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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
September 30, December 31,
2004 2003(1)
------------- -----------
ASSETS
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2004 - $172,596; 2003 - $177,770) $ 175,551 $ 182,182
Policy loans on insurance contracts 76,846 80,992
---------- ----------
Total Investments 252,397 263,174
CASH AND CASH EQUIVALENTS 16,208 12,338
ACCRUED INVESTMENT INCOME 4,350 4,332
DEFERRED POLICY ACQUISITION COSTS 27,427 25,035
OTHER ASSETS 5,877 3,648
SEPARATE ACCOUNTS ASSETS 930,431 943,233
---------- ----------
TOTAL ASSETS $1,236,690 $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)
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS (Continued)
(Dollars in thousands, except common stock par value and shares) (Unaudited)
September 30, December 31,
2004 2003(1)
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 209,158 $ 216,197
Claims and claims settlement expenses 4,535 4,071
---------- ----------
Total policyholder liabilities and accruals 213,693 220,268
OTHER POLICYHOLDER FUNDS 2,546 2,114
FEDERAL INCOME TAXES - DEFERRED 4,356 4,698
FEDERAL INCOME TAXES - CURRENT 17 965
AFFILIATED PAYABLES - NET 3,446 2,837
OTHER LIABILITIES 264 28
SEPARATE ACCOUNTS LIABILITIES 930,431 943,233
---------- ----------
Total Liabilities 1,154,753 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 26,591 21,756
Accumulated other comprehensive income 836 1,351
---------- ----------
Total Stockholder's Equity 81,937 77,617
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,236,690 $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.
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,
------------------------
2004 2003(1)
------- --------
REVENUES:
Policy charge revenue $ 4,579 $ 4,181
Net investment income 2,717 2,916
Net realized investment losses - (1,138)
------- -------
Total Revenues 7,296 5,959
------- -------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 2,276 2,404
Policy benefits (net of reinsurance recoveries: 2004 - $440;
2003 - $74) 979 507
Reinsurance premium ceded 494 366
Amortization of deferred policy acquisition costs (2,015) 453
Insurance expenses and taxes 807 959
------- -------
Total Benefits and Expenses 2,541 4,689
------- -------
Earnings Before Federal Income Tax Provision 4,755 1,270
------- -------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 17 580
Deferred 1,268 (135)
------- -------
Total Federal Income Tax Provision 1,285 445
------- -------
NET EARNINGS $ 3,470 $ 825
======= =======
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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,
-------------------------
2004 2003(1)
-------- --------
REVENUES:
Policy charge revenue $ 13,781 $ 12,056
Net investment income 8,379 9,751
Net realized investment gains 245 544
-------- --------
Total Revenues 22,405 22,351
-------- --------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 6,887 7,393
Policy benefits (net of reinsurance recoveries: 2004 - $825;
2003 - $299) 2,016 2,849
Reinsurance premium ceded 1,395 1,179
Amortization of deferred policy acquisition costs 196 3,031
Insurance expenses and taxes 2,151 2,714
-------- --------
Total Benefits and Expenses 12,645 17,166
-------- --------
Earnings Before Federal Income Tax Provision 9,760 5,185
-------- --------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 1,863 3,418
Deferred 1,030 (1,603)
-------- --------
Total Federal Income Tax Provision 2,893 1,815
-------- --------
EARNINGS BEFORE CHANGE IN ACCOUNTING PRINCIPLE 6,867 3,370
-------- --------
Change in Accounting Principle, Net of Tax (2,032) -
-------- --------
NET EARNINGS $ 4,835 $ 3,370
======== ========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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,
-----------------------
2004 2003(1)
------- -------
NET EARNINGS $ 3,470 $ 825
------- -------
OTHER COMPREHENSIVE INCOME:
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 1,908 (1,167)
Reclassification adjustment for losses included in net earnings - 1,187
------- -------
Net unrealized gains on investment securities 1,908 20
Adjustments for:
Policyholder liabilities (106) 315
Deferred federal income taxes (631) (117)
------- -------
Total other comprehensive income, net of taxes 1,171 218
------- -------
COMPREHENSIVE INCOME $ 4,641 $ 1,043
======= =======
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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,
------------------------
2004 2003(1)
------- --------
NET EARNINGS $ 4,835 $ 3,370
------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period (1,212) 2,570
Reclassification adjustment for gains included in net earnings (245) (232)
------- -------
Net unrealized gains (losses) on investment securities (1,457) 2,338
Adjustments for:
Policyholder liabilities 664 729
Deferred federal income taxes 278 (1,073)
------- -------
Total other comprehensive income (loss), net of taxes (515) 1,994
------- -------
COMPREHENSIVE INCOME $ 4,320 $ 5,364
======= =======
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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 (1) income 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 4,835 4,835
Other comprehensive loss, net of tax (515) (515)
-------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 2004 $ 2,200 $ 52,310 $ 26,591 $ 836 $ 81,937
======== ======== ======== ======== ========
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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,
--------------------------
2004 2003(1)
--------- --------
Cash Flows From Operating Activities:
Net earnings $ 4,835 $ 3,370
Noncash items included in earnings:
Change in accounting principle, net of tax 2,032 -
Amortization of deferred policy acquisition costs 196 3,031
Capitalization of policy acquisition costs (2,594) (1,376)
Amortization of investments 458 532
Interest credited to policyholders' account balances 6,887 7,393
Change in variable contract reserves (372) -
Provision (benefit) for deferred Federal income tax 1,030 (1,603)
(Increase) decrease in operating assets:
Accrued investment income (18) 143
Federal income taxes - current - 1,628
Other (2,229) (275)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 608 1,821
Other policyholder funds 432 217
Federal income taxes - current (948) 454
Affiliated payables - net 609 3,388
Other 236 (276)
Other operating activities:
Net realized investment gains (245) (544)
-------- --------
Net cash and cash equivalents provided by operating activities 10,917 17,903
-------- --------
Cash Flows From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 3,698 35,650
Maturities of available-for-sale securities 23,571 50,390
Purchases of available-for-sale securities (22,308) (89,445)
Policy loans on insurance contracts 4,146 4,247
-------- --------
Net cash and cash equivalents provided by investing activities $ 9,107 $ 842
-------- --------
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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,
-------------------------
2004 2003(1)
-------- --------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Policyholder deposits (excludes internal policy replacement deposits) $ 54,167 $ 35,209
Policyholder withdrawals (including transfers from separate accounts) (70,321) (52,168)
-------- --------
Net cash and cash equivalents used in financing activities (16,154) (16,959)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,870 1,786
CASH AND CASH EQUIVALENTS:
Beginning of year 12,338 23,092
-------- --------
End of period $ 16,208 $ 24,878
======== ========
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 2,811 $ 1,336
Intercompany interest 14 8
(1) Prior period amounts have been restated as discussed in Note 3 to the
financial statements.
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)
(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.
For a complete discussion of the Company's 2003 financial statements and
accounting policies, refer to the Company's restated 2003 Annual Report on Form
10-K for the year ended December 31, 2003, which was included as an Exhibit 99.1
to Form 8-K dated May 18, 2004.
The interim Financial Statements for the three and nine 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 nine
months ended September 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 6 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 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.
In September 2004, the Financial Accounting Standards Board ("FASB") approved
FASB Staff Position EITF 03-1-1, which defers the effective date for recognition
and measurement guidance contained in EITF 03-1 until certain issues are
resolved. The impact on the Company's Financial Statements will be determined
when the final EITF 03-1 is issued. The Company expects that the issues will be
resolved in the fourth quarter 2004 and will adopt the guidance at that time.
The Company previously implemented the disclosure requirements of EITF 03-1 in
its 2003 Financial Statements. See Note 4 to the 2003 Annual Report for
additional information.
NOTE 3. OTHER EVENTS
On December 31, 2002, the 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
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 $377 increase in net
affiliated payables, a $127 decrease in current federal income taxes payable,
and a $250 decrease in retained earnings. For the three and nine months ended
September 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 an available-for-sale 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. There were no realized investment
losses on securities deemed to have incurred other-than-temporary declines in
fair value for the three and nine month periods ended September 30, 2004. For
the three and nine month periods ended September 30, 2003, realized investment
losses on securities deemed to have incurred other-than-temporary declines in
fair value were $786.
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 included in
accumulated other comprehensive income were as follows:
September 30, December 31,
2004 2003
------------- ------------
Assets:
Fixed maturity securities $2,955 $4,412
------ ------
Liabilities:
Policyholders' account balances 1,670 2,334
Federal income taxes - deferred 449 727
------ ------
2,119 3,061
------ ------
Stockholder's equity:
Accumulated other comprehensive income $ 836 $1,351
====== ======
NOTE 5. DEFERRED POLICY ACQUISITION COSTS
The components of amortization of DAC for the three and nine month periods ended
September 30 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2004 2003 2004 2003
------- ------- -------- -------
Normal amortization related to variable life
and annuity insurance products $ 952 $ 453 $ 3,163 $ 3,031
DAC unlocking related to variable annuity products (1) (2,967) - (2,967) -
------- ------- ------- -------
Total net amortization of DAC $(2,015) $ 453 $ 196 $ 3,031
======= ======= ======= =======
(1) During 2003 DAC unlocking for variable annuity and variable life insurance
products was recorded in the fourth quarter 2003.
The impact of revisions to estimates on cumulative amortization of deferred
policy acquisition costs ("DAC") is recorded as a charge or benefit to current
operations ("DAC unlocking"). During the third quarter 2004 the Company elected
to adopt new assumptions for market returns associated with assets held in the
Company's variable annuity separate accounts. If returns over a determined
historical period differ from the Company's long-term assumption, returns for
future determined periods are calculated so that the long-term assumption is
achieved. This method for projecting market returns is known as reversion to the
mean. The Company previously established estimates for market returns based on
actual historical results and on future anticipated market returns without the
use of a mean reversion technique.
NOTE 6. 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 associated
with Separate Accounts products 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") and/or 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 deposits accumulated at a specified
interest rate, ii) the contract value on specified contract anniversaries, iii)
return of contract deposits, 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.
At September 30, 2004, the Company had the following variable annuity contracts
containing guarantees:
GMDB GMIB
-------------- -----------
Net amount at risk $ 88,449 (1) $ 59 (2)
Average attained age of contract owners 66 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 contract owners' 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 contract owner determined in
accordance with the terms of the contract in excess of the contract
owners' 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 September 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 September 30, 2004 was as follows:
GMDB GMIB
-------------- -----------
Balance at January 1, 2004 $ 3,087 $ -
Incurred guarantee benefits 956 18
Paid guarantee benefits (1,354) -
-------------- -----------
Balance at September 30, 2004 $ 2,689 $ 18
============== ===========
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 based on
actual and projected experience for each contract type. These estimates are
consistent with the estimates used in the calculation of DAC.
At September 30, 2004, contract owners' 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 $ 27,182 138,220 383,881 47,293 $ 596,576
GMDB and GMIB (3) $ 2,579 14,296 46,398 6,312 $ 69,585
------------- ------- ------- ------ --------------
Total $ 29,761 152,516 430,279 53,605 $ 666,161
============= ======= ======= ====== ==============
(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 life GMDB liability at September 30, 2004
was $188. The variable life GMDB liability is set as a percentage of asset-based
fees and cost of 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 September 30, 2004, contract owners' account balances by mutual fund class
for contracts containing GMDB provisions were distributed as follows:
Money
Market Bond Equity Balanced Other Total
---------- ------ ------ -------- ----- ----------
GMDB $ 38,563 40,243 82,610 101,893 634 $ 263,943
NOTE 7. 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 nine
month periods ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
-------- ------- ------- -------
Provision for income taxes computed at Federal statutory rate $ 1,664 $ 445 $ 3,416 $ 1,815
Increase (decrease) in income taxes resulting from:
Dividend received deduction (370) - (611) -
Foreign tax credit (9) - 88 -
------- ------- ------- -------
Federal income tax provision $ 1,285 $ 445 $ 2,893 $ 1,815
======= ======= ======= =======
The Federal statutory rate for each of the three and nine month periods ended
September 30 was 35%.
NOTE 8. 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 September 30, 2004 and December 31, 2003 were
$32,713 and $28,371, respectively. For the nine month periods ended September
30, 2004 and 2003, statutory net income was $4,663 and $5,734, respectively.
NOTE 9. 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 nine month periods
ended September 30. The prior period amounts have been restated as discussed in
Note 3 to the financial statements.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net Revenues (1):
Annuities $ 2,841 $ 1,714 $ 8,761 $ 8,680
Life Insurance 2,063 1,635 6,105 5,751
Other 116 206 652 527
-------- -------- -------- --------
Total Net Revenues $ 5,020 $ 3,555 $ 15,518 $ 14,958
======== ======== ======== ========
Net Earnings Before Change in Accounting Principle:
Annuities $ 3,020 $ 291 $ 4,554 $ 2,009
Life Insurance 374 401 1,889 1,019
Other 76 133 424 342
-------- -------- -------- --------
Net Earnings Before Change in Accounting Principle 3,470 825 6,867 3,370
-------- -------- -------- --------
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 $ 3,470 $ 825 $ 4,835 $ 3,370
======== ======== ======== ========
(1) Net revenues include total revenues net of interest credited to
policyholders' account balances.
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 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 September 30, 2004
as compared to September 30, 2003.
September 30, 2004
versus
September 30, 2003
------------------
Dow 8.7%
NASDAQ 6.2%
S&P 11.9%
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 nine months of 2004, positive
investment performance contributed to an increase in asset-based policy charge
revenue of $1.5 million and a decrease in GMDB expense of $0.5 million as
compared to the same period in 2003.
Medium Term Interest Rates
The Company defines medium term interest rates as the average interest rate on
U.S. Treasury securities with terms of 1 to 10 years. 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.
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.
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. Credit
spreads represent the credit risk premiums required by market participants for a
given credit quality, i.e. 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 impact of changes in medium term interest rates, corporate credit and credit
spreads on market valuations for the three and nine month periods ended
September 30 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Average medium term interest rate yield 3.04% 2.48% 3.04% 2.48%
Increase (decrease) in medium term interest rates (in basis points) (27) 68 44 (6)
Credit spreads (in basis points) 80 98 80 98
Contracting of credit spreads (in basis points) (8) (11) (5) (100)
Increase (decrease) on market valuations: (in millions)
Available-for-sale investment securities $ 1.9 $ - $ (1.5) $ 2.3
Interest-sensitive policyholder liabilities (0.1) 0.3 0.7 0.7
------- ------- ------- -------
Net increase (decrease) on market valuations $ 1.8 $ 0.3 $ (0.8) $ 3.0
======= ======= ======= =======
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 September 30, 2004, variable annuities and variable life
insurance account for $18.3 million (or 67%) and $9.1 million (or 33%),
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.
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 ("DAC unlocking"). For the three and nine month
periods ended September 30, 2004, the Company increased earnings by $3.0 million
via revised estimates for amortization of DAC for variable annuities. During
2003 revisions to estimates on cumulative amortization for variable annuity and
variable life insurance products were recorded in the fourth quarter 2003.
During the third quarter 2004 the Company elected to adopt new assumptions for
market returns associated with assets held in the Company's variable annuity
separate accounts. If returns over a determined historical period differ from
the Company's long-term assumption, returns for future determined periods are
calculated so that the long-term assumption is achieved. This method for
projecting market returns is known as reversion to the mean. The Company
previously established estimates for market returns based on actual historical
results and on future anticipated market returns without the use of a mean
reversion technique. 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, thus increasing net
earnings. 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, thus decreasing net earnings.
The most significant assumptions involved in the estimation of future gross
profits are future net separate accounts performance, surrender rates, and
mortality rates. For variable annuities, the Company generally establishes a
long-term rate of net separate accounts growth. The long-term rate may be
adjusted if the Company's long-term expectations change. Using the mean
reversion technique, the Company modifies the rate of net separate accounts
growth over the near term, based on recent historical returns. The result is
that the long-term rate is assumed to be realized over a period of approximately
ten years. For variable life, 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.
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 nine
month periods ended September 30, 2004. For the three and nine month periods
ended September 30, 2003, OTT impairments on investments in fixed maturity
securities were $0.8 million.
Federal Income Taxes
The Company uses the asset and liability method in providing income taxes on all
transactions that have been recognized in the financial statements. The asset
and liability method requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or realized. The Company
provides for federal income taxes based on amounts the Company believes it will
ultimately owe. Inherent in the provision for federal income taxes are estimates
regarding the realization of certain tax deductions and credits.
Specific estimates include the realization of the dividend-received deduction
("DRD") and the foreign tax credit ("FTC"). A portion of the Company's
investment income related to separate accounts business qualifies for the DRD
and FTC. Information necessary to calculate these tax adjustments is typically
not available until the following year. However, during the current year's
provision, management makes estimates regarding the future deductibility of
these items. These estimates are primarily based on recent historic experience.
During the three and nine month periods ended September 30, 2004, the Company
reduced its provision for federal income taxes by $0.4 million and $0.5 million,
respectively, due to DRD and FTC adjustments. There were no DRD and FTC
adjustments during the three and nine month periods ended September 30, 2003.
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 nine
months ended September 30, 2004, changes in policyholder liabilities did not
have a material impact on the Company's Statements of Earnings.
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 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. In September 2004, the Financial Accounting Standards Board
("FASB") approved FASB Staff Position EITF 03-1-1, which defers the effective
date for recognition and measurement guidance contained in EITF 03-1 until
certain issues are resolved. The impact on the Company's Financial Statements
will be determined when the final EITF 03-1 is issued. The Company expects that
the issues will be resolved in the fourth quarter 2004 and will adopt the
guidance at that time. The Company previously implemented the disclosure
requirements of EITF 03-1 in its 2003 Financial Statements. See Note 4 to the
2003 Annual Report for additional information.
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 deposits decreased $4.1 million (or 21%) to $15.3
million and $20.7 million (or 56%) to $57.8 million during the current three and
nine month periods ended September 30, 2004, respectively, as compared to the
same periods in 2003. Annuity and life insurance deposits by type of product
were as follows:
($ In Millions) % Change
------------------------------- ------------------------------------
Third Quarter Nine Months Third Quarter Nine Months
2004 2004 2004 vs. 2003 2004 vs. 2003
------------- ------------ -------------- -------------
Variable Annuities:
B-Share $ 14.1 $ 50.9 -3% 153%
C-Share 0.1 3.2 -93 -61
L-Share 0.7 3.0 -71 -56
----------- ------------ ---- ----
14.9 57.1 -19 62
----------- ------------ ---- ----
Variable Life Insurance 0.1 0.4 - -20
Modified Guaranteed Annuities 0.3 0.3 100 50
Other - - -100 -100
----------- ------------ ---- ----
Total Direct Deposits $ 15.3 $ 57.8 -21% 56%
=========== ============ ==== ====
During the current three and nine month periods, variable annuity deposits
decreased $3.4 million (or 19%) to $14.9 million and increased $21.9 million (or
62%) to $57.1 million, respectively, as compared to the same periods in 2003.
Management attributes the decrease in variable annuity deposits during the
current three month period primarily to decreases in C-Share and L-Share
variable annuity deposits. During the current three month period, C-Share and
L-Share variable annuity deposits decreased $1.2 million (or 93%) and $1.7
million (or 71%), respectively, as compared to the same period in 2003. C-Share
and L-Share variable annuity products do not contain GMIB provisions. 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.
Management attributes the increase in variable annuity deposits during the
current nine month period 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 $32.1 million during the current nine
month period. Sales of the new B-Share variable annuity product were $7.9
million during the third quarter 2003. 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. During the current nine month period, C-Share
and L-Share variable annuity deposits decreased $5.1 million (or 61%) and $3.8
million (or 56%), 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 nine month period, variable life insurance deposits decreased
$0.1 million (or 20%) to $0.4 million as compared to the same period in 2003.
The decrease in variable life insurance deposits is primarily due to the
discontinuation of manufacturing variable life insurance products during the
first quarter 2003. Variable life insurance deposits displayed above generally
represent renewal deposits on existing life insurance contracts. During the
current three month period, variable life insurance deposits were relatively
unchanged as compared to the same period in 2003.
SURRENDERS
Policy and contract surrenders increased $8.4 million (or 50%) to $25.2 million
and $23.1 million (or 43%) to $77.2 million during the current three and nine
month periods ended September 30 2004, respectively, as compared to the same
periods in 2003. During the current three and nine month periods, variable
annuity surrenders increased $7.5 million (or 65%) to $19.1 million and $18.3
million (or 57%) to $50.6 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 nine month periods, variable life surrenders increased $1.0
million (or 26%) to $4.7 million and $5.6 million (or 36%) to $21.1 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 September 30, 2004, the Company's assets were $1,236.7 million or $15.1
million lower than assets at December 31, 2003. Assets excluding separate
accounts assets decreased $2.3 million (or 1%) 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 nine months of 2004. Separate accounts assets, which represent 75% of
total assets, decreased $12.8 million (or 1%) to $930.4 million. Changes in
separate accounts assets for the first three quarters of 2004 were as follows:
1Q04 2Q04 3Q04 Total
-------- -------- -------- --------
(In Millions)
Investment performance - variable products $ 26.1 $ 2.4 $ (7.2) $ 21.3
Net cash outflow - variable products (6.5) (10.7) (16.9) (34.1)
------- ------- ------- -------
Net increase (decrease) $ 19.6 $ (8.3) $ (24.1) $ (12.8)
======= ======= ======= =======
At September 30, 2004 and December 31, 2003, approximately $174.2 million (or
99%) and $180.9 million (or 99%), respectively, of the Company's fixed maturity
securities were considered investment grade. The Company defines investment
grade securities as unsecured debt obligations that have a rating equivalent to
Standard and Poor's BBB- or higher (or similar rating agency). Also, at
September 30, 2004, approximately $5.4 million (or 3%) 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.
At September 30, 2004 and December 31, 2003, approximately $1.4 million (or 1%)
and $1.3 million (or 1%), respectively, of the Company's fixed maturity
securities were considered below investment grade. Below 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 below investment grade holdings are the result of
ratings downgrades on the Company's portfolio as the Company does not purchase
below investment grade securities. The Company closely monitors such
investments.
During the first nine months of 2004, the Company experienced contract owner
withdrawals that exceeded deposits by $39.1 million. The components of contract
owner transactions for all products were as follows:
September 30,
2004
-------------
(In Millions)
Deposits collected $ 57.8
Internal tax-free exchanges (3.7)
-----------
Net contract owner deposits 54.1
-----------
Contract owner withdrawals 70.3
Net transfers from separate accounts 22.9
-----------
Net contract owner withdrawals 93.2
-----------
Net contract owner activity $ (39.1)
===========
LIQUIDITY
To fund all business activities, the Company maintains a high quality and liquid
investment portfolio. As of September 30, 2004, the Company's assets included
$186.7 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.
During the fourth quarter 2004, the Company intends to pay an ordinary cash
dividend of $2.5 million to Merrill Lynch & Co.
RESULTS OF OPERATIONS
For the three month periods ended September 30, 2004 and 2003, the Company
recorded net earnings of $3.5 million and $0.8 million, respectively. For the
nine month periods ended September 30, 2004 and 2003, the Company reported net
earnings of $4.8 million and $3.4 million, respectively.
Policy charge revenue increased $0.4 million (or 10%) and $1.7 million (or 14%)
during the current three and nine month periods ended September 30, 2004,
respectively, as compared to the same periods in 2003. The increases in policy
charge revenue are attributable to increases in average variable account
balances. Average variable account balances increased $52.2 million (or 6%) and
$108.1 million (or 13%) during the current three and nine month periods ended
September 30, 2004, respectively, as compared to the same periods in 2003.
During the same comparative periods, asset-based policy charge revenue increased
$0.3 million (or 12%) and $1.5 million (or 19%), respectively. Non-asset based
policy charge revenue was relatively unchanged during the current three and nine
month periods as compared to the same periods in 2003.
Net earnings derived from interest spread decreased $0.1 million (or 14%) and
$0.9 million (or 37%) during the current three and nine month periods ended
September 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.
Net realized investment losses decreased $1.1 million and net realized
investment gains decreased $0.3 million during the current three and nine month
period ended September 30, 2004 as compared to the same periods in 2003. The
following table provides the changes in net realized investment gains by type
for each respective period:
Three Months Nine Months
Net Realized Gains (Losses) 2004 vs. 2003 2004 vs. 2003
- --------------------------- ------------- --------------
(In Millions)
Credit related $ 1.7 (1) $ 1.8 (1)
Interest related (0.6) (2) (2.1) (2)
------------ ------------
$ 1.1 $ (0.3)
============ ============
(1) Decreases in credit related net realized losses are primarily due to
reductions in 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
third quarter 2003. There were no OTT declines during the third quarter
2004.
(2) Decreases in interest related net realized gains are primarily due to
decreased invested asset sales and the increasing interest rate
environment during the current three and nine month periods as compared to
the same periods in 2003.
Policy benefits increased $0.5 million (or 93%) and decreased $0.8 million (or
29%) during the current three and nine month periods ended September 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 Nine Months
Policy benefits 2004 vs. 2003 2004 vs. 2003
- ----------------------------------- ------------- ---------------
(In Millions)
Life insurance mortality expense $ 0.4 (1) $ (0.3) (1)
Variable annuity mortality expense 0.1 (0.5) (2)
------- --------
$ 0.5 $ (0.8)
======= ========
(1) Primarily due to period-to-period fluctuations in net amount at risk per
death claim.
(2) The decrease is due to decreased death benefit expense incurred under GMDB
provisions due to improving equity markets.
Reinsurance premium ceded increased $0.1 million (or 35%) and $0.2 million (or
18%) during the current three and nine months ended September 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 nine month
periods as compared to the same periods in 2003.
Amortization of deferred policy acquisition costs decreased $2.5 million and
$2.8 million during the current three and nine month periods ended September 30,
2004, respectively, as compared to the same periods in 2003. Excluding the
impact of DAC unlocking noted in the Critical Accounting Policies section above,
amortization of deferred policy acquisition costs increased $0.5 million (or
110%) and $0.2 million (or 4%) during the current three and nine month periods,
respectively, as compared to the same periods in 2003. The increases during the
current three and nine month periods are primarily due to increases in policy
charge revenue.
Insurance expenses and taxes decreased $0.2 million (or 16%) and $0.6 million
(or 21%) during the current three and nine month periods ended September 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 nine month periods
as compared to the same periods in 2003.
The Company's effective federal income tax rate was 27% and 30% during the
current three and nine month periods ended September 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 DRD and FTC adjustments recorded during the current three and nine month
periods.
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.
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.
(a) Nothing to report.
(b) Nothing to report.
Item 6. 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 Rule
15d-14(a).
31.2 Certification by the Chief Financial Officer pursuant to Rule
15d-14(a).
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.
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, 2004
EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).
31.2 Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).
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.