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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
COMMISSION FILE NUMBERS 33-34562; 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.)
222 BROADWAY, 14TH FLOOR
NEW YORK, NEW YORK 10038
(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)
June 30, December 31,
2004 2003 (1)
-------- ------------
ASSETS
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2004 - $159,366; 2003 - $177,770) $ 160,413 $ 182,182
Policy loans on insurance contracts 76,913 80,992
---------- ----------
Total Investments 237,326 263,174
CASH AND CASH EQUIVALENTS 28,142 12,338
ACCRUED INVESTMENT INCOME 4,102 4,332
DEFERRED POLICY ACQUISITION COSTS 24,745 25,035
RECEIVABLES FROM SECURITIES SOLD 968 -
OTHER ASSETS 4,016 3,648
SEPARATE ACCOUNTS ASSETS 954,560 943,233
---------- ----------
TOTAL ASSETS $1,253,859 $1,251,760
========== ==========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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)
June 30, December 31,
2004 2003 (1)
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 209,587 $ 216,197
Claims and claims settlement expenses 4,277 4,071
----------- -----------
Total policyholder liabilities and accruals 213,864 220,268
OTHER POLICYHOLDER FUNDS 522 2,114
FEDERAL INCOME TAXES - DEFERRED 2,457 4,698
FEDERAL INCOME TAXES - CURRENT 695 965
AFFILIATED PAYABLES - NET 3,503 2,837
OTHER LIABILITIES 962 28
SEPARATE ACCOUNTS LIABILITIES 954,560 943,233
----------- -----------
Total Liabilities 1,176,563 1,174,143
----------- -----------
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 23,121 21,756
Accumulated other comprehensive income (loss) (335) 1,351
----------- -----------
Total Stockholder's Equity 77,296 77,617
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,253,859 $ 1,251,760
=========== ===========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
2
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
Three Months Ended
June 30,
--------------------
2004 2003(1)
------- -------
REVENUES:
Policy charge revenue $ 4,546 $ 4,039
Net investment income 2,724 3,334
Net realized investment gains 243 1,438
------- -------
Total Revenues 7,513 8,811
------- -------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 2,238 2,461
Policy benefits (net of reinsurance recoveries: 2004 - $93;
2003 - $164) 559 1,163
Reinsurance premium ceded 481 390
Amortization of deferred policy acquisition costs 1,020 1,623
Insurance expenses and taxes 659 1,028
------- -------
Total Benefits and Expenses 4,957 6,665
------- -------
Earnings Before Federal Income Tax Provision 2,556 2,146
------- -------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 696 2,304
Deferred 55 (1,553)
------- -------
Total Federal Income Tax Provision 751 751
------- -------
NET EARNINGS $ 1,805 $ 1,395
======= =======
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
3
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
-----------------------
2004 2003(1)
-------- --------
REVENUES:
Policy charge revenue $ 9,202 $ 7,875
Net investment income 5,662 6,835
Net realized investment gains 245 1,682
-------- --------
Total Revenues 15,109 16,392
-------- --------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 4,611 4,989
Policy benefits (net of reinsurance recoveries: 2004 - $385;
2003 - $225) 1,037 2,342
Reinsurance premium ceded 901 813
Amortization of deferred policy acquisition costs 2,211 2,578
Insurance expenses and taxes 1,344 1,755
-------- --------
Total Benefits and Expenses 10,104 12,477
-------- --------
Earnings Before Federal Income Tax Provision 5,005 3,915
-------- --------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 1,846 2,838
Deferred (238) (1,468)
-------- --------
Total Federal Income Tax Provision 1,608 1,370
-------- --------
EARNINGS BEFORE CHANGE IN ACCOUNTING PRINCIPLE 3,397 2,545
-------- --------
Change in Accounting Principle, Net of Tax (2,032) -
-------- --------
NET EARNINGS $ 1,365 $ 2,545
======== ========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
4
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
Three Months Ended
June 30,
---------------------
2004 2003(1)
------- -------
NET EARNINGS $ 1,805 $ 1,395
------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (5,053) 2,880
Reclassification adjustment for gains included in net earnings (243) (1,175)
------- -------
Net unrealized gains (losses) on investment securities (5,296) 1,705
Adjustments for:
Policyholder liabilities 1,691 (670)
Deferred federal income taxes 465 (362)
------- -------
Total other comprehensive income (loss), net of taxes (3,140) 673
------- -------
COMPREHENSIVE INCOME (LOSS) $(1,335) $ 2,068
======= =======
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
5
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
---------------------
2004 2003(1)
------- -------
NET EARNINGS $ 1,365 $ 2,545
------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (3,120) 3,737
Reclassification adjustment for gains included in net earnings (245) (1,419)
------- -------
Net unrealized gains (losses) on investment securities (3,365) 2,318
Adjustments for:
Policyholder liabilities 770 414
Deferred federal income taxes 909 (956)
------- -------
Total other comprehensive income (loss), net of taxes (1,686) 1,776
------- -------
COMPREHENSIVE INCOME (LOSS) $ (321) $ 4,321
======= =======
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
6
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(1) income (loss) equity (1)
----- ------- ----------- ------------- ----------
BALANCE JANUARY 1, 2003 $ 2,200 $ 52,310 $ 17,627 $ 189 $ 72,326
Net earnings 4,129 4,129
Other comprehensive income, net of tax 1,162 1,162
------- --------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2003 2,200 52,310 21,756 1,351 77,617
Net earnings 1,365 1,365
Other comprehensive loss, net of tax (1,686) (1,686)
------- --------- ---------- ---------- ----------
BALANCE, JUNE 30, 2004 $ 2,200 $ 52,310 $ 23,121 $ (335) $ 77,296
======= ========= ========== ========== ==========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
7
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
-----------------------
2004 2003(1)
-------- --------
Cash Flows From Operating Activities:
Net earnings $ 1,365 $ 2,545
Noncash items included in earnings:
Change in accounting principle, net of tax 2,032 -
Amortization of deferred policy acquisition costs 2,211 2,578
Capitalization of policy acquisition costs (1,927) (627)
Amortization of investments 313 360
Interest credited to policyholders' account balances 4,611 4,989
Change in variable contract reserves (284) -
Benefit for deferred Federal income tax (238) (1,468)
(Increase) decrease in operating assets:
Accrued investment income 230 134
Federal income taxes - current - 1,628
Other (368) (182)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 350 1,238
Other policyholder funds (1,592) 247
Federal income taxes - current (270) 2,179
Affiliated payables - net 666 1,661
Other 934 (404)
Other operating activities:
Net realized investment gains (245) (1,682)
-------- --------
Net cash and cash equivalents provided by operating activities 7,788 13,196
-------- --------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 2,731 22,124
Maturities of available-for-sale securities 23,435 31,889
Purchases of available-for-sale securities (8,798) (70,507)
Policy loans on insurance contracts 4,079 4,456
-------- --------
Net cash and cash equivalents provided by (used in) investing activities $ 21,447 $(12,038)
======== ========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements. (Continued)
8
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
-----------------------
2004 2003(1)
-------- --------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 40,342 $ 16,316
Policyholder withdrawals (including transfers from separate accounts) (53,773) (30,781)
-------- --------
Net cash and cash equivalents used in financing activities (13,431) (14,465)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,804 (13,307)
CASH AND CASH EQUIVALENTS:
Beginning of year 12,338 23,092
-------- --------
End of period $ 28,142 $ 9,785
======== ========
Supplementary Disclosure of Cash Flow Information:
Cash paid to (received from) affiliates for:
Federal income taxes $ 2,116 $ (969)
Intercompany interest 6 (2)
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
See accompanying notes to financial statements.
9
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands)
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 six month periods are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair statement of the financial
statements have been included. These unaudited Financial Statements should be
read in conjunction with the audited financial statements included in the 2003
Annual Report on Form 10-K. The December 31, 2003 unaudited Balance Sheet was
derived from the audited 2003 financial statements and was adjusted for the
amounts included in Note 3. The nature of the Company's business is such that
the results of any interim period are not necessarily indicative of results for
a full year. In presenting the Financial Statements, management makes estimates
that affect the reported amounts and disclosures in the financial statements.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on the Financial Statements, and it is possible that such
changes could occur in the near term.
Certain reclassifications and format changes have been made to prior period
financial statements, where appropriate, to conform to the current period
presentation.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
On January 1, 2004, the Company adopted the provisions of Statement of Position
("SOP") 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts. SOP 03-1
requires the establishment of a liability for contracts that contain death or
other insurance benefits using a reserve methodology that is different from the
methodology that the Company previously employed. As a result, the Company
recorded a $3,120 increase in policyholder liabilities and a $6 decrease in
deferred policy acquisition costs resulting in a charge to earnings of $2,032,
net of a federal income tax benefit of $1,094, which was reported as a
cumulative effect of a change in accounting principle. For the three and six
months ended June 30, 2004, changes in policyholder liabilities related to SOP
03-1 did not have a material impact on the Company's Statements of Earnings.
In addition, SOP 03-1 requires new disclosures regarding the Company's Separate
Accounts and insurance contracts containing guarantee provisions. See Note 5 to
the Financial Statements for these disclosures.
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". EITF 03-1 requires that when the fair value
of an investment security is less than its carrying value, an impairment exists
for which the determination must be made as to whether the impairment is
other-than-temporary. The EITF 03-1 impairment model applies to all investment
securities accounted for under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and to investment securities accounted for under the cost method to
the extent an impairment indicator exists. Under the guidance, the determination
of whether an impairment is other-than-temporary and therefore would result in a
recognized loss depends on market conditions and management's intent and ability
to hold the securities with unrealized losses. The Company is required to adopt
the impairment evaluation and recognition guidance in EITF 03-1 in the third
quarter 2004 and is currently assessing the impact on the financial statements.
NOTE 3. OTHER EVENTS
On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No.148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock Based
Compensation. Effective for the first quarter 2004, Merrill Lynch & Co. adopted
the fair value method of accounting for stock-based compensation under SFAS 123,
using the retroactive restatement method described in SFAS 148. Under the fair
value recognition provisions of
10
SFAS 123, stock-based compensation cost is measured at the grant date based on
the value of the award and is recognized as expense over the vesting period. The
adoption of the fair value method of accounting by Merrill Lynch & Co. resulted
in additional allocated compensation expense to the Company. The Company's
December 31, 2003 Balance Sheet has been restated to reflect such expenses.
Accordingly, the December 31, 2003 Balance Sheet reflects a $127 decrease in
current federal income taxes payable, a $377 increase in net affiliated
payables, and a $250 decrease in retained earnings. For the three and six months
ended June 30, 2004 and 2003, the allocation of additional compensation expense
did not have a material impact on the Company's Statements of Earnings.
NOTE 4. INVESTMENTS
The Company's investments in fixed maturity and equity securities are classified
as 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 (loss), net of tax. If management determines that a
decline in the value of a security is other-than-temporary, the carrying value
is adjusted to estimated fair value and the decline in value is recorded as a
net realized investment loss.
The Company has recorded certain adjustments to policyholders' account balances
in conjunction with unrealized holding gains or losses on investments classified
as available-for-sale. The Company adjusts those liabilities as if the
unrealized holding gains or losses had actually been realized, with
corresponding credits or charges reported in accumulated other comprehensive
income (loss), net of taxes. The components of net unrealized gains (losses)
included in accumulated other comprehensive income (loss) were as follows:
June 30, December 31,
2004 2003
------- -------
Assets:
Fixed maturity securities $ 1,047 $ 4,412
------- -------
Liabilities:
Policyholders' account balances 1,564 2,334
Federal income taxes - deferred (182) 727
------- -------
1,382 3,061
------- -------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ (335) $ 1,351
======= =======
NOTE 5. SEPARATE ACCOUNTS
The Company's Separate Accounts consist of variable annuities and variable life
contracts, of which the assets and liabilities are legally segregated and
reported as separate captions in the Balance Sheets. Separate Accounts are
established in conformity with New York State Insurance Law and are generally
not chargeable with liabilities that arise from any other business of the
Company. Separate Accounts assets may be subject to claims of the Company only
to the extent the value of such assets exceeds Separate Accounts liabilities.
The assets of the Separate Accounts are carried at the daily net asset value of
the mutual funds in which they invest.
Absent any contract provision wherein the Company guarantees either a minimum
return or account value upon death or annuitization, the net investment income
and net realized and unrealized gains and losses attributable to Separate
Accounts assets supporting variable annuities and variable life contracts accrue
directly to the contract owner and are not reported as revenue in the Statements
of Earnings. Mortality, policy administration and surrender charges to all
Separate Accounts are included in revenue in the Statements of Earnings.
VARIABLE ANNUITY CONTRACTS CONTAINING GUARANTEES
The Company issues variable annuity contracts in which the Company may
contractually guarantee to the contract owner a guaranteed minimum death benefit
("GMDB"). In addition, some contracts include an optional guaranteed minimum
income benefit ("GMIB"). In general, contracts containing GMDB provisions
provide a death benefit equal to the greater of the GMDB or the contract value.
Depending on the type of contract, the GMDB may equal: i) contract premiums
accumulated at a specified interest rate, ii) the contract value on specified
contract anniversaries, iii) return of contract premiums, or iv) some
combination of these benefits. Each benefit type is reduced for contract
withdrawals. In general, contracts containing GMIB provisions provide the option
to receive a guaranteed future income stream upon annuitization. There is a
waiting period of ten years that must elapse before the GMIB provision can be
exercised. These guarantees include benefits that are payable in the event of
death or annuitization.
11
At June 30, 2004, the Company had the following variable annuity contracts
containing guarantees:
GMDB GMIB
---- ----
Net amount at risk $83,281(1) $ -(2)
Average attained age of contract owners 67 58
Weighted average period remaining until expected annuitization n/a 10 yrs
(1) Net amount at risk for GMDB is defined as the current GMDB in excess of
the policyholders' current account balance at the balance sheet date.
(2) Net amount at risk for GMIB is defined as the present value of the minimum
guaranteed annuity payments available to the policyholder determined in
accordance with the terms of the contract in excess of the policyholders'
current account balance at the balance sheet date.
The Company has recorded liabilities for contracts containing guarantees as a
component of policyholder liabilities in the June 30, 2004 Balance Sheet. Prior
to the adoption of SOP 03-1, the Company's liability was $144 and was included
as a component of claims and claims settlement expenses in the December 31, 2003
Balance Sheet. Changes in these guarantee liabilities are included as a
component of policy benefits in the Statements of Earnings. The variable annuity
liability for each type of guarantee at June 30, 2004 was as follows:
GMDB GMIB
---- ----
Balance at January 1, 2004 $ 3,087 $ -
Incurred guarantee benefits 640 11
Paid guarantee benefits (931) -
------- -------
Balance at June 30, 2004 $ 2,796 $ 11
======= =======
The GMDB liability is determined by projecting future expected guaranteed
benefits under multiple scenarios for returns on Separate Accounts assets. The
Company uses estimates for mortality and surrender assumptions that are deemed
appropriate for each contract type. These estimates are consistent with the
estimates used in the calculation of deferred policy acquisition costs.
At June 30, 2004, policyholders' account balances by mutual fund class for
contracts containing each type of guarantee were distributed as follows:
Money
Market Bond Equity Balanced Total
-------- ------- ------- -------- --------
GMDB only $ 31,039 137,784 406,443 47,980 $623,246
GMDB and GMIB (3) $ 5,055 10,589 35,950 6,743 $ 58,337
-------- ------- ------- ------ --------
Total $ 36,094 148,373 442,393 54,723 $681,583
======== ======= ======= ====== ========
(3) All variable annuity contracts with GMIB provisions include a GMDB.
VARIABLE LIFE CONTRACTS CONTAINING GUARANTEES
The Company has issued variable life contracts in which the Company
contractually guarantees to the contract owner a GMDB. In general, contracts
containing GMDB provisions provide a death benefit equal to the amount specified
in the contract regardless of the level of the contract's account value.
The Company has recorded liabilities for contracts containing guarantees as a
component of policyholder liabilities in the Balance Sheets. Changes in the
guarantee liability are included as a component of policy benefits in the
Statements of Earnings. The variable
12
life GMDB liability at June 30, 2004 was $184. The variable life GMDB liability
is set as a percentage of all mortality, expense, and insurance charges deducted
from contracts that include a GMDB provision. The percentage is established
based on the Company's estimate of the likelihood of future GMDB claims.
At June 30, 2004, policyholders' account balances by mutual fund class for
contracts containing GMDB provisions were distributed as follows:
Money
Market Bond Equity Balanced Other Total
------ ---- ------ -------- ----- -----
GMDB $ 39,448 39,944 87,052 105,622 600 $272,666
NOTE 6. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income taxes based on
earnings before Federal income taxes, computed using the Federal statutory tax
rate, versus the reported provision for income taxes for the three and six month
periods ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Provision for income taxes computed at Federal statutory rate $ 895 $ 751 $ 1,752 $ 1,370
Increase (decrease) in income taxes resulting from:
Dividend received deduction (241) - (241) -
Foreign tax credit 97 - 97 -
------- ------- ------- -------
Federal income tax provision $ 751 $ 751 $ 1,608 $ 1,370
======= ======= ======= =======
The Federal statutory rate for each of the three and six month periods ended
June 30 was 35%.
NOTE 7. STOCKHOLDER'S EQUITY AND STATUTORY ACCOUNTING PRACTICES
The Company's statutory financial statements are presented on the basis of
accounting practices prescribed or permitted by the 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 June 30, 2004 and December 31, 2003 were
$31,693 and $28,371, respectively. For the six month periods ended June 30, 2004
and 2003, statutory net income was $3,545 and $4,794, respectively.
NOTE 8. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Annuities and Life Insurance. The Company's Annuity
segment consists of variable annuities and interest-sensitive annuities. The
Company's Life Insurance segment consists of variable life insurance products
and interest-sensitive life insurance products. The Company currently does not
manufacture, market, or issue life insurance products. The accounting policies
of the business segments are the same as those for the Company's financial
statements included herein. All revenue and expense transactions are recorded at
the product level and accumulated at the business segment level for review by
management. The "Other" category, presented in the following segment financial
information, represents net revenues and net earnings on assets that do not
support annuity or life insurance contract owner liabilities.
The following table summarizes each business segment's contribution to
consolidated net revenues and net earnings for the three and six month periods
ended June 30. The prior period amounts have been restated as discussed in Note
3 to the financial statements.
13
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net Revenues (1):
Annuities $ 3,060 $ 4,099 $ 5,920 $ 6,966
Life Insurance 1,983 2,058 4,042 4,116
Other 232 193 536 321
-------- -------- -------- --------
Total Net Revenues $ 5,275 $ 6,350 $ 10,498 $ 11,403
======== ======== ======== ========
Net Earnings Before Change in Accounting Principle:
Annuities $ 664 $ 1,086 $ 1,534 $ 1,718
Life Insurance 990 184 1,515 618
Other 151 125 348 209
-------- -------- -------- --------
Net Earnings Before Change in Accounting Principle 1,805 1,395 3,397 2,545
Change in Accounting Principle, Net of Tax:
Annuities - - (1,917) -
Life Insurance - - (115) -
-------- -------- -------- --------
Change in Accounting Principle, Net of Tax - - (2,032) -
-------- -------- -------- --------
Total Net Earnings $ 1,805 $ 1,395 $ 1,365 $ 2,545
======== ======== ======== ========
(1) Net revenues include total revenues net of interest credited to
policyholders' account balances.
14
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Certain statements contained in this Report may be considered forward-looking,
including statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. These forward-looking statements are not statements of historical fact
and represent only management's beliefs regarding future events, which are
inherently uncertain. There are a variety of factors, many of which are beyond
the Company's control, which affect its operations, performance, business
strategy, and results and could cause its actual results and experience to
differ materially from the expectations and objectives expressed in any
forward-looking statements. These factors include, but are not limited to, the
factors listed in the Economic Environment section listed below, as well as
actions and initiatives taken by both current and potential competitors, general
economic conditions, the effects of current, pending, and future legislation,
regulation and regulatory actions, and the other risks and uncertainties
detailed in the Company's Financial Statements and Notes to Financial
Statements. Accordingly, readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the dates on which they are
made. The Company does not undertake to update forward-looking statements to
reflect the impact of circumstances or events that arise after the dates the
forward-looking statements are made. The reader should, however, consult any
further disclosures the Company may make in future filings of its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
DISCONTINUANCE OF VARIABLE LIFE INSURANCE
During the first quarter 2003, the Company discontinued manufacturing its single
premium variable life insurance product. As a result, the Company currently does
not manufacture, market, or issue life insurance products. The Company continues
to support all life insurance contracts inforce.
TAX LEGISLATION
During May 2003, Congress passed the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (the "Act"). A key provision in the Act is reduced federal income
tax rates on dividends and capital gains paid to investors on stocks and mutual
funds held individually. Pending future Congressional action, these federal
income tax rate reductions are set to expire after 2008. These enacted tax rate
reductions may impact the relative attractiveness of annuities as compared to
stocks and mutual funds.
BUSINESS OVERVIEW
The Company's gross earnings are principally derived from two sources:
- - the charges imposed on variable annuity and variable life insurance
contracts, and
- - the net earnings from investment of fixed rate life insurance and annuity
contract owner deposits less interest credited to contract owners,
commonly known as interest spread
The costs associated with acquiring contract owner deposits (deferred policy
acquisition costs) are amortized over the period in which the Company
anticipates holding those funds, as noted in the Critical Accounting Policies
section below. Insurance expenses and taxes reported in the Statements of
Earnings are net of amounts deferred. In addition, the Company incurs expenses
associated with the maintenance of inforce contracts.
ECONOMIC ENVIRONMENT
The Company's financial position and/or results of operations are primarily
impacted by the following economic factors: equity market performance,
fluctuations in medium term interest rates, and the corporate credit environment
via credit quality and fluctuations in credit spreads. The following discusses
the impact of each economic factor.
Equity Market Performance
Changes in the U.S. equity market directly affect the values of the underlying
U.S. equity-based mutual funds supporting separate accounts assets and,
accordingly, the values of variable contract owner account balances. Since
asset-based fees collected on inforce variable contracts represent a significant
source of revenue, the Company's financial condition will be impacted by
fluctuations in investment performance of separate accounts assets. Fluctuations
in the U.S. equity market also directly impact the Company's exposure to
guaranteed minimum death benefit ("GMDB") provisions contained in the variable
contracts it manufactures. Negative investment performance generally results in
greater exposure to GMDB provisions, to the extent there is an increase in the
number of variable contracts (and amount per contract) in which the GMDB exceeds
the variable account balance. Prolonged periods of negative investment
performance may result in greater GMDB expense. Effective January 1, 2004, GMDB
expense represents the amount of
15
GMDB expense paid in excess of the variable account balance plus the change in
GMDB liabilities. GMDB expense is recorded as a component of policy benefits.
Prior to the adoption of Statement of Position ("SOP") 03-1 GMDB expense
represented the amount of GMDB expense paid in excess of the variable account
balance and was also recorded as a component of policy benefits.
There are several standard indices published on a daily basis that measure
performance of selected components of the U.S. equity market. Examples include
the Dow Jones Industrial Average ("Dow"), NASDAQ Composite Index ("NASDAQ") and
the Standard & Poor's 500 Composite Stock Price Index ("S&P"). The following
table provides the increase for each equity market index at June 30, 2004 as
compared to June 30, 2003.
June 30, 2004
vs.
June 30, 2003
-------------
Dow 16.1 %
NASDAQ 26.2 %
S&P 17.1 %
The investment performance of the underlying U.S. equity-based mutual funds
supporting the Company's variable products do not replicate the returns of any
specific U.S. equity market index. However, investment performance will
generally increase or decrease with corresponding increases or decreases of the
overall U.S. equity market. During the first six months of 2004, positive
investment performance contributed to an increase in asset-based policy charge
revenue of $1.1 million and a decrease in GMDB expense of $0.6 million as
compared to the same period in 2003.
Medium Term Interest Rates
Changes in interest rates affect the value of investments, primarily fixed
maturity securities and preferred equity securities, as well as interest
sensitive liabilities. Changes in interest rates have an inverse relationship to
the value of investments and interest sensitive liabilities. Also, since the
Company has certain fixed products that contain guaranteed minimum crediting
rates, decreases in interest rates can decrease the amount of interest spread
earned by the Company.
The Company defines medium term interest rates as the average interest rate on
U.S. Treasury securities with terms of 1 to 10 years. During the three and six
month periods ended June 30, 2004, medium term interest rates increased
approximately 99 basis points and 71 basis points, respectively, to yield, on
average, 3.31% during the current six month period. During the three and six
month periods ended June 30, 2003, medium term interest rates decreased
approximately 63 basis points and 73 basis points, respectively, to yield, on
average, 1.80%.
Corporate Credit and Credit Spreads
Changes in the corporate credit environment directly impact the value of the
Company's investments, primarily fixed maturity securities. The Company
primarily invests in investment-grade corporate debt to support its fixed rate
product liabilities.
Credit spreads represent the credit risk premiums required by market
participants for a given credit quality, e.g. the additional yield that a debt
instrument issued by a AA-rated entity must produce over a risk-free alternative
(e.g., U.S. Treasury instruments). Changes in credit spreads have an inverse
relationship to the value of investments.
The Company defines credit spreads according to the Merrill Lynch U.S. Corporate
Bond Index for BBB-A Rated bonds with three to five year maturities. During the
three and six month periods ended June 30, 2004, credit spreads widened
approximately 7 basis points and 3 basis points, respectively, and ended the
current six month period at 88 basis points. During the three and six month
periods ended June 30, 2003, credit spreads contracted approximately 41 basis
points and 89 basis points, respectively, and ended the period at 109 basis
points.
The impact of changes in medium term interest rates, corporate credit and credit
spreads on market valuations for the three and six month periods ended June 30
were as follows:
16
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Increase (decrease) in medium term interest rates (basis 99 -63 71 -73
points)
Widening (contracting) of credit spreads (basis points) 7 -41 3 -89
Increase (decrease) on market valuations: (in millions)
Available-for-sale investment securities $ (5.3) $ 1.7 $ (3.4) $ 2.3
Interest-sensitive policyholder liabilities 1.7 (0.7) 0.8 0.4
------- ------- ------- -------
Net increase (decrease) on market valuations $ (3.6) $ 1.0 $ (2.6) $ 2.7
======= ======= ======= =======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ and could have a
material impact on the Financial Statements, and it is possible that such
changes could occur in the near term.
The Company's critical accounting policies and estimates are discussed below:
Deferred Policy Acquisition Costs for Variable Annuities and Variable Life
Insurance
The costs of acquiring business, principally commissions, certain expenses
related to policy issuance, and certain variable sales expenses that relate to
and vary with the production of new and renewal business, are deferred and
amortized in accordance with Statement of Financial Accounting Standards No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments.
Deferred policy acquisition costs ("DAC") are subject to recoverability testing
at the time of policy issuance and loss recognition testing at the end of each
reporting period. At June 30, 2004, variable annuities and variable life
insurance account for $15.4 million (or 62%) and $9.3 million (or 38%),
respectively, of the Company's DAC asset.
DAC for variable annuities is amortized with interest over the lives of the
policies in relation to the present values of estimated future gross profits
from asset-based fees, contract fees, and surrender charges, less a provision
for GMDB expenses, policy maintenance expenses, and non-capitalized commissions.
DAC for variable life insurance is amortized with interest over the lives of the
policies in relation to the present values of estimated future gross profits
from fees related to contract loans, asset-based fees, and cost of insurance
charges, less claims (net of reinsurance), cost of mortality reinsurance, policy
maintenance expenses, and non-capitalized commissions.
The most significant assumptions involved in the estimation of future gross
profits are future net separate accounts performance, surrender rates, and
mortality rates. The Company generally assumes a level long-term rate of net
separate accounts growth for all future years. The long-term rate may be
adjusted if the Company's long-term expectations change. Additionally, the
Company may modify the rate of net separate accounts growth over the short term
to reflect the Company's near-term expectations of the economy and financial
market performance in which separate accounts assets are invested.
Future gross profit estimates are subject to periodic evaluation by the Company,
with necessary revisions applied against amortization to date. The impact of
revisions to estimates on cumulative amortization is recorded as a charge or
benefit to current operations. Changes in assumptions can have a significant
impact on the amount of DAC reported for variable annuities and variable life
insurance products and their related amortization patterns. In general,
increases in the estimated separate accounts return and decreases in surrender
or mortality assumptions increase the expected future profitability of the
underlying business and may lower the rate of DAC amortization. Conversely,
decreases in the estimated separate accounts return and increases in surrender
or mortality assumptions reduce the expected future profitability of the
underlying business and may increase the rate of DAC amortization.
17
Other-Than-Temporary Impairment Losses on Investments
The Company regularly reviews each investment in its fixed maturity and equity
securities portfolio to evaluate the necessity of recording impairment losses
for other-than-temporary ("OTT") declines in the fair value of investments.
Management makes this determination through a series of discussions with the
Company's portfolio managers and credit analysts, as well as information
obtained from external sources (i.e. company announcements, ratings agency
announcements, or news wire services). The factors that give rise to potential
impairments include, but are not limited to, i) certain credit-related events
such as default of principal or interest payments, ii) bankruptcy of issuer, and
iii) certain security restructurings. In the absence of a readily ascertainable
market value, the estimated fair value on these securities represents
management's best estimate and is based on comparable securities and other
assumptions as appropriate. OTT impairment losses result in a permanent
reduction of the cost basis of the underlying investment. There were no OTT
impairments on investments in fixed maturity securities for the three and six
month periods ended June 30, 2004 and 2003, respectively.
RECENT DEVELOPMENTS
New Accounting Pronouncements
On January 1, 2004, the Company adopted the provisions of SOP 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts. SOP 03-1 requires the establishment of a
liability for contracts that contain death or other insurance benefits using a
reserve methodology that is different from the methodology that the Company
previously employed. As a result, the Company recorded a $3.1 million increase
in policyholder liabilities resulting in a charge to earnings of $2.0 million,
net of a federal income tax benefit of $1.1 million, which was reported as a
cumulative effect of a change in accounting principle. For the three and six
months ended June 30, 2004, changes in policyholder liabilities did not have a
material impact on the Company's Statements of Earnings.
NEW BUSINESS
The Company has strategically placed its marketing emphasis on the sale of
variable annuity products. These products are designed to address the retirement
planning needs of Merrill Lynch & Co.'s clients. The Company issues three types
of variable annuity products. These products are differentiated by the
availability of guaranteed living benefits and the degree of liquidity afforded
to the contract owner. The B-Share variable annuities offer a guaranteed minimum
income ("GMIB") provision and contain a seven year surrender charge period,
L-Share variable annuities do not offer a GMIB provision and contain a three
year surrender charge period, and C-Share variable annuities do not offer a GMIB
provision and have no surrender charge period. Each variable annuity product
provides tax-deferred retirement savings with the opportunity for diversified
investing in a wide selection of underlying mutual fund portfolios. In addition,
the Company issues a modified guaranteed annuity product. The modified
guaranteed annuity product also provides tax-deferred retirement savings through
a guaranteed fixed interest rate for a period selected by the contract owner,
but imposes a market value adjustment for withdrawals prior to the expiration of
the guarantee period.
Annuity and life insurance premiums increased $13.5 million (or 208%) to $20.0
million and $24.8 million (or 140%) to $42.5 million during the current three
and six month periods ended June 30, 2004, respectively, as compared to the same
periods in 2003. Annuity and life insurance premiums by type of product were as
follows:
18
($ In Millions) % Change
----------------------------- --------------------------------
Second Quarter Six Months Second Quarter Six Months
2004 2004 2004 vs. 2003 2004 vs. 2003
-------------- ---------- -------------- -------------
Variable Annuities:
B-Share $ 17.0 $ 36.9 673% 559%
C-Share 2.0 3.1 -5 -55
L-Share 0.9 2.3 -50 -48
------- ----- ---- ----
19.9 42.3 226 150
------- ----- ---- ----
Variable Life Insurance 0.1 0.2 - -50
Modified Guaranteed Annuities - - -100 -100
Other - - -100 -100
------- ----- ---- ----
Total Direct Premiums $ 20.0 $ 42.5 208% 140%
======= ===== ==== ====
During the current three and six month periods, variable annuity premiums
increased $13.8 million (or 226%) to $19.9 million and $25.4 million (or 150%)
to $42.3 million, respectively, as compared to the same periods in 2003.
Management attributes the increase in variable annuity premiums primarily to the
introduction of a new B-Share variable annuity product during the third quarter
of 2003. Sales of the new B-Share variable annuity product were $9.6 million and
$23.7 million during the current three and six month periods, respectively. The
new B-Share variable annuity product is designed for the tax qualified IRA
market and includes a GMIB provision. Also, during the second quarter 2003, the
Company added a GMIB provision to its existing B-Share variable annuity. GMIB
provisions have increased in popularity due to consumers' increasing demand for
guaranteed living benefits. Management believes that the volatility in the
equity markets over the past three years has been the catalyst for this demand.
During the current three month period, C-Share and L-Share variable annuity
premiums decreased $0.1 million (or 5%) and $0.9 million (or 50%), respectively,
as compared to the same period in 2003. During the current six month period,
C-Share and L-Share variable annuity premiums decreased $3.8 million (or 55%)
and $2.1 million (or 48%), respectively, as compared to the same period in 2003.
As mentioned above, C-Share and L-Share variable annuity products do not contain
GMIB provisions.
During the current six month period, variable life insurance premiums decreased
$0.2 million (or 50%) to $0.2 million as compared to the same period in 2003.
The decrease in variable life insurance premiums is primarily due to the
discontinuation of manufacturing variable life insurance products during the
first quarter 2003. Variable life insurance premiums displayed above generally
represent renewal premiums on existing life insurance contracts. During the
current three month period, variable life insurance premiums were relatively
unchanged as compared to the same period in 2003.
SURRENDERS
Policy and contract surrenders increased $8.5 million (or 47%) to $26.7 million
and $14.7 million (or 39%) to $52.0 million during the current three and six
month periods ended June 30 2004, respectively, as compared to the same periods
in 2003. During the current three and six month periods, variable annuity
surrenders increased $6.1 million (or 57%) to $16.8 million and $10.8 million
(or 52%) to $31.4 million, respectively, as compared to the same periods in
2003. Management attributes the increases in variable annuity surrenders to the
increasing consumer demand for variable annuity products containing guaranteed
living benefit provisions. As contracts reach the end of their surrender charge
period, contract owners are more willing to surrender variable annuities without
guaranteed living benefit provisions in favor of variable annuities with
guaranteed living benefit provisions. In addition, during the current three and
six month periods, variable life surrenders increased $3.0 million (or 62%) to
$7.9 million and $4.7 million (or 40%) to $16.4 million, respectively, as
compared to the same periods in 2003. The increases in variable life surrenders
primarily represent movement by contract owners to other insurance products
issued by insurance companies unaffiliated with the Company. As previously
noted, the Company no longer manufactures variable life insurance products.
FINANCIAL CONDITION
At June 30, 2004, the Company's assets were $1,253.9 million or $2.1 million
higher than the $1,251.8 million in assets at December 31, 2003. Assets
excluding separate accounts assets decreased $9.2 million (or 3%) primarily due
to a reduction in the number of fixed rate contracts inforce and a decrease in
market values on investment securities as a result of the rising interest rate
environment during the first six months of 2004. Separate accounts assets,
which represent 76% of total assets, increased $11.3 million (or 1%) to
$954.6 million. Changes in separate accounts assets for the first two
quarters of 2004 were as follows:
19
1Q04 2Q04 Total
---- ---- -----
(In Millions)
Investment performance - variable products $ 26.1 $ 2.4 $ 28.5
Net cash outflow - variable products (6.5) (10.7) (17.2)
--------- ------- --------
Net increase (decrease) $ 19.6 $ (8.3) $ 11.3
========= ======= ========
At June 30, 2004 and December 31, 2003, approximately $1.3 million (or 1%) of
the Company's fixed maturity securities were considered non-investment grade.
The Company defines non-investment grade securities as unsecured debt
obligations that have a rating equivalent to Standard and Poor's BB+ or lower
(or similar rating agency). Non-investment grade securities are speculative and
are subject to significantly greater risks related to the creditworthiness of
the issuers and the liquidity of the market for such securities. Current
non-investment grade holdings are the result of ratings downgrades on the
Company's portfolio as the Company does not purchase non-investment grade
securities. Also, at June 30, 2004, approximately $1.8 million (or 1%) 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 $3.5 million
(or 2%) of the Company's fixed maturity securities at December 31, 2003. The
Company closely monitors such investments.
During the first six months of 2004, the Company experienced contract owner
withdrawals that exceeded deposits by $22.3 million. The components of contract
owner transactions for all products were as follows:
June 30,
2004
-------------
(In Millions)
Premiums collected $ 42.5
Internal tax-free exchanges (2.2)
Net contract owner deposits 40.3
--------
Contract owner withdrawals 53.8
Net transfers from separate accounts 8.8
--------
Net contract owner withdrawals 62.6
--------
Net contract owner activity $ (22.3)
========
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of June 30, 2004, the Company's assets included $184.6
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 2004, 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.
RESULTS OF OPERATIONS
For the three month periods ended June 30, 2004 and 2003, the Company recorded
net earnings of $1.8 million and $1.4 million, respectively. For the six month
periods ended June 30, 2004 and 2003, the Company reported net earnings of $1.4
million and $2.5 million, respectively.
Policy charge revenue increased $0.5 million (or 13%) and $1.3 million (or 17%)
during the current three and six month periods ended June 30, 2004,
respectively, as compared to the same periods in 2003. The increases in policy
charge revenue are attributable to the increase in average variable account
balances. Average variable account balances increased $108.3 million (or 13%)
and $136.0 million (or 17%) during the current three and six month periods ended
June 30, 2004, respectively, as compared to the same periods in 2003. During the
same comparative periods, asset-based policy charge revenue increased $0.4
million (or 18%) and $1.1 million (or 22%), respectively. Non-asset based policy
charge revenue was relatively unchanged during the current three and six month
periods as compared to the same period in 2003.
20
Net realized investment gains decreased $1.2 million and $1.4 million during the
current three and six month periods ended June 30, 2004, respectively, as
compared to the same periods in 2003. The decreases are primarily due to
decreased invested asset sales during the current three and six month periods as
compared to the same periods in 2003.
Net earnings derived from interest spread decreased $0.4 million (or 44%) and
$0.8 million (or 43%) during the current three and six month periods ended June
30, 2004, respectively, as compared to the same periods in 2003. The decreases
in interest spread are primarily due to the reduction in fixed rate contracts
inforce, as well as, reductions in invested asset yields resulting from the
increase in credit quality of the portfolio and a higher level of call activity.
Policy benefits decreased $0.6 million (or 52%) and $1.3 million (or 56%) during
the current three and six month periods ended June 30, 2004, respectively, as
compared to the same periods in 2003. The following table provides the changes
in policy benefits by type for each respective period:
Three Months Six Months
Policy benefits 2004 vs. 2003 2004 vs. 2003
--------------- ------------- -------------
(In Millions)
Life insurance mortality expense $ (0.5) $ (0.7)(1)
Variable annuity mortality expense (0.1) (0.6)(2)
------ ------
$ (0.6) $ (1.3)
====== ======
(1) The decreases in life insurance mortality expense are due to decreases in
net amount at risk per death claim.
(2) The decreases in variable annuity mortality expense are due to decreased
death benefit expense incurred under GMDB provisions due to improving
equity markets.
Reinsurance premium ceded increased $0.1 million (or 23%) and $0.1 million (or
11%) during the current three and six months ended June 30, 2004, respectively,
as compared to the same periods in 2003 primarily due to increases in variable
annuity reinsurance premium ceded. This increase is attributable to the
Company's effort to reinsure variable annuity products containing GMIB
provisions. Reinsurance premium ceded related to the Company's life insurance
products was relatively unchanged during the current three and six month periods
as compared to the same periods in 2003.
Amortization of deferred policy acquisition costs decreased $0.6 million (or
37%) and $0.4 million (or 14%) during the current three and six month periods
ended June 30, 2004, respectively, as compared to the same periods in 2003. The
decreases in amortization of deferred policy acquisition costs are primarily due
to reductions in interest-related realized gains on certain fixed annuity
portfolios.
Insurance expenses and taxes decreased $0.4 million (or 36%) and $0.4 million
(or 23%) during the current three and six month periods ended June 30, 2004,
respectively, as compared to the same periods in 2003. The decreases in
insurance expenses and taxes are primarily due to decreased New York State
Insurance Department assessments during the current three and six month periods
as compared to the same periods in 2003.
The Company's effective federal income tax rate was 29% and 32% during the
current three and six month periods ended June 30, 2004, respectively, as
compared to 35% during the equivalent periods in 2003. The changes in the
effective federal income tax rate during the respective periods are primarily
due to certain permanent adjustments recorded in the second quarter 2004.
As noted in the Recent Developments section above, effective January 1, 2004,
the Company adopted SOP 03-1 and recorded a cumulative change in accounting
principle of $2.0 million, net of a federal income tax benefit of $1.1 million.
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.
21
ITEM 4. Controls and Procedures
In 2002, the Company formed a Disclosure Committee to assist with the monitoring
and evaluation of its disclosure controls and procedures. The Company's Chief
Executive Officer, Chief Financial Officer, and Disclosure Committee have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934) as
of the end of the period covered by this Report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are effective.
In addition, no change in the Company's internal control over financial
reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of
1934) occurred during the period covered by this quarterly report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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.
The Registrant filed the following Current Report on Form 8-K with
the Commission during the second quarter of 2004, under the caption
"Item 5. Other Events":
Current Report on Form 8-K dated May 18, 2004 for the purpose of
reporting that in the first quarter of 2004, Merrill Lynch and Co.
Inc. ("Merrill Lynch & Co.") adopted the fair value method of
accounting for stock-based compensation options under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, using the retroactive restatement method
permitted under SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. The adoption of the fair
value method of accounting by Merrill Lynch & Co. resulted in
additional allocated compensation expense to the Registrant. As a
result, the Registrant's Financial Statements and Notes thereto
filed as Item 15 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003, and the Registrant's Management's
Narrative Analysis of Results of Operations filed as Item 7 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003, were restated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML LIFE INSURANCE COMPANY OF NEW YORK
/s/ JOSEPH E. JUSTICE
-----------------------------------------
Joseph E. Justice
Senior Vice President, Treasurer and
Chief Financial Officer
Date: August 13, 2004
EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.