine month periods, variable annuity premiums
increased $8.6 million (or 89%) to $18.3 million and decreased $4.3 million (or
11%) to $35.2 million, respectively, as compared to the same periods in 2002.
Management attributes the increase in variable annuity premiums during the
current three month period primarily to the introduction of a new B-Share
variable annuity product, which was introduced during the third quarter 2003.
Sales of the new B-Share variable annuity product were $7.9 million during the
current three month period ended September 30, 2003. The new B-Share variable
annuity product is designed for the tax-qualified IRA market and includes a
living benefit provision. The C-Share and L-Share variable annuities do not
contain living benefits. Also, on June 16, 2003 the Company added a living
benefit provision to its existing B-Share variable annuity.
During the current three and nine month periods, modified guaranteed annuity
premiums decreased $4.9 million (or 100%) and $6.2 million (or 97%),
respectively, as compared to the same periods in 2002. The decreases are
primarily due to the lower interest rate environment during the current three
and nine month periods of 2003 as compared to 2002.
WITHDRAWALS
Policy and contract withdrawals decreased $3.6 million (or 6%) to $54.1 million
during the first nine months of 2003, as compared to the same period in 2002.
During the first nine months of 2003, variable annuity withdrawals decreased
$7.4 million (or 19%) as compared to the same period in 2002. Management
attributes the decrease in variable annuity withdrawals to the general decline
in the equity markets occurring over the past three years whereby variable
annuity contract owners are less inclined to give up contracts in which GMDB
provisions are in excess of the variable account balance. Partially offsetting
the decrease in variable annuity withdrawals was an increase in variable life
withdrawals, which increased $2.8 million (or 22%) during the first nine months
of 2003 as compared to same period in 2002. The increase in variable life
withdrawals primarily represents movement by contract owners to other
non-proprietary insurance products. As previously noted, the Company does not
manufacture variable life insurance products.
During the current three month period ended September 30, 2003, policy and
contract withdrawals were relatively unchanged as compared to the same period in
2002.
FINANCIAL CONDITION
At September 30, 2003, the Company's assets were $1,196.9 million, or $67.7
million higher than the $1,129.2 million in assets at December 31, 2002
primarily due to an increase in separate accounts assets. Separate accounts
assets increased $63.4 million (or 8%) to $873.8 million. Changes in separate
accounts assets for the first three quarters of 2003 were as follows:
1Q03 2Q03 3Q03 Total
---- ---- ---- -----
(In Millions)
Investment performance - variable products $ (14.8) $ 81.9 $ 22.6 $ 89.7
Net cash outflow - variable products (9.0) (13.0) (4.3) (26.3)
------- ------- ------- -------
$ (23.8) $ 68.9 $ 18.3 $ 63.4
======= ======= ======= =======
At September 30, 2003 and December 31, 2002, approximately $3.1 million (or 2%)
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 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 September 30, 2003,
approximately $4.4 million (or 2%) 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 reduction in securities rated BBB- is due
to management's intention to increase the overall credit quality of the fixed
maturity security portfolio. Management closely monitors such securities.
During the first nine months of 2003, the Company experienced contract owner
withdrawals that exceeded deposits by $33.2 million. The components of contract
owner transactions were as follows:
September 30,
2003
-------------
(In Millions)
Premiums collected $ 37.1
Internal tax-free exchanges (1.9)
---------
Net contract owner deposits 35.2
Contract owner withdrawals 52.2
Net transfers from separate accounts 16.2
---------
Net contract owner withdrawals 68.4
---------
Net contract owner activity $ (33.2)
=========
LIQUIDITY AND CAPITAL RESOURCES
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of September 30, 2003, the Company's assets included
$198.3 million of cash, short-term investments and investment grade publicly
traded available-for-sale securities that could be liquidated if funds were
required.
During June 2003, the Company and Merrill Lynch & Co. executed a "keepwell"
agreement. The agreement obligates Merrill Lynch & Co. to maintain a level of
capital in the Company in excess of minimum regulatory capital requirements.
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, 2003 and 2002, the Company
reported net earnings of $0.8 million and $1.5 million, respectively. For the
nine month periods ended September 30, 2003 and 2002, the Company reported net
earnings of $3.4 million and $2.7 million, respectively.
Policy charge revenue decreased $0.2 million (or 5%) and $1.7 million (or 12%)
during the current three and nine month periods ended September 30, 2003,
respectively, as compared to the same periods in 2002. During the current three
and nine month periods, non-asset based policy charge revenue decreased $0.3
million (or 18%) and $0.9 million (or 17%), respectively, as compared to the
same periods in 2002. The decreases in non-asset based policy charge revenue are
primarily due to decreases in cost of insurance charges and deferred policy load
amortization. During the current nine month period, asset-based policy charge
revenue decreased $0.8 million (or 9%) as compared the same period in 2002. The
decrease in asset-based policy charge revenue is primarily attributable to the
decrease in average variable account balance. During the same comparative
period, average variable account balances decreased $86.8 million (or 9%).
Net earnings derived from interest spread decreased $0.6 million (or 52%) and
$0.6 million (or 21%) during the current three and nine month periods ended
September 30, 2003, respectively, as compared to the same periods in 2002. The
decreases in interest spread are primarily due to reductions in invested asset
yields resulting from (i) the generally lower interest rate environment during
the current three and nine month periods of 2003 as compared to 2002 and (ii)
the increase in credit quality of the portfolio.
Net realized investment losses increased $1.4 million and net realized
investment gains increased $3.8 million during the current three and nine month
periods ended September 30, 2003, respectively, as compared to the same periods
in 2002. The following table provides the changes in net realized investment
gains (losses) by type for each respective period:
Three Months Nine Months
Net Realized Gains (Losses) 2003 - 2002 2003 - 2002
- ------------------------------------ ----------- -----------
($ in Millions)
Interest related $ 0.5 (1) $ 2.6 (1)
Credit related (1.9) (2) 1.2 (3)
---- ---
$ (1.4) $ 3.8
==== ===
(1) Attributable to increases in invested asset market valuations
resulting from generally lower interest rates and contracting
credit spreads during the current three and nine month periods
of 2003 as compared to 2002.
(2) Increases in credit related net realized losses are primarily
due to increases in other-than-temporary ("OTT") declines in the
carrying value of fixed maturity securities and asset sales of
several large security holdings. OTT declines were $0.8 million
and asset sales were $0.9 million during the current three month
period ended September 30, 2003. There were no OTT declines
during the three month period ended September 30, 2002.
(3) Decreases in credit related net realized losses are primarily
due to decreases in OTT declines in the carrying value of fixed
maturity securities. During the first nine months of 2003, OTT
declines and asset sales were $1.8 million. During the first
nine months of 2002, OTT declines were $3.4 million.
Policy benefits decreased $1.0 million (or 67%) during the current three month
period ended September 30, 2003, as compared to the same period in 2002. During
the current three month period variable annuity mortality expense decreased $0.6
million as compared to the same period in 2002. The decrease in variable annuity
mortality expense is primarily due to decreased death benefit payments incurred
under GMDB provisions. In addition, life insurance mortality expense decreased
$0.4 million during the current three month period ended September 30, 2003, as
compared to the same period in 2002. The decrease in life insurance mortality
expense is primarily due to a decrease in net amount at risk per death claim.
During the first nine months of 2003, policy benefits remained relatively
unchanged as compared to the same period in 2002.
Reinsurance premium ceded decreased $0.2 million (or 32%) and $0.4 million (or
26%) during the current three and nine month periods ended September 30, 2003,
respectively, as compared to the same periods in 2002. The decreases in
reinsurance premium ceded are attributable to a decrease in life insurance
inforce.
Amortization of deferred policy acquisition costs decreased $0.4 million (or
45%) and increased $0.3 million (or 10%) during the current three and nine month
periods ended September 30, 2003, respectively, as compared to the same periods
in 2002. The changes in amortization of deferred policy acquisition costs during
the two periods are primarily due to fluctuations in interest-related realized
gains on certain fixed annuity portfolios.
Insurance expenses and taxes increased $0.2 million (or 20%) and $0.2 million
(or 9%) during the current three and nine month periods ended September 30,
2003, as compared to the same periods in 2002. The increases are primarily due
to increased New York State Insurance Department assessments.
The Company's effective federal income tax rate was 35% during the current three
and nine month periods ended September 30, 2003 as compared to 23% and 29%,
respectively, during the equivalent periods in 2002. 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 three and nine month periods ended September 30, 2002, the Company's current
and deferred tax components were significantly impacted by adjustments in tax
reserves for guaranteed minimum death benefits. The reserve adjustments resulted
in an increased current tax benefit and an increased deferred tax expense during
the three and nine month periods ended September 30, 2002.
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.
ITEM 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
quarterly report on Form 10-Q, that the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) are effective. There have been no changes in the Company's
internal control over financial reporting that occurred during the period
covered by this quarterly report on Form 10-Q that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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.)
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
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: November 12, 2003
EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.