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EX-24.1 - EX-24.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co OF NEW YORKw77750exv24w1.htm
EX-31.1 - EXHIBIT 31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co OF NEW YORKw77750exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co OF NEW YORKw77750exv32w1.htm
EX-32.2 - EXHIBIT 32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co OF NEW YORKw77750exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co OF NEW YORKw77750exv31w2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission File Nos. 33-34562; 33-60288; 333-48983; 333-133224

ML LIFE INSURANCE COMPANY OF NEW YORK
(Exact name of Registrant as specified in its charter)

     
New York   16-1020455

 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
 
4 Manhattanville Road
Purchase, New York 10577

(Address of Principal Executive Offices)
 
1-800-333-6524

(Registrant’s telephone no. including area code)

     Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. [ ] Yes [X] No

     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. [X] Yes  [  ] No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes [  ] No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

[ ] large accelerated filer      [ ] accelerated filer      [X] non-accelerated filer      [ ] smaller reporting company

     Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: Not applicable.

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common 220,000

     REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 


 

PART I
Item 1. Business
ML Life Insurance Company of New York (“MLLICNY”, “Registrant”, the “Company”, “we”, “our”, or “us”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. AEGON N.V. and its subsidiaries and joint ventures have life insurance and pension operations in over twenty countries in Europe, the Americas, and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations in a number of these countries.
On December 28, 2007 (the “acquisition date”), MLLICNY and its affiliate, Merrill Lynch Life Insurance Company (“MLLIC”) were acquired by AUSA for $0.13 billion and $1.12 billion, respectively, for a total price for both entities of $1.25 billion. Prior to the acquisition date, MLLICNY was a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc. (“MLIG”), which is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. (“ML&Co.”).
The Registrant is a life insurance company, who conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Registrant was incorporated in 1973 under the laws of the State of New York. The Registrant is currently subject to primary regulation by the New York State Insurance Department.
The Registrant is currently licensed to conduct business in nine states. During 2009, annuity sales were made principally in New York as measured by total contract owner deposits. During 2009, the Company, in addition to no longer issuing life insurance products, is no longer issuing variable annuity and market value adjusted annuity products.
Information pertaining to contract owner deposits, contract owner account balances, and capital contributions can be found in the Registrant’s Financial Statements which are contained herein.
The Registrant makes available, free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. This information is available through Our Insurance Companies section of the AUSA website at www.aegonins.com. These reports are available through the website as soon as reasonably practicable after the Registrant electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
Item 1A. Risk Factors
Risk Factors that Could Affect Merrill Lynch Life Insurance Company
In the course of conducting its business operations, MLLICNY could be exposed to a variety of risks that are inherent to the insurance industry. A summary of some of the significant risks that could affect MLLICNY’s financial condition and results of operations is included below. Some of these risks are managed in accordance with established risk management policies and procedures. Other factors besides those discussed below or elsewhere in this Annual Report also could adversely affect our business and operations, and the following risk factors should not be considered a complete list of potential risks that may affect the Company.
Economic Environment
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and cost of capital, as well as our access to capital
Since mid 2007, the capital and credit markets have been experiencing extreme volatility and disruption. Beginning in the second half of 2008, the volatility and disruption reached unprecedented levels and the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. Although market conditions have begun to improve in recent months, our results of operations, financial condition, cash flows and statutory capital position could be materially affected by continued disruptions in the capital and credit markets.
We maintain a level of cash and securities which, combined with expected cash inflows from investments and operations, is believed adequate to meet anticipated short-term and long-term benefit obligations. However, withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, such as changes in economic conditions. In addition, disruptions, uncertainty, or volatility in the capital and credit markets may limit our access to capital required to operate our business. Such market conditions may limit our ability to satisfy statutory capital requirements, fund redemption requests, and generate fee income and market related revenue to meet liquidity needs. As such, we may be forced to utilize available internal resources or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility and liquidity.

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Our operating environment remains challenging in light of uncertainty about the timing and strength of an economic recovery and the impact of governmental budgetary and regulatory initiatives. The steps we have taken to realign our business and strengthen our capital position may not be adequate to mitigate the financial and other risks associated with our operating environment, particularly if economic conditions deteriorate from their current levels or regulatory requirements change significantly, and we may be required to or we may seek to raise additional capital or take other strategic or financial actions which could materially affect our results of operations, financial condition and liquidity
Persistent volatility in financial markets and uncertainty about the timing and strength of a recovery in the U.S. economy adversely affected our business and results in 2009. Recently, concerns over the availability and cost of credit, the U.S. mortgage market, a declining U.S. real estate market, inflation, energy costs and geopolitical issues have contributed to the increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated a recession. In addition, the fixed income markets have experienced a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market. However, these concerns have expanded to include a broad range of mortgage- and asset-backed and other fixed income securities, including those rated investment grade and a wide range of financial institutions and markets, asset classes and sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Although market conditions have begun to improve in recent months, these events and the continuing market upheavals have had and may continue to have a material effect on the value of our investment portfolio. In the event of extreme prolonged market events, such as the global credit crisis, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.
We are exposed to significant financial and capital markets risks including changes in interest rates, credit spreads, equity prices, market volatility, performance of the economy, in general, the performance of the specific obligors included in our portfolio and other factors outside our control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates will increase the net unrealized loss position of our investment portfolio and sustained increases in interest rates may result in policyholders surrendering their contracts which may require us to liquidate assets in an unrealized loss position. Conversely, due to the long-term nature of some of our liabilities, sustained declines in interest rates may subject us to reinvestment risk.
The exposure to credit spreads primarily relates to market price variability and reinvestment risk associated with changes in credit spreads. If issuer credit spreads widen or increase significantly over an extended period of time, it would likely result in additional other-than-temporary impairments. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturities. Credit spread tightening may also cause an increase in the reported value of certain liabilities that are valued using a discount rate that reflects our own credit spread. In addition, market volatility may make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period-to-period changes from market volatility, which could have a material effect on our results of operations or financial condition. Continuing challenges include continued weakness in the residential and commercial real estate market and increased mortgage delinquencies, investor anxiety over the U.S. economy, and rating agency downgrades of various structured products and financial issuers. If significant, continued volatility, changes in interest rates, changes in credit spreads and defaults, a lack of pricing transparency, market liquidity, and declines in equity prices could continue to have a material effect on our results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized positions.
The exposure to equity risks relates to the potential for lower earnings associated with our equity-based Separate Accounts, where fee income is earned based upon account values. The decline in equity markets over the last two years has significantly reduced the account values and related fee income during that period. In addition, certain of our products offer guaranteed benefits which increase our potential benefit exposure and statutory capital exposure should equity markets decline. Due to declines in equity markets, our liability for these guaranteed benefits has significantly increased and our statutory capital position has decreased. Further sustained declines in equity markets may result in the need to devote significant additional capital to support these products.
Regulatory developments relating to the recent financial crisis may also significantly affect our operations in ways that we cannot predict. U.S. governmental or regulatory authorities, including the Securities and Exchange Commission, the New York Stock Exchange or the Financial Industry Regulatory Authority (“FINRA”), are considering enhanced or new regulatory requirements intended to prevent future crises or otherwise stabilize the institutions under their supervision. New regulations will likely affect critical matters, including capital requirements, and published proposals by insurance regulatory authorities that could reduce the pressure on our capital position may not be adopted or may be adopted in a form that does not afford as much capital relief as anticipated. If we fail to manage the impact of these developments effectively, our results of operations and financial condition could be materially affected.

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Competitive Environment
Competitive factors may adversely affect financial results
Our competitors have applied for, and in some cases obtained, business method patents on such things as investment techniques, computerized methods of contract administration, and strategies to avoid or reduce taxes among others. Competition with such companies may materially affect our results of operations.
Regulatory and Legislative Risks
The insurance industry is heavily regulated and changes in regulation may adversely affect our results of operations
The insurance industry is subject to comprehensive state regulation and supervision. We are also impacted by federal legislation and administrative policies in areas such as financial services regulations and federal taxation. The primary purpose of state regulation of the insurance business is to protect policyholders. The laws of the various states establish insurance departments with broad powers to regulate such matters as: licensing companies to transact business, admitting statutory assets, regulating unfair trade and claims practices, establishing statutory reserve requirements and solvency standards, restricting various transactions between affiliates and regulating the types, amounts and valuation of investments. State insurance regulators, federal regulators and the National Association of Insurance Commissioners (“NAIC”) continually reexamine existing laws and regulations, and may impose changes in the future.
State insurance guaranty associations have the right to assess insurance companies doing business in their state for funds to help pay the obligations of insolvent insurance companies to policyholders and claimants. As the amount and timing of an assessment is beyond our control, the liabilities established for these potential assessments may not be adequate.
Federal legislation and administrative policies in areas such as financial services regulation and federal taxation can adversely affect our results of operations. New interpretations of existing laws and the passage of new legislation may increase our claims exposure on policies we have issued previously, thus having an adverse effect on financial results.
Potential changes in federal or state tax laws, including changes impacting the availability of the Separate Accounts dividend received deduction, may adversely affect our business, results of operations, and financial condition
Changes in federal and state tax laws could make certain products the Company has sold less attractive to consumers. For example, enacted reductions in the federal income tax that individual investors are required to pay on dividends and capital gains on stocks and mutual funds provide an incentive for some customers and potential customers to shift assets into mutual funds, and away from variable annuity products. These enacted tax rate reductions may impact the relative attractiveness of annuities as compared to stocks and mutual funds. In addition, the Company benefits from certain tax benefits, such as dividends received deductions and tax credits.
Due in large part to the recent financial crisis that has affected many governments, there is an increasing risk that federal and/or state tax legislation could be enacted that would result in higher taxes on insurance companies and/or their policyholders. Although the specific form of any such potential legislation is uncertain, it may include lessening or eliminating some or all of the tax advantages currently benefiting the Company or its policyholders. This could occur in the context of deficit reduction or other tax reforms. The effects of any such changes could result in lapses of policies currently held and/or the incurrence of higher corporate taxes which could have a material adverse effect on financial condition and results of operations.
Market Risk
Changes in equity markets and other factors may significantly affect our financial results
The fee revenue that is earned on equity-based Separate Accounts assets is based upon account values. As strong equity markets result in higher account values, strong equity markets positively affect our results of operations through increased policy charge revenue and decreased benefit exposure. Conversely, a weakening of the equity markets results in lower fee income and may have a material adverse effect on our results of operations and capital resources.
In the absence of a mean reversion adjustment to future cash flows the increased fee revenue resulting from strong equity markets increases the expected gross profits (“EGPs”) from variable insurance products as do lower-than-expected lapses, mortality rates, and expenses. As a result, the higher EGPs may result in lower amortized costs related to deferred acquisition costs (“DAC”), deferred sales inducements (“DSI”), and value of business acquired (“VOBA”). However, the mean reversion process will generally minimize changes in the rate of DAC, DSI and VOBA amortization as future market growth rates are adjusted to counter the current period market returns, subject to a floor and cap return. Correspondingly, a decrease in the equity markets as well as increases in lapses, mortality rates, and expenses depending upon their significance, may result in higher net amortized costs associated with DAC, DSI, and VOBA and may have a material adverse effect on our results of operations and capital resources.

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The mean reversion process will generally minimize changes in the rate of DAC, DSI and VOBA amortization as future market growth rates are adjusted to counter the current period market returns, subject to a floor and a cap return. For more information on DAC, DSI, and VOBA amortization, see “Item 6–Management’s Narrative Analysis of Results of Operations–Critical Accounting Policies” below.
Changes in equity markets and interest rates affects the profitability of our products with guaranteed benefits, therefore, such changes may have a material adverse effect on our financial results
The valuation of liabilities related to the guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) for variable annuities is tied to the difference between the value of the underlying accounts and the guaranteed death or income benefit, calculated using a benefit ratio approach. The GMDB and GMIB liability valuations take into account the present value of total expected GMDB and GMIB payments and the present value of total expected assessments over the life of the contract and claims and assessments to date. Both the level of expected GMDB and GMIB payments and expected total assessments used in calculating the benefit ratio are affected by the equity markets. Accordingly, a decrease in the equity markets will increase the net amount at risk under the GMDB and the GMIB benefits we offer as part of our variable annuity products, which has the effect of increasing the value of GMDB and GMIB liabilities we must record.
The value of liabilities related to the guaranteed minimum withdrawal benefits (“GMWB”) for variable annuities are based on the fair value of the underlying benefit. The liabilities related to GMWB benefits valued at fair value are impacted by changes in equity markets, volatility and interest rates. Accordingly, strong equity markets and increases in interest rates will generally decrease the value of GMWB liabilities. Conversely, a decrease in the equity markets, along with a decrease in interest rates, will result in an increase in the value of GMWB liabilities we must record.
The value of contra liabilities related to the reinsurance of guaranteed minimum income benefits (“GMIB reinsurance”) for variable annuities is based on the fair value of the underlying benefit. The contra liabilities related to the GMIB reinsurance benefits valued at fair value are affected by changes in equity markets, volatility and interest rates. Accordingly, strong equity markets and increases in interest rates will generally decrease the value of the GMIB reinsurance contra liability. Conversely, a decrease in the equity markets, along with a decrease in interest rates, will generally result in an increase in the GMIB reinsurance contra liabilities we must record. Changes in the values of guaranteed benefits would result in a charge to earnings in the quarter in which the liabilities are increased or decreased.
A customized dynamic hedge program is maintained to mitigate the risks associated with income volatility around the change in reserves on guaranteed withdrawal benefits. However, the hedge positions may not be effective to exactly offset the changes in the carrying value of the guarantees due to, among other things, the time lag between changes in their values and corresponding changes in the hedge positions, high levels of volatility in the equity markets and derivatives, extreme swings in interest rates, contract holder behavior that is different than expected, and divergence between the performing of the underlying funds and hedging indices.
Credit Risk
Defaults in our bond portfolio may adversely affect profitability and shareholder’s equity
For general account products, we typically bear the risk for investment performance (return of principal and interest). We are exposed to credit risk on our fixed income portfolio (e.g. bonds). Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in the real estate values, operational failure, and fraud. Any event reducing the value of the fixed income portfolio other than on a temporary basis could have a material adverse effect on our business, results of operations, and financial condition.
Interest Rate Risk
Changes in market interest rates may adversely affect our financial results
The profitability of our fixed life and annuity products depends in part on interest rate spreads, therefore, interest rate fluctuations could negatively affect our financial results. Some of our fixed products have interest rate guarantees that expose us to the risk that changes in interest rates will reduce our “spread” or the difference between the amounts that we are required to pay under the contracts and the amounts we are able to earn on our general account investments intended to support our obligations under the contracts. Declines in our spread or instances where the returns on our general account investments are not enough to support the interest rate guarantees on these products could have a material adverse effect on our financial results.
In periods of increasing interest rates, we may not be able to replace the assets in our general account with higher yielding assets needed to fund the higher crediting rates. We therefore may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets.

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In periods of declining interest rates, we have to reinvest the cash we receive as interest or return of principal on our investments in lower yielding instruments then available. Moreover, borrowers may prepay fixed income securities in our general account in order to borrow at lower market rates, which exacerbates this risk. As we are entitled to reset the interest rates on our fixed rate annuities only at limited, pre-established intervals, and since many of our policies have guaranteed minimum interest or crediting rates, our spreads could decrease and potentially become negative.
Increases in interest rates may cause increased surrenders and withdrawals of insurance products. In periods of increasing interest rates, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek products with perceived higher returns. This process may lead to cash outflows of our existing block of business. These outflows may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses. A sudden demand among policyholders to change product types or withdraw funds could lead us to sell assets at a loss to meet funding demands.
Liquidity Risk
Business and financial results may be adversely affected by an inability to sell assets to meet maturing obligations
We could be exposed to liquidity risk, which is the risk that we cannot quickly convert invested assets to cash without incurring significant losses. Our liquidity may be impaired due to circumstances that we may be unable to control, such as general market disruptions or an operational problem. Our ability to sell assets may also be impaired if other market participants are seeking to sell similar assets at the same time. The inability to sell assets to meet maturing obligations, a negative change in its credit ratings, or regulatory capital restrictions, may have an adverse effect on financial results.
Underwriting Risk
Differences between actual claims experience and underwriting and reserving assumptions may require liabilities to be increased, which may have a material adverse effect on our financial results
Our earnings depend upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical provisions and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, earnings would be reduced. Furthermore, if these higher claims were part of a trend, we may be required to increase our liabilities, which may also reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into earnings over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income, and expenses) are not realized, the amortization of these costs may be accelerated and may require write-offs due to unrecoverability. This may have a material adverse effect on our financial results.
Other Risks
A pandemic, terrorist attack or other catastrophic event may adversely affect our results of operations and liquidity
Our mortality experience may be adversely impacted by a catastrophic event. In addition, a severe catastrophic event may cause significant volatility in global financial markets, disruptions to commerce, and reduced economic activity. The resulting macroeconomic conditions may adversely affect our cash flows as well as the value and liquidity of our invested assets. We may also experience operational disruptions if our employees are unable or unwilling to come to work due to a pandemic or other catastrophe.
A computer system failure or security breach may disrupt our business, damage our reputation and adversely affect our results of operations, financial condition and cash flows
We use computer systems to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly dependent on our ability to access these systems to perform necessary business functions such as providing customer support, administering variable products, making changes to existing policies, filing and paying claims, managing our investment portfolios, and producing financial statements. While we have policies, procedures, automation and backup plans designed to prevent or limit the effect of failure, our computer systems may be vulnerable to disruptions or breaches as a result of natural disasters, man-made disasters, criminal activity, pandemics, or other events beyond our control. The failure of our computer systems for any reason could disrupt our operations, result in loss of customer business and may adversely affect our profitability.
We retain confidential information on our computer systems, including customer information and proprietary business information. Any compromise of the security of our computer systems that results in the disclosure of personally identifiable customer information could damage our reputation, expose us to litigation, increase regulatory scrutiny and require us to incur significant technical, legal, and other expenses.

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Litigation and regulatory investigations may adversely affect our business, results of operations, and financial condition
In recent years, the insurance industry has increasingly been the subject of litigation, investigation, and regulatory activity by various governmental and enforcement authorities concerning common industry practices such as the disclosure of contingent commissions and suitability of sales. We cannot predict at this time the effect this current trend towards litigation and investigation will have on the insurance industry or to our business. Lawsuits, including class actions and regulatory actions, may be difficult to assess or quantify, may seek recovery of very large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for substantial periods of time. A substantial legal liability or significant regulatory action could have a material adverse effect on our business, results of operations, and financial condition.
The Company’s election to discontinue new sales at the present time creates a risk that the growth of future revenues may be limited and uncertain. Growth in revenues would thus be dependent on the market performance of the assets underlying the policies and the policy and rider fees received on a potentially declining number of policies in force.
The current economic environment has presented significant challenges to the Company’s ability to issue existing products at competitive returns. Further, new products designed to combat the volatile economic environment may not be able to be administered on existing company administrative systems. The Company’s election to discontinue new sales at the present time means that future growth in revenues may be limited. The uncertainty of the performance of the securities markets would also mean that where the Company’s revenues are dependent on fees or charges based on market value of investments underlying the policies, the Company’s revenues would also be uncertain. Further, as policyholders surrender their policies and the number of policies in force is reduced, and as policyholders die or otherwise withdraw value from their policies, the revenues that the Company receives for policy and rider administration, and for mortality and expense risks will likely decline over time. However, there remain a significant number of annuity and life insurance policies in force that will continue to be serviced and are expected to continue to generate revenues for the foreseeable future.
Global climate changes may have an adverse effect on our results of operations and financial condition
Atmospheric concentrations of carbon dioxide and other greenhouse gases have increased dramatically since the industrial revolution, resulting in a gradual increase in global average temperatures and an increase in the frequency and severity of natural disasters. These trends are expected to continue in the future and have the potential to impact nearly all sectors of the economy to varying degrees. Our initial research indicates that climate change does not pose an imminent or significant threat to our operations or business, but we will continue to monitor new developments in the future.
Climate change may impact asset prices as well as general economic conditions. Governmental policies to slow climate change may have an adverse effect on investment sectors such as utilities, transportation and manufacturing. Changes in asset prices may impact the value of our fixed income investments. We manage our investment risks by maintaining a well-diversified portfolio, both geographically and by sector. We also monitor our investments on an ongoing basis, allowing us to adjust our exposure to sectors and/or geographical areas that face severe risks due to climate change.
Item 1B. Unresolved Staff Comments
     Not Applicable.
Item 2. Properties
The Registrant’s home office is located at 4 Manhattanville Road, Purchase, New York. After March 31, 2010, the Registrant’s home office will be located at 440 Mamaroneck Avenue, Harrison, New York 10528. Personnel performing services for the Registrant operate in AUSA office space in Cedar Rapids, Iowa and St. Petersburg, Florida. An allocable share of the cost of each of the above mentioned premises was paid by the Registrant through the common cost allocation service agreement.
In addition, personnel performing services for the Registrant occupy office space in Jacksonville, Florida, which is owned by ML&Co. An allocable share of the cost of each of the above mentioned premises was paid by the Registrant through the transition services agreement between AUSA and ML&Co.
Prior to the acquisition date, the services were pursuant to the Registrant’s Management Services agreement with MLIG. An allocable share of the cost of each of the above mentioned premises was paid by the Registrant through the service agreement with MLIG.

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Item 3. Legal Proceedings
There is no material pending litigation to which the Registrant is a party or of which any of its property is the subject and there are no legal proceedings contemplated by any governmental authorities against the Registrant of which it has any knowledge.
PART II
Item 4. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  (a)   The Registrant is a wholly owned subsidiary of AUSA. There is no public trading market for the Registrant’s common stock.
    During 2009, the Registrant did not receive a capital contribution from AUSA nor pay any dividends to AUSA. During 2008, the Registrant paid a $7.0 million cash dividend to AUSA. No other cash or stock dividends have been declared on Registrant’s common stock at any time during the two most recent fiscal years. Under laws applicable to insurance companies domiciled in the State of New York, notice of intention to declare a dividend must be filed with the New York Superintendent of Insurance who may disallow the payment. See Note 9 to the Registrant’s Financial Statements.
  (b)   Not applicable.
 
  (c)   Not applicable.
Item 5. Selected Financial Data
Information called for by this item is omitted pursuant to General Instruction I. of Form 10-K.
Item 6. Management’s Narrative Analysis of Results of Operations
This Management’s Narrative Analysis of Results of Operations should be read in conjunction with the Financial Statements and Notes to Financial Statements included herein.
Forward Looking Statements
The statements contained in this Report that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would, is confident, will, and similar expressions as they relate to our Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties include but are not limited to the following:
    Changes in general economic conditions;
 
    Changes in the performance of financial markets, including emerging markets, such as with regard to:
  o   The frequency and severity of defaults by issuers in our fixed income investment portfolios; and
 
  o   The effects of corporate bankruptcies and/or accounting restatements on the financial markets and the resulting decline in the value of equity and debt securities we hold;
    The frequency and severity of insured loss events;
 
    Changes affecting mortality and other factors that may impact the profitability of our insurance products;
 
    Changes affecting interest rate levels and continuing low or rapidly changing interest rate levels;
 
    Increasing levels of competition;
 
    Changes in laws and regulations, particularly those affecting our operations, the products we sell, and the attractiveness of certain products to our customers;
 
    Regulatory changes relating to the insurance industry in the jurisdictions in which we operate;
 
    Lowering of one or more of the financial strength ratings and the adverse impact such action may have on the premium writings, policy retention, profitability and liquidity;
 
    Acts of God, acts of terrorism, acts of war and pandemics;
 
    Changes in the policies of central banks and/or governments;
 
    Litigation or regulatory actions that could require us to pay significant damages or change the way we do business;
 
    Customer responsiveness to both new products and distribution channels;
 
    Competitive, legal, regulatory or tax changes that affect the distribution cost of or demand for our products; and
 
    Our failure to achieve anticipated levels of earnings or operational efficiencies as well as other cost saving initiatives.

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We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect Company expectations at the time of the writing. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. The reader should, however, consult any further disclosures MLLICNY 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.
Business Overview
MLLICNY conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. As of September 30, 2009, the Company, in addition to no longer issuing life insurance products, is no longer issuing variable annuity and market value adjusted annuity products. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and guaranteed minimum withdrawal benefits (“GMWB”).
Acquisition
On December 28, 2007, the Company and its affiliate, MLLIC, were acquired by AUSA. The acquisition was accounted for by AUSA using the purchase method of accounting, which required the assets and liabilities of MLLICNY to be identified and measured at their estimated fair values as of the acquisition date.
The Company made refinements during 2008 to the initial estimated fair values as additional information became available. The following adjustments as of December 31, 2008 were made to the initial purchase price allocation:
                         
    Purchase Price Allocation
    December 31,           December 31
(dollars in millions)   2007   Adjustments   2008 (a)
Value of business acquired, gross
  $ 44.0     $ 6.8     $ 50.8  
Goodwill
    6.9       (3.3 )     3.6  
Other intangibles
    8.3       (1.2 )     7.1  
Federal income taxes — current
    0.8       (0.1 )     0.7  
Reinsurance receivable
    0.9             0.9  
Other assets
    5.2       0.1       5.3  
 
                       
Policyholder account balances
    140.8       4.1       144.9  
Future policy benefits
    22.8       (3.6 )     19.2  
Federal income taxes — deferred
          1.8       1.8  
 
(a)   This reflects the December 31, 2008 balance before adjustments for unrealized gains (losses) on investments, amortization and/or impairments.
In addition, the purchase method of accounting applied by AUSA to the acquired assets and liabilities associated with the Company has been “pushed down” to the financial statements of the Company, thereby establishing a new basis of accounting. As a result, the Company follows AUSA’s accounting policies subsequent to the acquisition date. This new basis of accounting is referred to as the “successor basis”, while the historical basis of accounting is referred to as the “predecessor basis’’. In general, all 2009 and 2008 amounts are representative of the successor basis of accounting while the Statements of Income, Stockholder’s Equity, Comprehensive Income, and Cash Flows amounts for 2007 are representative of the predecessor basis of accounting. Financial statements included herein for periods prior and subsequent to the acquisition date are labeled “Predecessor” and “Successor”, respectively.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) 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.

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The Company’s critical accounting policies and estimates are discussed below. See Note 1 to the Financial Statements for additional information regarding accounting policies.
Valuation of Fixed Maturity and Equity Securities
The Company’s investments in fixed maturity and equity securities are classified as available-for-sale and reported at estimated fair value. The fair values of fixed maturity and equity securities are determined by management after taking into consideration several sources of data. The Company’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, those securities are submitted to brokers to obtain quotes. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.
Each month, the Company performs an analysis of the information obtained from third party services and brokers to ensure that the information is reasonable and produces a reasonable estimate of fair value. The Company considers both qualitative and quantitative factors as part of this analysis, including but not limited to, recent transactional activity for similar fixed maturities, review of pricing statistics and trends, and consideration of recent relevant market events.
At December 31, 2009 and 2008, approximately, $9.2 million (or 8%) and $7.7 million (or 7%), respectively, of the Company’s fixed maturity and equity securities portfolio consisted of non-publicly traded securities. Since significant judgment is required for the valuation of non-publicly traded securities, the estimated fair value of these securities may differ from amounts realized upon an immediate sale.
Changes in the fair value of fixed maturity and equity securities are reported as a component of accumulated other comprehensive income (loss), net of taxes on the Balance Sheets and are not reflected in the Statements of Income until a sale transaction occurs or when credit-related declines in estimated fair value are deemed other-than-temporary.
Derivative Instruments
Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. As of December 31, 2009, the Company had 20 outstanding short futures contracts with a notional amount of $5.6 million. As of December 31, 2008, the Company had 10 outstanding short futures contracts with a notional amount of $2.3 million.
Other-Than-Temporary Impairment (“OTTI”) 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 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, and information obtained from external sources (i.e. company announcements, ratings agency announcements, or news wire services). For equity securities, the Company also considers the ability and intent to hold the investments for a period of time sufficient for a forecasted market price recovery up to or beyond the amortized cost of the investment. The factors that may give rise to a potential OTTI include, but are not limited to, i) certain credit-related events such as default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than cost or amortized cost for an extended period of time. 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. Management bases this determination on the most recent information available.
To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. During the second quarter 2009, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance for the recognition and presentation of OTTI. The recognition provisions apply only to debt securities classified as available-for-sale and held-to-maturity, while the presentation and disclosure requirements apply to both debt and equity securities.
For equity securities, once management determines a decline in the value of an available-for-sale security is other-than-temporary, the cost basis of the equity security is reduced to its fair value, with a corresponding charge to earnings.

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For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows. If the net present value is less than the amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount representing the credit loss, where the present value of cash flows expected to be collected is less than the amortized cost basis of the security, and an amount related to all other factors (referred to as the non credit portion). The credit loss is recognized in earnings and the non credit loss is recognized in other comprehensive income (“OCI”), net of applicable taxes and value of business acquired. Management records subsequent changes in the estimated fair value (positive and negative) of available-for-sale debt securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI.
For the years ended December 31, 2009 and 2008, the Company recorded an OTTI in income, net of value of business acquired amortization, of $0.9 million and $0.5 million, respectively. The Company did not experience any realized investment losses due to other-than-temporary declines in fair value for the year ended December 31, 2007.
Deferred Policy Acquisition Costs (“DAC”)
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 based on the estimated future gross profits for a group of contracts. DAC are subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period. At December 31, 2009 and 2008, variable annuities accounted for the Company’s entire DAC asset of $0.4 million and $0.4 million, respectively.
DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, 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, mortality rates and reinsurance costs. For variable annuities, the Company generally establishes a long-term rate of net Separate Accounts growth. If returns over a determined historical period differ from the long-term assumption, returns for future determined periods are calculated so that the long-term assumption is achieved. The result is that the long-term rate is assumed to be realized over a specified period. However, the long-term rate may be adjusted if expectations change. This method for projecting market returns is known as reversion to the mean, a standard industry practice. At December 31, 2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate, while at December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate. Surrender and mortality rates for all variable contracts are based on historical experience and a projection of future experience.
Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or benefit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the 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 returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the years ended December 31, 2009 and 2008 there was less than $0.1 million of DAC unlocking impacting pre-tax income. For the year ended December 31, 2007, there was a favorable impact to pre-tax income related to DAC unlocking of $1.8 million. See Note 6 to the Financial Statements for a further discussion.
Deferred Sales Inducements (“DSI”)
The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner’s deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the deferred sales inducement asset.

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The expense and the subsequent capitalization and amortization are recorded as a component of policy benefits in the Statements of Income. At December 31, 2009 and 2008, variable annuities accounted for the Company’s entire DSI asset of $0.1 million and $0.2 million, respectively. See Note 6 to the Financial Statements for a further discussion.
Value of Business Acquired (“VOBA”)
VOBA represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, policyholder behavior, Separate Account performance, operating expenses, investment returns, and other factors. Actual experience on the purchased business may vary from these projections. Revisions in estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross profits are less than the unamortized balance. In addition, MLLICNY utilizes the reversion to the mean assumption, a common industry practice, in its determination of the amortization of VOBA. This practice assumes that the expectations for long-term appreciation in equity markets is not changed by minor short-term market fluctuations, but that it does change when large interim deviations have occurred. At December 31, 2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate, while at December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate. At December 31, 2009 and 2008, the Company’s VOBA asset was $31.0 million and $41.5 million, respectively. For the years ended December 31, 2009 and 2008, the unfavorable impact to pre-tax income related to VOBA unlocking was $0.5 million and $2.5 million, respectively. For the years ended December 31, 2009 and 2008, there was an impairment charge of $7.2 million and $4.3 million, respectively. See Note 5 to the Financial Statements for a further discussion.
Other Intangibles
Other intangibles that were acquired at the acquisition date include a distribution agreement, a tradename, and a non-compete agreement. At December 31, 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co. distribution channel instead of continuing to sell new variable annuities on the Company. As a result of this decision, an impairment charge of $6.8 million was taken for the entire unamortized other intangible balance at December 31, 2008. Prior to December 31, 2008, the tradename and the non-compete agreements were amortized on a straight-line basis over their useful life of five years. The distribution intangible was amortized over the expected economic benefit period and at a pace consistent with the expected future gross profit streams generated from the distribution agreement, which was thirty years. The entire asset amount had been allocated to annuities. See Note 5 to the Financial Statements for a further discussion.
Goodwill
Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests conducted at least annually. Impairment testing is to be performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit represents the operating segment which is the level at which the financial information is prepared and regularly reviewed by management. The entire asset amount has been allocated to annuities. Goodwill is reviewed for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator, or unanticipated competition would cause MLLICNY to review the carrying amounts of goodwill for impairment. When considered impaired, the carrying amounts are written down to fair value based primarily on discounted cash flows. At December 31, 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co. distribution channel instead of continuing to sell new variable annuities on the Company. As a result of this decision, an impairment charge was taken for the majority of the goodwill balance ($3.1 million) at December 31, 2008. The remaining amount of $0.5 million at December 31, 2009 and 2008 relates to MLLICNY’s state licenses. See Note 5 to the Financial Statements for a further discussion.
Policyholder Account Balances
The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at December 31, 2009 and 2008 were $125.3 million and $135.1 million, respectively.
Future Policy Benefits
Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation.

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These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At December 31, 2009 and 2008, future policy benefits were $18.5 million and $19.9 million, respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. At December 31, 2009 and 2008, GMDB and GMIB liabilities included within future policy benefits were as follows:
                 
    December 31,
(dollars in millions)   2009   2008
GMDB liability
  $ 0.3     $ 0.5  
GMIB liability
    2.5       1.1  
The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings (“unlocking”), if actual experience or evidence suggests that the assumptions should be revised. For the years ended December 31, 2009, 2008, and 2007, the favorable (unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was ($0.2) million, ($2.3) million, and $1.2 million, respectively.
Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB provisions and for the reinsurance of GMIB provisions (“GMIB reinsurance”) for variable annuities based on the fair value of the underlying benefit. GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.
At December 31, 2009 and 2008, GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:
                 
    December 31,
(dollars in millions)   2009   2008
GMWB liability
  $ 1.3     $ 4.3  
GMIB reinsurance asset
    (5.7 )     (7.4 )
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 it 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 dividend-received deductions (“DRD”) and foreign tax credits (“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, within the current year’s provision, management makes estimates regarding the future tax deductibility of these items. These estimates are primarily based on recent historic experience. See Note 8 to the Financial Statements for a further discussion.
The valuation allowance for deferred tax assets at December 31, 2009 was $3.7 million. There was no valuation allowance at December 31, 2008. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, is not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of further taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.
The Company files a return in the U.S. federal tax jurisdiction and various state tax jurisdictions. As a result of the Company’s election for federal income tax purposes of Internal Revenue Code Section 338, the predecessor is responsible for any uncertain tax positions that existed prior to the acquisition date.

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Recent Accounting Guidance
On July 1, 2009, the FASB Accounting Standards CodificationTM (“Codification”) was launched as the single source of authoritative nongovernmental GAAP. Accounting guidance promulgated by the FASB is communicated through an Accounting Standards Update (“ASU”). An ASU provides the reason for the update and details the amendments to the Codification. Guidance in the Codification is organized by Topic, each representing a collection of related guidance (e.g., Financial Services—Insurance). Topics are further subdivided into Subtopics (e.g., Insurance Activities), and Sections (e.g., Recognition, Measurement, or Disclosure).
The following outlines the adoption of recent accounting guidance. See Note 1 to the Financial Statements for a further discussion.
Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles
The Company adopted guidance that establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities as of the period ended September 30, 2009. This guidance was formerly known as Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.
ASC 320, Investments—Debt and Equity Securities
The Company adopted revised guidance for the recognition and presentation of OTTI as of the period ended June 30, 2009. This guidance was formerly known as FASB Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.
ASC 820, Fair Value Measurements and Disclosures
    The Company adopted guidance on measuring the fair value of certain alternative investments (i.e., investments in hedge funds, private equity funds, venture capital funds, offshore fund vehicles, funds of funds, and real estate funds) as of the period ended December 31, 2009 (ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)).
 
    The Company adopted guidance, as of the period ended December 31, 2009, which clarified that when a quoted price in an active market for an identical liability is not available, an entity should measure fair value using an approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs (ASU 2009-05, Measuring Liabilities at Fair Value).
 
    The Company adopted guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly as of the period ended June 30, 2009. This guidance was formerly known as FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and supersedes guidance formerly known as FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.
 
    The Company adopted guidance requiring disclosures about fair value of financial instruments in interim reporting periods as well as annual periods as of the period ended June 30, 2009. This guidance was formerly known as FSP No. FAS 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments.
 
    On January 1, 2008, the Company adopted guidance providing a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. This guidance was formerly known as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
 
    On January 1, 2008, the Company adopted guidance that defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. This guidance was formerly known as SFAS No. 157, Fair Value Measurements.

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ASC 855, Subsequent Events
The Company adopted guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued as of the period ended June 30, 2009. In addition, the Company adopted revisions to this guidance for the period ending December 31, 2009. This guidance was formerly known as SFAS No. 165, Subsequent Events.
ASC 325-40, Investments—Other; Beneficial Interests in Securitized Financial Assets
The Company adopted guidance that amends impairment and related interest income measurement guidance to permit the use of reasonable management judgment about the probability that the company will be able to collect all amounts due as of the period ended December 31, 2008. This guidance was formerly known as FSP No. EITF 99-20-1, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20.
ASC 815, Derivatives and Hedging
    On January 1, 2009, the Company adopted guidance that amends and expands the disclosure requirements related to derivative instruments and hedging activities. This guidance was formerly known as SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.
 
    The Company adopted guidance requiring disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments as of the period ended December 31, 2008. This guidance was formerly known as FSP No. FAS 133-1 and FASB Interpretation No. 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.
ASC 805, Business Combinations
On January 1, 2009, the Company prospectively adopted guidance that provides requirements for the accounting and reporting of transactions that represent business combinations to be accounted for under the acquisition method. This guidance was formerly known as SFAS No. 141 (revised 2007), Business Combinations.
ASC 350, Intangibles—Goodwill and Other
On January 1, 2009, the Company adopted guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance was formerly known as FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.
In addition, the following is recent accounting guidance that will be adopted in the future. See Note 1 to the Financial Statements for a further discussion.
ASC 820, Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements, which includes new disclosures and clarifications of existing disclosures about fair value measurements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2009 except for disclosures about purchases, sales, issuances, and settlements in the Level 3 roll forward, which are effective for fiscal years beginning after December 15, 2010. The Company will adopt the guidance on January 1, 2010 and 2011, as appropriate.
New Business
The Company’s marketing emphasis, prior to September 30, 2009, had been on the sale of variable annuity products. These products were designed to address the retirement planning needs of ML&Co. clients. Each variable annuity product was designed to provide tax-deferred retirement savings with the opportunity for diversified investing in a wide selection of underlying mutual fund portfolios.

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Total direct deposits decreased $7.0 million during 2009 as compared to 2008. Total direct deposits (including internal exchanges) were as follows:
                           
    Successor       Predecessor  
(dollars in millions)   2009     2008       2007  
Variable annuity deposits
  $ 2.8     $ 9.8       $ 36.6  
All other deposits
    0.1       0.1         0.1  
 
                   
 
                         
Total direct deposits
  $ 2.9     $ 9.9       $ 36.7  
 
                   
The decrease in variable annuity deposits during 2009 and 2008 was primarily due to volatile equity markets as well as the Company discontinuing the sale of variable annuity products in 2009. All other deposits include deposits on discontinued modified guaranteed annuities and immediate annuities as well as renewal deposits on existing life insurance and fixed annuity contracts. There were no internal exchanges during 2009. Internal exchanges during 2008 and 2007 were $0.8 million and $4.2 million, respectively.
Surrenders
Policy and contract surrenders decreased $19.1 million (or 24%) to $59.4 million during 2009 as compared to 2008. Policy and contract surrenders decreased $46.5 million (or 37%) to $78.5 million during 2008 as compared to 2007. The decrease is primarily due to the decline in the equity markets in late 2008 and early 2009.
Financial Condition
At December 31, 2009, the Company’s assets were $909.8 million or $39.9 million higher than the $869.8 million in assets at December 31, 2008. Assets excluding Separate Accounts assets decreased $5.8 million. Separate Accounts assets, which represent 71% of total assets, increased $45.7 million (or 8%) to $644.1 million. Changes in Separate Accounts assets were as follows:
         
(dollars in millions)   2009  
Investment performance
  $ 116.7  
Deposits
    2.9  
Policy fees and charges
    (13.0 )
Surrenders, benefits and withdrawals
    (60.9 )
 
     
 
       
Net change
  $ 45.7  
 
     
There were no fixed contract owner deposits in 2009, 2008 and 2007. During 2009, 2008 and 2007, fixed contract owner withdrawals were $8.2 million, $9.4 million and $3.0 million, respectively.
Investments
The Company maintains a conservative general account investment portfolio comprised primarily of investment grade fixed maturity securities, policy loans, and cash and cash equivalents.

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The following schedule identifies MLLICNY’s general account invested assets by type at December 31:
                 
    2009   2008
Fixed maturity securities
               
Investment grade fixed maturity securities
    48 %     51 %
Below investment grade fixed maturity securities
    2       3  
 
           
Total fixed maturity securities
    50       54  
 
           
Equity securities
           
Cash and cash equivalents
    22       14  
Policy loans
    28       32  
 
           
 
    100 %     100 %
 
           
Fixed Maturities and Equity Securities
The Company adopted revised guidance for the recognition and presentation of OTTI effective as of June 30, 2009. The prior requirement for management to assert that it has the intent and ability to hold an impaired debt security until recovery was replaced with the requirement that management assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis.
As permitted by the guidance, the Company recorded an increase of $0.1 million to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on the Statement of Stockholder’s Equity to reclassify the non credit portion of previously other-than-temporarily impaired available-for-sale securities held as of April 1, 2009. The following summarizes the components for this cumulative effect adjustment:
                         
            Net        
    Unrealized     Unrealized     Total  
    OTTI     Loss on     Cumulative  
    on Available-     Available-     Effect  
    For-Sale     For-Sale     Adjustment  
(dollars in millions)   Securities     Securities     in OCI  
Increase in amortized cost of available-for-sale securities
  $ 0.1     $ 0.1     $ 0.2  
Change in VOBA
          (0.1 )     (0.1 )
 
                 
Net cumulative effect adjustment
  $ 0.1     $     $ 0.1  
 
                 
The cumulative effect adjustment was calculated for all available-for-sale securities held as of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, the Company did not intend to sell the security and it was not more likely than not that the Company would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received as of April 1, 2009, to the amortized cost basis of the available-for-sale securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective available-for-sale security in effect before recognizing any OTTI. In addition, because the carrying amount of VOBA is adjusted for the effects of realized and unrealized gains and losses on available-for-sale securities, the Company recognized a true-up to the VOBA balances for this cumulative effect adjustment.

16


 

The amortized cost and estimated fair value of investments in fixed maturity and equity securities at December 31, 2009 and 2008 were:
                                                 
    December 31, 2009
                                            % of
    Amortized     Gross Unrealized             Estimated     Estimated
(dollars in millions)   Cost     Gains     Losses     OTTI (1)     Fair Value     Fair Value
Fixed maturity securities
                                               
Corporate bonds
                                               
Financial services
  $ 12.9     $ 0.5     $ (0.3 )   $     $ 13.1       11 %
Industrial
    46.0       3.0                   49.0       43  
Utility
    3.3       0.2                   3.5       3  
Asset-backed securities
                                               
Housing related
    2.4             (0.2 )           2.2       2  
Credit cards
    2.8       0.1                   2.9       3  
Autos
    2.0       0.1                   2.1       2  
Commercial mortgage-backed securities — non agency backed
    25.8       0.3       (0.6 )           25.5       22  
Residential mortgage-backed securities
                                               
Agency backed
    7.9       0.3                   8.2       7  
Non agency backed
    1.1             (0.2 )           0.9       1  
Government and government agencies
                                               
United States
    3.2             (0.1 )           3.1       3  
Foreign
    3.5       0.1       (0.2 )           3.4       3  
 
                                 
Total fixed maturity securities
    110.9       4.6       (1.6 )           113.9       100  
 
                                 
 
                                               
Equity securities — banking securities
    0.1                         0.1        
 
                                 
Total equity securities
    0.1                         0.1        
 
                                 
Total fixed maturity and equity securities
  $ 111.0     $ 4.6     $ (1.6 )   $     $ 114.0       100 %
 
                                 
 
(1)   Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

17


 

                                                 
    December 31, 2008
                                            % of
    Amortized     Gross Unrealized             Estimated     Estimated
(dollars in millions)   Cost     Gains     Losses     OTTI     Fair Value     Fair Value
Fixed maturity securities
                                               
Corporate bonds
                                               
Financial services
  $ 17.4     $     $ (2.1 )   $     $ 15.3       13 %
Industrial
    56.5       0.6       (4.4 )           52.7       46  
Utility
    4.4             (0.1 )           4.3       4  
Asset-backed securities
                                               
Housing related
    2.8             (0.1 )           2.7       2  
Credit cards
    2.7             (0.5 )           2.2       2  
Autos
    2.0             (0.2 )           1.8       2  
Commercial mortgage-backed securities — non agency backed
    24.8             (5.0 )           19.8       17  
Residential mortgage-backed securities
                                               
Agency backed
    9.7       0.2       (0.1 )           9.8       8  
Non agency backed
    1.4             (0.5 )           0.9       1  
Government and government agencies
                                               
United States
    2.2       0.1                   2.3       2  
Foreign
    4.0       0.2       (0.2 )           4.0       3  
 
                                 
Total fixed maturity securities
    127.9       1.1       (13.2 )           115.8       100  
 
                                               
Equity securities
                                               
Banking securities
    0.1             (0.1 )                  
Other financial services securities
    0.2                         0.2        
 
                                 
Total equity securities
    0.3             (0.1 )           0.2        
 
                                 
Total fixed maturity and equity securities
  $ 128.2     $ 1.1     $ (13.3 )   $     $ 116.0       100 %
 
                                 
The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally, for asset-backed securities (“ABS”), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired as of December 31, 2009.
Nine issuers represent more than 5% of the total unrealized loss position, comprised of three commercial mortgage-backed securities (“CMBS”) holdings, two capital securities within the financial services sector, two government securities, one ABS subprime mortgage and one residential mortgage-backed security (“RMBS”). The Company‘s CMBS unrealized loss is $0.6 million and relates to LBUBS Commercial Mortgage Tranche 2006-C7, Morgan Stanley Capital I 2005- HQ6 and Morgan Stanley Capital I 2006-HQ9. These are CMBS that contain fixed income positions where our holdings are all rated investment grade. The Company’s RMBS unrealized loss is $0.2 million and relates to GSR Mortgage Loan Tranche 2005-AR5. GSR Mortgage Loan Tranche 2005-AR5 is a securitized portfolio of RMBS that contains fixed income positions where our holding is rated below investment grade. The Company’s ABS subprime mortgage unrealized loss is $0.2 million and relates to Conseco Fin Sec Corp 2001-C, which is a fixed rate first lien subprime mortgage security that is rated investment grade. The Company‘s investment grade capital securities have an unrealized loss of $0.3 million and were issued by Wells Fargo & Company and JP Morgan Chase & Co. The Company’s government and government agencies securities which have an unrealized loss of $0.2 million, were issued in Venezuela and Quebec, and are rated below investment grade and investment grade, respectively.

18


 

Financial Services Sectors
MLLICNY’s $0.3 million of gross unrealized losses within the financial services sector has an estimated fair value of $3.8 million. The majority of the unrealized loss in the financial services sector relates to the banking sub-sector which has $0.3 million of gross unrealized losses on securities with an estimated fair value of $2.3 million. Companies within MLLICNY’s financial services sector are generally high in credit quality and, as a whole, represent a large portion of the corporate debt market. The extreme stress on the capital base of banks within the sector has been significantly reduced following unprecedented liquidity and capital support from major governments over the last year.
Fundamentals remain somewhat weakened by the global recession and some companies remain dependent on government support. However, funding concerns have largely abated as capital markets have reopened and investor confidence is returning to the sector. In addition, the sector has raised a significant amount of capital, creating a large buffer to help absorb rising credit losses. Following the unprecedented global market turmoil, regulators are likely to strengthen capital requirements for the sector as a whole as well as implement additional regulatory controls and oversight. All of the securities in an unrealized loss position are rated investment grade.
    Banking
    The overall exposure to the banking sub-sector in the Company’s portfolio is of high quality. The unrealized losses in the banking sub-sector primarily reflect low floating rate coupons on some securities, and credit spread widening due to economic weakness and market concerns that deeply subordinated securities will not be supported by the government. Government initiatives put into place during 2008 and 2009 have been largely successful in reopening the funding markets though lending remains cautious in some sectors of the economy. Many banks have benefited from both direct assistance (government capital injections, asset relief plans and government guarantees on debt) and indirect assistance (various government liquidity measures, including short-term funding facilities). Included in the Company’s banking exposure are hybrid securities, which typically have an original maturity of more than thirty years, may be perpetual, and were designed to receive enhanced equity credit from rating agencies. In addition, they have other features that may not be consistent across issues such as a cumulative or non-cumulative coupon, capital replacement language and an alternative payment mechanism. The Company’s exposure to hybrid securities in an unrealized loss is all rated investment grade and there is little risk of payment interruption. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider those investments to be impaired as of December 31, 2009.
    There are no individual issuers rated below investment grade in this sub-sector which have an unrealized loss position greater than $0.2 million.
Asset-Backed Securities – Housing Related
ABS Housing Related securities are secured by pools of residential mortgage loans primarily those which are categorized as subprime. The unrealized loss is primarily due to decreased liquidity and increased credit spreads in the market combined with significant increases in expected losses on loans within the underlying pools. Expected losses within the underlying pools are generally higher than original expectations, primarily in certain later-vintage adjustable rate mortgage loan pools, which has led to some rating downgrades in these securities.
The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance.
All ABS housing related securities are monitored and reviewed on a monthly basis with detailed cash flow models using the current collateral pool and capital structure on the portfolio quarterly. Model output is generated under base and several stress-case scenarios. ABS housing asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. The ABS housing models incorporate external estimates on property valuations, borrower characteristics, propensity of a borrower to default or prepay and the overall security structure. Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term. Recent payment history, a percentage of on-going delinquency rates and a constant prepayment rate are also incorporated into the model. Once the entire pool is modeled, the results are closely analyzed by the asset specialist to determine whether or not our particular tranche or holding is at risk for payment interruption. Holdings are impaired to the net present value of projected future cash flows where loss events have taken place or are projected to take place that would affect future cash flows on our particular tranche.

19


 

As the unrealized losses in the ABS housing related portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in this sector which have an unrealized loss position greater than $0.2 million.
Commercial Mortgage-Backed Securities
CMBS are securitizations of underlying pools of mortgages on commercial real estate. The underlying mortgages have varying risk characteristics and are pooled together and sold in different rated tranches. All of the Company’s CMBS holdings are conduit securities. Over 96% of the Company’s exposure to CMBS is AAA rated, with the majority of these positions being AAA — senior rated securities. The following tables summarize the Company’s CMBS exposure by rating and vintage at December 31:
                         
    2009  
                    Net  
            Estimated     Unrealized  
    Amortized     Fair     Gains (Losses)  
(dollars in millions)   Cost     Value     and OTTI  
AAA — Senior
  $ 23.1     $ 23.4     $ 0.3  
AAA — Junior
    1.7       1.4       (0.3 )
A
    1.0       0.7       (0.3 )
 
                 
Total
  $ 25.8     $ 25.5     $ (0.3 )
 
                 
                         
    2008  
                    Net  
            Estimated     Unrealized  
    Amortized     Fair     Gains (Losses)  
(dollars in millions)   Cost     Value     and OTTI  
AAA — Senior
  $ 22.2     $ 18.6     $ (3.6 )
AAA — Mezzanine
    0.9       0.5       (0.4 )
AAA — Junior
    1.7       0.7       (1.0 )
 
                 
Total
  $ 24.8     $ 19.8     $ (5.0 )
 
                 
                                                 
    2009  
    Estimated Fair Value by Vintage  
(dollars in millions)   2005&Prior     2006     2007     2008     2009     Total  
AAA — Senior (a)
  $ 4.2     $ 19.2     $     $     $     $ 23.4  
AAA — Junior
    0.7       0.7                         1.4  
A
          0.7                         0.7  
 
                                   
Total
  $ 4.9     $ 20.6     $     $     $     $ 25.5  
 
                                   
                                                 
    2008  
    Estimated Fair Value by Vintage  
(dollars in millions)   2004&Prior     2005     2006     2007     2008     Total  
AAA — Senior (a)
  $ 0.4     $ 3.2     $ 15.0     $     $     $ 18.6  
AAA — Mezzanine
                0.5                   0.5  
AAA — Junior
          0.4       0.3                   0.7  
 
                                   
Total
  $ 0.4     $ 3.6     $ 15.8     $     $     $ 19.8  
 
                                   
 
(a)   All 2004 & Prior AAA’s are classified as ‘AAA — Senior’. This was prior to the market convention of Credit Enhanced tiering within AAA’s, which started in 2005.
All CMBS securities of the Company are monitored and modeled under base and several stress-case scenarios by asset specialists. A widely recognized industry modeling software is used to perform a loan-by-loan, bottom-up approach. This methodology also incorporates external estimates on the property market, capital markets, property cash flows, and loan structure.

20


 

Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to the net present value of projected future cash flows.
The gross unrealized loss on CMBS is $0.6 million. Over the past 18 months, the commercial real estate market has continued to soften. As property fundamentals deteriorate, CMBS loan delinquencies have been climbing at the same time. The introduction of the 20% and 30% credit enhanced classes within the 2005-2008 vintage deals provide some offset to these negative fundamentals. While the CMBS sector is beginning to show signs of improvement, the lending market remains limited as lenders have become more conservative with underwriting standards, property transactions have diminished greatly, and higher mortgage spreads have curtailed borrowing. A lack of liquidity in the market combined with a broad re-pricing of risk has led to increased credit spreads across the credit classes. As the unrealized losses in the CMBS portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in this sub-sector which have an unrealized loss position greater than $0.2 million.
Residential Mortgage-Backed Securities
RMBS are securitizations of underlying pools of non-commercial mortgages on real estate. The underlying residential mortgages have varying credit ratings and are pooled together and sold in tranches. The majority of the Company’s RMBS unrealized losses relate to whole loan passthroughs.
All RMBS securities of the Company are monitored and reviewed on a monthly basis with detailed modeling completed on the portfolio quarterly. Model output is generated under base and several stress-case scenarios. RMBS asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Models incorporate external loan-level analytics to identify the riskiest securities. The results from the models are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Positions are impaired to the net present value of projected future cash flows where loss events have taken place or are projected to take place that would affect future cash flows.
The unrealized loss on RMBS is $0.2 million and is attributed to the B rated generic shelf name, GSR MTGE LN TR 2005-AR5 (“GSR”). The Company’s amortized cost in GSR is $1.1 million and the deal contains its own unique pool of collateral and represents a separate and distinct trust. The combination of low floating-rate reset margins, slow prepayment speeds, severe illiquidity in the market for near-prime securities, and the unprecedented level of mortgage-related credit spread widening have pushed the overall market value as a percent of amortized cost on all RMBS bonds in an unrealized loss position to 80%.
As the unrealized losses in the RMBS portfolio relates to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired as of December 31, 2009.
There are no other individual issuers rated below investment grade in the RMBS sector which have unrealized loss positions greater than $0.2 million.
At December 31, 2009 and 2008, approximately $8.2 million (or 24%) and $9.8 million (or 32%), respectively, of RMBS and CMBS holdings were fully collateralized by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. RMBS and CMBS securities are structured to allow the investor to determine, within certain limits, the amount of interest rate risk, prepayment risk and default risk that the investor is willing to accept. It is this level of risk that determines the degree to which the yields on RMBS and CMBS will exceed the yields that can be obtained from corporate securities with similar credit ratings.
Government and Government Agencies
Government and Government Agencies exposure relates to government issued securities including Venezuelan and Canadian government bonds and US Treasury bonds. Global economic concerns have adversely affected the market values on all but the strongest rated government debt. All of the issuers in the government and government agencies sector continue to make payments in accordance with the original bond agreements. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider the positions to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in this sector which have an unrealized loss position greater than $0.2 million.

21


 

The amortized cost and estimated fair value of fixed maturity securities by rating agency equivalent were:
                                 
    December 31, 2009     December 31, 2008  
            Estimated             Estimated  
    Amortized     Fair     Amortized     Fair  
(dollars in millions)   Cost     Value     Cost     Value  
AAA
  $ 40.2     $ 40.4     $ 46.2     $ 40.7  
AA
    9.2       9.5       9.7       9.4  
A
    35.6       37.0       35.0       33.8  
BBB
    20.9       22.1       29.8       26.5  
Below investment grade
    5.0       4.9       7.2       5.4  
 
                       
Total fixed maturity securities
  $ 110.9     $ 113.9     $ 127.9     $ 115.8  
 
                       
 
                               
Investment grade
    95 %     96 %     94 %     95 %
Below investment grade
    5 %     4 %     6 %     5 %
The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P’s BBB- or higher (or similar rating agency). At December 31, 2009 approximately $3.7 million (or 3%) of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by Standard and Poor’s. This compares to $2.6 million (or 2%) of BBB- rated fixed maturity securities at December 31, 2008. 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. The Company closely monitors such investments.
Unrealized gains (losses) incurred during 2009 and 2008 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. The Company has the ability and intent to hold the investments for a period of time sufficient for a forecasted market price recovery up to or beyond the amortized cost of the investment.
Details underlying securities in a continuous gross unrealized loss and OTTI position for investment grade securities were as follows:
                         
    December 31, 2009  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
(dollars in millions)   Value     Cost     OTTI (1)  
Investment Grade Securities
                       
Less than or equal to six months
                       
Corporate bonds — industrial
  $ 1.0     $ 1.0     $  
Government and government agencies
                       
United States
    1.9       1.9        
Foreign
    2.2       2.3       (0.1 )
 
                 
Total fixed maturity and equity securities
    5.1       5.2       (0.1 )
 
                 
 
                       
Greater than six months but less than or equal to one year
                       
Corporate bonds — industrial
    0.3       0.3        
Asset-backed securities — housing related
    0.7       0.7        
Government and government agencies — United States
    1.0       1.1       (0.1 )
 
                 
Total fixed maturity and equity securities
    2.0       2.1       (0.1 )
 
                 
 
                       
Greater than one year
                       
Corporate bonds — financial services
    3.8       4.1       (0.3 )
Asset-backed securities — housing related
    1.5       1.7       (0.2 )
Commercial mortgage-backed securities — non agency backed
    6.0       6.6       (0.6 )
 
                 
Total fixed maturity and equity securities
  $ 11.3     $ 12.4     $ (1.1 )
 
                 

22


 

                         
    December 31, 2009  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
(dollars in millions)   Value     Cost     OTTI (1)  
Investment Grade Securities (continued)
                       
Total of all investment grade securities
                       
Corporate bonds
                       
Financial services
  $ 3.8     $ 4.1     $ (0.3 )
Industrial
    1.3       1.3        
Asset-backed securities — housing related
    2.2       2.4       (0.2 )
Commercial mortgage-backed securities — non agency backed
    6.0       6.6       (0.6 )
Government and government agencies
                       
United States
    2.9       3.0       (0.1 )
Foreign
    2.2       2.3       (0.1 )
 
                 
Total fixed maturity and equity securities
  $ 18.4     $ 19.7     $ (1.3 )
 
                 
 
                       
Total number of securities in a continuous unrealized loss position
                    25  
 
(1)   Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.
                         
    December 31, 2008  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
(dollars in millions)   Value     Cost     OTTI  
Investment Grade Securities
                       
Less than or equal to six months
                       
Corporate bonds
                       
Financial services
  $ 5.9     $ 6.4     $ (0.5 )
Industrial
    20.5       22.7       (2.2 )
Utility
    1.2       1.2        
Asset-backed securities
                       
Housing related
    2.1       2.2       (0.1 )
Credit cards
    2.2       2.7       (0.5 )
Autos
    1.8       2.0       (0.2 )
Commercial mortgage-backed securities — non agency backed
    18.9       22.9       (4.0 )
Residential mortgage-backed securities — agency backed
    1.5       1.6       (0.1 )
Government and government agencies — foreign
    0.3       0.3        
Equity securities — banking securities
          0.1       (0.1 )
 
                 
Total fixed maturity and equity securities
    54.4       62.1       (7.7 )
 
                 
 
                       
Greater than six months but less than or equal to one year
                       
Corporate bonds
                       
Financial services
    6.3       8.1       (1.8 )
Industrial
    7.0       7.5       (0.5 )
Utility
    1.6       1.6        
Commercial mortgage-backed securities — non agency backed
    0.9       1.9       (1.0 )
Residential mortgage-backed securities — non agency backed
    0.9       1.4       (0.5 )
 
                 
Total fixed maturity and equity securities
  $ 16.7     $ 20.5     $ (3.8 )
 
                 

23


 

                         
    December 31, 2008  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
(dollars in millions)   Value     Cost     OTTI  
Investment Grade Securities (continued)
                       
Total of all investment grade securities
                       
Corporate bonds
                       
Financial services
  $ 12.2     $ 14.5     $ (2.3 )
Industrial
    27.5       30.2       (2.7 )
Utility
    2.8       2.8        
Asset-backed securities
                       
Housing related
    2.1       2.2       (0.1 )
Credit cards
    2.2       2.7       (0.5 )
Autos
    1.8       2.0       (0.2 )
Commercial mortgage-backed securities — non agency backed
    19.8       24.8       (5.0 )
Residential mortgage-backed securities
                       
Agency backed
    1.5       1.6       (0.1 )
Non agency backed
    0.9       1.4       (0.5 )
Government and government agencies — foreign
    0.3       0.3        
Equity securities — banking securities
          0.1       (0.1 )
 
                 
Total fixed maturity and equity securities
  $ 71.1     $ 82.6     $ (11.5 )
 
                 
 
                       
Total number of securities in a continuous unrealized loss position
                    108  
Details underlying securities in a continuous gross unrealized loss and OTTI position for below investment grade securities were as follows:
                         
    December 31, 2009  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
(dollars in millions)   Value     Cost     OTTI (1)  
Below Investment Grade Securities
                       
Greater than one year
                       
Corporate bonds — industrial
  $ 0.5     $ 0.5     $  
Residential mortgage-backed securities — non agency backed
    0.9       1.1       (0.2 )
Government and government agencies — foreign
    0.4       0.5       (0.1 )
Equity securities — banking securities
    0.1       0.1        
 
                 
Total fixed maturity and equity securities
  $ 1.9     $ 2.2     $ (0.3 )
 
                 
 
                       
Total number of securities in a continuous unrealized loss position
                    4  
 
(1)   Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

24


 

                         
    December 31, 2008  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
(dollars in millions)   Value     Cost     OTTI  
Below Investment Grade Securities
                       
Less than or equal to six months
                       
Corporate — industrial
  $ 4.0     $ 5.1     $ (1.1 )
Government and government agencies — foreign
    0.7       0.9       (0.2 )
 
                 
Total fixed maturity and equity securities
    4.7       6.0       (1.3 )
 
                 
 
                       
Greater than six months but less than or equal to one year
                       
Corporate — industrial
    0.1       0.5       (0.4 )
Equity securities — other financial services securities
    0.1       0.2       (0.1 )
 
                 
Total fixed maturity and equity securities
    0.2       0.7       (0.5 )
 
                 
 
                       
Total of all below investment grade securities
                       
Corporate — industrial
    4.1       5.6       (1.5 )
Government and government agencies — foreign
    0.7       0.9       (0.2 )
Equity securities — other financial services securities
    0.1       0.2       (0.1 )
 
                 
Total fixed maturity and equity securities
  $ 4.9     $ 6.7     $ (1.8 )
 
                 
 
                       
Total number of securities in a continuous unrealized loss position
                    18  
Gross unrealized losses and OTTI on available-for-sale below investment grade securities represented 21% and 14% of total gross unrealized losses and OTTI on all available-for-sale securities at December 31, 2009 and 2008, respectively. Generally below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to December 31, 2009.
Details underlying available-for-sale securities below investment grade and in an unrealized loss and OTTI position were as follows:
                                 
            December 31, 2009  
    Ratio of                     Gross  
    Amortized Cost     Estimated             Unrealized  
    to Estimated     Fair     Amortized     Losses and  
(dollars in millions)   Fair Value     Value     Cost     OTTI  
Greater than one year
                               
 
  70% to 100%   $ 1.9     $ 2.2     $ (0.3 )
 
                         
Total
          $ 1.9     $ 2.2     $ (0.3 )
 
                         

25


 

                                 
            December 31, 2008  
    Ratio of                     Gross  
    Amortized Cost     Estimated             Unrealized  
    to Estimated     Fair     Amortized     Losses and  
(dollars in millions)   Fair Value     Value     Cost     OTTI  
Less than or equal to six months
                               
 
  70% to 100%   $ 3.6     $ 4.1     $ (0.5 )
 
  40% to 70%     1.1       1.9       (0.8 )
 
                         
 
            4.7       6.0       (1.3 )
 
                         
 
                               
Greater than six months but less than or equal to one year
                               
 
  70% to 100%     0.2       0.2        
 
  Below 40%           0.5       (0.5 )
 
                         
 
            0.2       0.7       (0.5 )
 
                         
Total
          $ 4.9     $ 6.7     $ (1.8 )
 
                         
The majority of assets depressed over 20% and greater than one year at December 31, 2009 are primarily related to RMBS. As there has been no impact to expected future cash flows, the Company does not consider the underlying investments to be impaired as of December 31, 2009.
Subprime Mortgage Investments
Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. In recent years, the market for these loans has expanded rapidly. During that time, however, lending practices and credit assessment standards grew steadily weaker. As a result, the market is now experiencing a sharp increase in the number of loan defaults. Investors in subprime mortgage assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies. The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance. The estimated fair value of the subprime mortgage investments at December 31, 2009 and 2008 was $2.2 million and $2.8 million, respectively, entirely in first lien — fixed rate, AAA quality and vintages prior to 2004.
OTTI
The Company’s impairment losses were $0.9 million for the year ended December 31, 2009 with no VOBA amortization. For the year ended December 31, 2008, impairment losses were $0.5 million, net of VOBA amortization. There were no impairment losses for the year ended December 31, 2007. During 2009, the Company impaired its holdings of preferred stock in CIT Group, Inc. for $0.3 million and its holding in Harrah’s Entertainment Inc. (“Harrah’s) to fair value for $0.3 million. Five unique issuers accounted for the remaining gross impairment of $0.3 million during 2009. During 2008, the Company impaired its holding in Harrah’s to fair value for $0.3 million. Six unique issuers accounted for the remaining gross impairments of $0.3 million during 2008.
The Company adopted revised guidance on the recognition and presentation of OTTI as of June 30, 2009. The gross cumulative effect of this adoption was a $0.2 million adjustment to retained earnings and amortized cost for the non credit related portion of previously recorded impairments on securities still in inventory at April 1, 2009. Of this, $0.1 million related to non credit impairments recorded in income during the first quarter of 2009. The current balance in OCI relating to OTTI at December 31, 2009 is zero as all “previously impaired” assets with OTTI in OCI were sold during 2009.
Business 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
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.

26


 

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”), the NASDAQ Composite Index (“NASDAQ”) and the Standard & Poor’s 500 Composite Stock Price Index (“S&P”). The Dow, NASDAQ and S&P ended 2009 with increases of 19%, 44% and 23%, respectively, from 2008. The Dow, NASDAQ and S&P ended 2008 with decreases of 34%, 41% and 38%, respectively, from 2007.
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. Approximately 74% of Separate Accounts assets were invested in equity-based mutual funds at December 31, 2009. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company’s financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets.
During 2009, average variable account balances decreased $171.7 million (or 22%) to $601.1 million as compared to the same period in 2008. The decrease in average variable account balances contributed $2.8 million to the decrease in asset-based policy charge revenue during 2009, as compared to the same period in 2008.
Fluctuations in the U.S. equity market also directly impact the Company’s exposure to guaranteed benefit provisions contained in the variable contracts it manufactures. Minimal or negative investment performance generally results in greater exposure to guarantee provisions. Prolonged periods of minimal or negative investment performance will result in greater guaranteed benefit costs as compared to assumptions. If the Company determines that it needs to increase its estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed benefit liabilities as compared to current practice.
Medium Term Interest Rates, Corporate Credit and Credit Spreads
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.
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, 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 interest sensitive investments.
The impact of changes in medium term interest rates, corporate credit and credit spreads on market valuations were as follows:
                 
    2009     2008  
Average medium term interest rate yield (a)
    1.43 %     0.89 %
Increase (decrease) in medium term interest rates (in basis points)
    54       (249 )
Credit spreads (in basis points) (b)
    200       735  
Expanding (contracting) of credit spreads (in basis points)
    (535 )     505  
 
               
Increase (decrease) on market valuations: (in millions)
               
Available-for-sale investment securities
  $ 15.2     $ (12.2 )
Interest-sensitive policyholder liabilities
    0.3       (0.1 )
 
           
Net change on market valuations
  $ 15.5     $ (12.3 )
 
           
 
(a)   The Company defines medium term interest rates as the average interest rate on U.S. Treasury securities with terms of one to five years.
 
(b)   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.
At December 31, 2009 and 2008, MLLICNY had 1,151 and 1,232 life insurance and annuity contracts inforce with interest rate guarantees, respectively. The estimated average rate of interest credited on behalf of contract owners was 4.03% and 4.11% during 2009 and 2008, respectively. Total invested assets supporting these liabilities with interest rate guarantees had an estimated average effective yield of 3.63% and 5.34% during 2009 and 2008, respectively. In 2009, the number of life insurance and annuity contracts inforce with interest rate guarantees decreased 81 (or 7%) as compared to 2008.

27


 

Liquidity and Capital Resources
Liquidity
The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. As of December 31, 2009 and 2008, The Company’s assets included $158.5 million and $140.4 million, respectively, of cash, short-term investments and investment grade publicly traded available-for-sale securities that could be liquidated if funds were required.
Capital Resources
During 2009, the Company did not receive a capital contribution from AUSA nor did the Company pay a dividend to AUSA. During 2008, the Company paid an ordinary cash dividend of $7.0 million to AUSA.
The Company and AUSA are parties to a “keepwell” agreement which, subject to its terms, commits AUSA to maintain MLLICNY at a minimum net worth.
Statutory Principles and Risk-Based Capital (“RBC”)
In order to continue to issue annuity products, the Company must meet or exceed the statutory capital and surplus requirements of the insurance departments of the states in which it conducts business. Statutory accounting principles differ from GAAP in two major respects. First, under statutory accounting principles, the acquisition costs of new business are charged to expense, while under GAAP they are amortized over a period of time. Second, under statutory accounting principles, the required additions to statutory reserves are calculated under different rules than under GAAP.
The National Association of Insurance Commissioners utilizes the RBC adequacy monitoring system. The RBC calculates the amount of adjusted capital that a life insurance company should have based upon that company’s risk profile. At December 31, 2009 and 2008, based on the RBC formula, the Company’s total adjusted capital levels were well in excess of the minimum amount of capital required to avoid regulatory action.
Ratings
Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than investors.
The insurer financial strength rating scales of S&P, A.M. Best, Moody’s Investors Service (“Moody’s”), and Fitch Ratings (“Fitch”) are characterized as follows:
    S&P — AAA to R
 
    A.M. Best — A++ to S
 
    Moody’s — Aaa to C
 
    Fitch — AAA to C
On March 31, 2009, S&P downgraded the Company’s insurance financial strength rating from AA to AA-. The ratings outlook is negative.
On April 23, 2009, A.M. Best downgraded the Company’s insurance financial strength rating from A+ to A. The ratings outlook remains stable.
The following table summarizes the Company’s ratings as of March 25, 2010:
         
S&P
  AA-   (4th out of 21)
A.M. Best
  A   (3rd out of 16)
Moody’s
  A1   (5th out of 21)
Fitch
  AA   (3rd out of 19)
A downgrade of our financial strength rating could affect our competitive position in the insurance industry and make it more difficult for us to market our products, as potential customers may select companies with higher financial strength ratings. These ratings are not a recommendation to buy or hold any of the Company’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.

28


 

Commitments and Contingencies
The following table summarizes the Company’s policyholders’ obligations as of December 31, 2009:
                                         
    Less     One To     Four To     More        
    Than One     Three     Five     Than Five        
(dollars in millions) (a)   Year     Years     Years     Years     Total  
General accounts
  $ 16.7     $ 29.3     $ 22.2     $ 81.4     $ 149.6  
Separate Accounts
    84.8       160.3       116.5       406.6       768.2  
 
                             
 
  $ 101.5     $ 189.6     $ 138.7     $ 488.0     $ 917.8  
 
                             
 
(a)   The policyholder liabilities include benefit and claim liabilities of which a significant portion represents policies and contracts that do not have a stated contractual maturity. The projected cash benefit payments in the table above are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality and lapse assumptions comparable with the Company’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amounts in the Company’s Financial Statements reflect the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table above exceeds the corresponding policyholder liability amounts.
In the normal course of business, the Company is subject to various claims and assessments. Management believes the settlement of these matters would not have a material effect on the financial position, results of operations or cash flows of the Company.
Results of Operations
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 (DAC) are amortized over the period in which the Company anticipates holding those funds, as noted in the Critical Accounting Policies section above. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses associated with the maintenance of in force contracts.
2009 compared to 2008
For the years ended December 31, 2009 and 2008, MLLICNY recorded a net loss of ($6.2) million and ($2.2) million, respectively. The decrease in income during 2009 as compared to 2008 was primarily due to the 2009 net realized investment losses, increased VOBA amortization and impairments, and the 2009 valuation allowance on deferred tax assets partially offset by the 2008 goodwill and other intangibles impairment charge.

29


 

Policy charge revenue decreased $3.7 million (or 20%) to $14.8 million during 2009, as compared to $18.5 million in 2008. The following table provides the changes in policy charge revenue by type for each respective period:
                         
(dollars in millions)   2009     2008     Change  
Asset-based policy charge revenue
  $ 8.8     $ 11.6     $ (2.8 ) (a)
Guaranteed benefit based policy charge revenue
    1.4       1.3       0.1  
Non-asset based policy charge revenue
    4.6       5.6       (1.0 ) (b)
 
                 
Total policy charge revenue
  $ 14.8     $ 18.5     $ (3.7 )
 
                 
 
(a)   Asset-based policy charge revenue was negatively impacted by the decrease in average variable account balances during late 2008 and early 2009.
 
(b)   The decrease in non-asset based policy charge revenue was primarily due to the run-off of the life business as well as less paid up additions during 2009 as a result of poor equity market performance in 2008.
Net realized investment gains (losses) decreased $3.7 million to ($2.9) million during 2009 as compared to $0.8 million in 2008. The following table provides the changes in net realized investment gains (losses) by type:
                         
(dollars in millions)   2009     2008     Change  
Credit related gains (losses)
  $ (0.6 )   $ (0.5 )   $ (0.1 )
Interest related gains (losses)
    (0.3 )     (0.1 )     (0.2 )
Equity related gains (losses)
    (2.0 )     1.3       (3.3 ) (a)
Associated amortization of VOBA
          0.1       (0.1 )
 
                 
Total net realized investment gains (losses)
  $ (2.9 )   $ 0.8     $ (3.7 )
 
                 
 
                       
Write-downs for OTTI included in net realized investment gains (losses)
  $ (0.9 )   $ (0.6 )   $ (0.3 )
 
(a)   The change in equity related gains (losses) principally relates to net losses on futures contracts during 2009 compared to net gains on futures contracts during 2008.
Policy benefits increased $0.7 million during 2009 as compared to 2008. The following table provides the changes in policy benefits by type:
                         
(dollars in millions)   2009     2008     Change  
Annuity benefit unlocking
  $ 0.1     $ 2.3     $ (2.2 ) (a)
Annuity benefit expense
    1.7       (1.3 )     3.0   (b)
Amortization of deferred sales inducements
    0.1             0.1  
Life insurance mortality expense
    1.4       1.6       (0.2 )
 
                 
Total policy benefits
  $ 3.3     $ 2.6     $ 0.7  
 
                 
 
(a)   See the Critical Accounting Policies and Estimates section above for further discussion of annuity benefit unlocking.
 
(b)   The increase in annuity benefit expense was primarily driven by the change in reserve for the embedded derivatives as compared to the same period in 2008. This was primarily a result of the positive equity markets relative to the same period in 2008.
Reinsurance premiums ceded decreased $1.0 million during 2009 as compared to 2008. Effective second quarter of 2008, the Company began to recapture the majority of its reinsurance resulting in the decreased reinsurance premiums, which is expected to be finalized in the first half of 2010.
Amortization and impairment of VOBA was $10.8 million and $9.0 million for 2009 and 2008, respectively. During 2009 and 2008, there was an impairment charge of $7.2 million and $4.3 million, respectively, as estimated future gross profits were less than the unamortized balance. In addition, for 2009 and 2008, there was unfavorable unlocking of $0.5 million and $2.5 million, respectively.
At December 31, 2008, an impairment charge was taken for the entire unamortized other intangibles balance which included the distribution agreement, the trade name and the non-compete agreement acquired at the acquisition date. Amortization expense for 2008 was $0.4 million. Impairment charges were recorded in the fourth quarter of 2008 for other intangibles and goodwill of $6.8 million and $3.1 million, respectively.

30


 

Insurance expenses and taxes increased $0.5 million as compared to 2008. The following table provides the changes in insurance expenses and taxes for each respective period:
                         
(dollars in millions)   2009     2008     Change  
Commissions
  $ 2.8     $ 2.2     $ 0.6   (a)
General insurance expense
    3.5       2.8       0.7   (b)
Taxes, licenses, and fees
    (0.3 )     0.5       (0.8 ) (c)
 
                 
Total insurance expenses and taxes
  $ 6.0     $ 5.5     $ 0.5  
 
                 
 
(a)   The increase in commissions is primarily related to an increase in trail commissions in 2009.
 
(b)   The increase in general insurance expenses is primarily due to increased transition and system conversion related expenses.
 
(c)   The decrease in taxes, licenses and fees is primarily due to a tax refund related to NY franchise taxes.
2008 compared to 2007
MLLICNY recorded net income (loss) of ($2.2) million and $10.6 million for 2008 and 2007, respectively.
Policy charge revenue decreased $2.3 million (or 11%) to $18.5 million during 2008 as compared to $20.8 million in 2007. The following table provides the changes in policy charge revenue by type for each respective period:
                           
    Successor       Predecessor        
(dollars in millions)   2008       2007     Change  
Asset-based policy charge revenue
  $ 11.6       $ 14.3     $ (2.7 ) (a)
Guaranteed benefit based policy charge revenue
    1.3         1.2       0.1  
Non-asset based policy charge revenue
    5.6         5.3       0.3  
 
                   
Total policy charge revenue
  $ 18.5       $ 20.8     $ (2.3 )
 
                   
 
(a)   Asset-based policy charge revenue was negatively impacted by the decrease in average variable account balances during 2008 as compared to 2007.
Net realized investment gains decreased $0.3 million (or 32%) to $0.8 million during 2008 as compared to 2007. The following table provides the changes in net realized investment gains by type:
                           
    Successor       Predecessor        
(dollars in millions)   2008       2007     Change  
Credit related gains (losses)
  $ (0.5 )     $ 1.1     $ (1.6 ) (a)
Interest related gains (losses)
    (0.1 )             (0.1 )
Equity related gains
    1.3               1.3   (b)
Associated amortization of VOBA
    0.1               0.1  
 
                   
Total net realized investment gains
  $ 0.8       $ 1.1     $ (0.3 )
 
                   
 
                         
Write-downs for OTTI included in net realized investment gains (losses)
  $ (0.6 )     $     $ (0.6 )
 
(a)   The increase in credit related losses during 2008 were primarily due to one credit impairment in the third quarter of 2008 and a large credit related gain in 2007.
 
(b)   The increase in equity related gains principally relates to net gains on futures contracts in 2008 as there were no futures contracts in 2007.

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Policy benefits increased $0.5 million during 2008, as compared to 2007. The following table provides the changes in policy benefits by type:
                           
    Successor       Predecessor        
(dollars in millions)   2008       2007     Change  
Annuity benefit unlocking
  $ 2.3       $ (1.2 )   $ 3.5   (a)
Annuity benefit expense
    (1.3 )       1.1       (2.4 ) (b)
Life insurance mortality expense
    1.6         2.2       (0.6 ) (c)
 
                   
Total policy benefits
  $ 2.6       $ 2.1     $ 0.5  
 
                   
 
(a)   See the Critical Accounting Policies and Estimates section above for further discussion of annuity benefit unlocking.
 
(b)   The decrease in annuity benefit expense was primarily due to the decrease in the guaranteed minimum benefit amounts as a result of volatile equity markets effect on reinsurance reserves.
 
(c)   The decrease in life insurance mortality expense during 2008 was due to a lower volume of claims in 2008 versus 2007.
Reinsurance premiums ceded decreased $0.5 million during 2008 as compared to 2007. Effective second quarter of 2008, the Company began to recapture the majority of its reinsurance resulting in the decreased reinsurance premiums.
Amortization of deferred policy acquisition costs was immaterial in 2008. The DAC balance was zero as of December 31, 2007 as a result of push down accounting at the acquisition date. Amortization of deferred policy acquisition costs was $2.2 million for 2007.
Amortization of VOBA was $9.0 million for 2008, which included $2.5 million of unfavorable unlocking. In addition, there was an impairment charge of $4.3 million as estimated future gross profits were less than the unamortized balance. There was no VOBA amortization in 2007.
Amortization of other intangibles was $0.4 million in 2008. There was no amortization of other intangibles in 2007. Impairment charges were recorded in the fourth quarter of 2008 for other intangibles and goodwill of $6.8 million and $3.1 million, respectively.
Insurance expenses and taxes increased $1.6 million in 2008 as compared to 2007. The following table provides the changes in insurance expenses and taxes for each respective period:
                           
    Successor       Predecessor        
(dollars in millions)   2008       2007     Change  
Commissions
  $ 2.2       $ 0.9     $ 1.3  (a)
General insurance expense
    2.8         3.2       (0.4 )
Taxes, licenses, and fees
    0.5         (0.2 )     0.7  (b)
 
                   
Total insurance expenses and taxes
  $ 5.5       $ 3.9     $ 1.6  
 
                   
 
(a)   The increase in commissions is primarily due to commission expense paid to Transamerica Capital, Inc., a related party during 2008.
 
(b)   The increase in taxes, licenses, and fees is primarily due to lower New York State Franchise tax in 2007.
Segment Information
MLLICNY’s operating results are categorized into two business segments: Annuity and Life Insurance. MLLICNY’s Annuity segment consists of variable annuity and interest-sensitive annuity contracts. MLLICNY’s Life Insurance segment consists of variable life insurance and interest-sensitive life insurance contracts. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies. All revenue and expense transactions are recorded at the contract level and accumulated at the business segment level for review by management.

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The “Other” category, presented in the following segment financial information, represents net revenues and income on invested assets that do not support life or annuity policyholder liabilities. Subsequent to the acquisition date, management no longer considers “Other” a category for segment reporting purposes. It is impracticable to restate the prior period segment information as well as disclosing the information under both the old basis and the new basis of reporting. Therefore, the predecessor information is shown under the old basis, three segments — Annuity, Life Insurance and Other, while the successor information is shown under the new basis, two segments — Annuity and Life Insurance.
Select financial information by segment for the years ended December 31 is as follows:
                         
    Successor
2009 (dollars in millions)   Annuity   Life   Total
Net revenues (a)
  $ 9.3     $ 5.8     $ 15.1  
Net income (loss)
    (7.7 )     1.5       (6.2 )
                         
    Successor
2008 (dollars in millions)   Annuity   Life   Total
Net revenues (a)
  $ 15.5     $ 8.7     $ 24.2  
Net income (loss)
    (4.0 )     1.8       (2.2 )
                                 
    Predecessor
2007 (dollars in millions)   Annuity   Life   Other   Total
Net revenues (a)
  $ 16.1     $ 7.3     $ 2.1     $ 25.5  
Net income
    7.3       1.9       1.4       10.6  
 
(a)   Management considers interest credited to policyholder liabilities in evaluating net revenues.
MLLICNY is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2009, 2008, or 2007.
Item 6A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
As an insurance company, the Company is in the “risk” business and as a result is exposed to a variety of risks. A description of our risk management and control systems is given below on the basis of significant identified risks for us. Our largest exposures are to changes in the financial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that we sold, deferred expenses, and value of business acquired.
Results of MLLICNY’s sensitivity analyses are presented to show the estimated sensitivity of net income to various scenarios. For each type of market risk, the analysis shows how net income would have been affected by changes in the relevant risk variables that were reasonably possible at the reporting date. For each sensitivity test, the impact of a reasonably possible change in a single factor (or shock) is shown. The analysis considers the interdependency between interest rates and lapse behavior for products sold where there is clear evidence of dynamic lapse behavior. Management action is taken into account to the extent that it is part of MLLICNY’s regular policies and procedures. However, incidental management actions that would require a change in policies and procedures are not considered.
Each sensitivity analysis reflects the extent to which the shock tested would affect management’s critical accounting estimates and judgment in applying MLLICNY’s accounting policies (See Note 1 of the Financial Statements for a description of the critical accounting estimates and judgments). The shock may affect the measurement of assets and liabilities based on assumptions that are not observable in the market as well as market consistent assumptions. For example, a shock in interest rates may lead to changes in the amortization schedule of DAC or to increased impairment losses on equity investments. Although management’s short-term assumption may change if there is a reasonable change in a risk factor, long-term assumptions will generally not be revised unless there is evidence that the movement is permanent. This fact is reflected in the sensitivity analyses provided below.
The sensitivities do not reflect what the net income for the period would have been if risk variables had been different because the analysis is based on the exposures in existence at the reporting date rather than on those that actually occurred during the year.

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Nor are the results of the sensitivities intended to be an accurate prediction of MLLICNY’s future income. The analysis does not consider all methods available to management to respond to changes in the financial environment, such as changing investment portfolio allocations or adjusting crediting rates. Furthermore, the results of the analysis cannot be extrapolated for wider variations since effects do not tend to be linear. No risk management process can clearly predict future results.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of investments, primarily fixed maturity securities and preferred equity securities. Changes in interest rates have an inverse relationship to the value of investments. MLLICNY manages interest rate risk as part of its asset/liability management strategy. For each portfolio, management monitors the expected changes in assets and liabilities, as produced by MLLICNY’s model, resulting from various interest rate scenarios. Based on these results, management closely matches the duration of insurance liabilities to the duration of assets supporting those liabilities.
The table below shows the interest rates at the end of the last five years:
                                         
    2009   2008   2007   2006   2005
3-Month US Libor
    0.25 %     1.43 %     4.70 %     5.36 %     4.54 %
10-Year US Treasury
    3.83 %     2.22 %     4.03 %     4.70 %     4.39 %
The sensitivity analysis in the table below shows an estimate of the effect of a parallel shift in the yield curve on net income and equity. Increases in interest rates have a negative effect on GAAP equity and net income in the current year because it results in unrealized losses on investments that are carried at fair value. The offsetting economic gain on the insurance contracts is however, not fully reflected in the sensitivities because many of these liabilities are not measured at fair value. Over time, the short-term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal.
                 
    Estimated Approximate Effects on:
Change in Interest Rates: (dollars in millions)   Net Income   Equity
2009
               
Shift Up of 100 Basis Points
  $ (0.7 )   $ (3.7 )
Shift Down of 100 Basis Points
  $ 0.6     $ 3.5  
 
               
2008
               
Shift Up of 100 Basis Points
  $ 0.1     $ (2.8 )
Shift Down of 100 Basis Points
  $ (0.4 )   $ 2.7  
The sensitivity analysis above reflects the assets and liabilities held at year-end. This does not necessarily reflect the risk exposure during the year as significant events do not necessarily occur on January 1. The selection of a 100 basis point immediate, parallel increase or decrease in interest rates is a hypothetical rate scenario used to demonstrate potential risk. While a 100 basis point immediate, parallel increase does not represent the Company’s view of future market changes, it is a near term reasonably possible hypothetical change that illustrates the potential impact of such events. While the income and equity impacts provide a presentation of interest rate sensitivity, they are based on the portfolio exposures at a point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio transactions in response to management’s assessment of changing market conditions and available investment opportunities.
Credit Risk
Credit risk represents the loss that MLLICNY would incur if an issuer fails to perform its contractual obligations and the value of the security held has been impaired or is deemed worthless. MLLICNY manages its credit risk by setting investment policy guidelines that assure diversification with respect to investment, issuer, geographic location and credit quality. Management regularly monitors compliance of each investment portfolio’s status with the investment policy guidelines, including timely updates of credit-related securities.
Equity Market Risk
Fluctuations in the equity markets have affected MLLICNY’s profitability, capital position and sales of equity related products in the past and may continue to do so. Exposure to equity markets exists in both assets and liabilities. Asset exposure exists through direct equity investment, where MLLICNY bears all or most of the volatility in returns and investment performance risk.

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Equity market exposure is also present in insurance contracts for account of policyholders where funds are invested in equities such as variable annuities and life insurance. Although most of the risk remains with the policyholder, lower investment returns can reduce the asset management fee earned by MLLICNY on the asset balance in these products. In addition, some of this business has minimum guarantees.
The table that follows set forth the closing levels of certain major indices at the end of the last five years:
                                         
    2009   2008   2007   2006   2005
S&P 500
    1,115       903       1,468       1,418       1,248  
NASDAQ
    2,269       1,577       2,652       2,415       2,205  
DOW
    10,428       8,776       13,265       12,463       10,718  
The sensitivity analysis of net income to change in equity prices is presented in the table below. The sensitivity of net income to changes in equity markets reflects changes in the market value of MLLICNY’s portfolio, changes in DAC amortization and the strengthening of the guaranteed minimum benefits, where applicable. The results of equity sensitivity tests are non-linear. The main reason for this is due to equity options sold to clients that are embedded in some of these products and the more severe scenarios could cause accelerated DAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not.
                 
    Estimated Approximate Effect
    on Net Income
Immediate Change of: (dollars in millions)   2009   2008
Equity Increase of 10%
  $ (0.1 )   $ 0.7  
Equity Increase of 20%
  $ (0.2 )   $ 1.2  
 
               
Equity Decrease of 10%
  $ 0.3     $ (2.6 )
Equity Decrease of 20%
  $ 0.8     $ (5.8 )
The selection of a 10% and 20% change in the equity markets should not be construed as a prediction of future market events, but rather as an illustration of the potential impact of such an event. The Company’s exposure can change as a result of changes in the Company’s mix of business.
Liquidity Risk
Liquidity risk is inherent in much of MLLICNY businesses. Each asset purchased and liability sold has liquidity characteristics that are unique. Some liabilities are surrenderable while some assets, such as private placements, mortgages loans and limited partnerships have low liquidity. If MLLICNY requires significant amounts of cash on short notice in excess of normal cash requirements, MLLICNY may have difficulty selling these investments at attractive prices, in a timely manner or both.
Underwriting Risk
The Company’s earnings depend significantly upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, MLLICNY may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability. This could have a materially adverse effect on MLLICNY’s business, results of operations and financial condition.
Sources of underwriting risk include policy lapses and policy claims such as mortality and expenses. In general, MLLICNY is at risk if policy lapses increase as sometimes MLLICNY is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. Within variable annuity contracts with certain guarantee benefits, MLLICNY is at risk if policy lapses decrease, as more contracts would remain in force until guaranteed payments are made.

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For mortality risk, MLLICNY sells certain types of policies that are at risk if mortality increases, such as term life insurance or guaranteed minimum death benefits, and sells certain types of policies that are at risk if mortality decreases (longevity risk) such as certain annuity products. MLLICNY is also at risk if expenses are higher than assumed by management.
MLLICNY monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. MLLICNY’s units also perform experience studies for underwriting risk assumptions, comparing MLLICNY’s experience to industry experience as well as combining MLLICNY’s experience and industry experience based on the depth of the history of each source to MLLICNY’s underwriting assumptions. MLLICNY also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
Sensitivity analysis of net income to various underwriting risks is shown in the table that follows. The sensitivities represent an increase or decrease of mortality rates over 2009. Increases in mortality rates lead to an increase in the level of benefits and claims on most business. The impact on net income and equity of sales transactions of investments required to meet the higher cash outflow from lapses or deaths are reflected in the sensitivities.
                 
    Estimated Approximate Effect
    on Net Income
Immediate Change of: (dollars in millions)   2009   2008
20% Increase in Lapse Rates
  $ (0.1 )   $ (1.2 )
20% Decrease in Lapse Rates
  $ 0.1     $ 1.2  
 
               
10% Increase in Mortality Rates
  $ (0.2 )   $ (0.9 )
10% Decrease in Mortality Rates
  $ 0.3     $ 0.5  
A shock in mortality rates will generally not lead to a change in the assumptions underlying the measurement of the insurance liabilities as management will recognize that the shock is temporary. Life insurers are also exposed to longevity risk.
Item 7. Financial Statements and Supplementary Data
The financials statements of Registrant are set forth in Part IV hereof and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
No information is required to be disclosed under this item.
Item 8A(T). Controls and Procedures
a) Evaluation of disclosure controls and procedures
The term “disclosure controls and procedures” (defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) generally refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by MLLICNY in the reports that it files or submits under the Exchange Act is accumulated and communicated to MLLICNY’s management, including MLLICNY’s principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. MLLICNY’s management, with the participation of the President and Chief Financial Officer, have evaluated the effectiveness of the MLLICNY’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). Based on that evaluation, MLLICNY’s President and Chief Financial Officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were effective.
b) Changes in internal control over financial reporting

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The term “internal control over financial reporting” (defined in Exchange Act Rule 13a-15(f)) generally refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
MLLICNY’s management, with the participation of the President and Chief Financial Officer, is responsible for establishing and maintaining an adequate system of internal control over financial reporting. MLLICNY’s management, with the participation of the President and Chief Financial Officer, has conducted an evaluation of the effectiveness of MLLICNY’s internal control over financial reporting as of December 31, 2009 based on the criteria related to internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, MLLICNY’s management concluded that the internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of MLLICNY’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the MLLICNY’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit MLLICNY to provide only management’s report in this annual report.
During the fiscal quarter ended December 31, 2009, there have been no changes in MLLICNY’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, MLLICNY’s internal control over financial reporting.
Item 8B. Other Information
     No information is required to be disclosed under this item.

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PART III
Information called for by items 9 through 12 of this part is omitted pursuant to General instruction I. of form 10-K.
Item 13. Principal Account Fees and Services
Fees Paid to the Registrant’s Independent Auditor
As of December 28, 2007, Ernst & Young LLP (“E&Y”) is MLLICNY’s independent registered public accountant. Services provided to MLLICNY by E&Y were the audit of MLLICNY’s Financial Statements for the 2009, 2008 and 2007 fiscal year periods. Prior to E&Y becoming the independent registered public accounting firm, Deloitte & Touche LLP (“D&T”) was the independent registered public accounting firm of record, a change that was precipitated by the acquisition of MLLICNY by AUSA, effective December 28, 2007. These changes were disclosed to the SEC on Form 8-K dated January 3, 2008.
The aggregate fees for professional services by E&Y in 2009 and 2008 for these accounting services were:
                 
    2009     2008  
Audit (a)
  $ 328,000     $ 400,000  
 
(a)   Audit fees consist of fees for the annual financial statement audit (including required quarterly reviews) and other procedures required to be performed by the independent auditor to be able to form an opinion on MLLICNY’s financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating the audit or quarterly review. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include statutory audits, comfort letters, services associated with SEC registration statements, periodic reports and other documents filed with the SEC.
Audit Committee Pre-approval Policies and Procedures
MLLICNY’s Audit Committee is responsible, among other matters, for the oversight of the external auditor. Consistent with SEC rules regarding auditor independence, the Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our independent auditors (the “Pre-approval Policy”).
Under the Pre-approval Policy, proposed services either:
(i)   may be pre-approved by the Audit Committee without consideration of specific case-by-case services (“general pre-approval”); or
(ii)   require the specific pre-approval of the Audit Committee (“specific pre-approval”). Appendices to the Pre-approval Policy (that are adopted each year) set out the audit, audit-related, tax, and other services that have received the general pre-approval of the Audit Committee. All other audit, audit-related, tax and other services must receive specific pre-approval from the Audit Committee.
During 2009, all services provided to MLLICNY by E&Y were pre-approved by the Audit Committee in accordance with the Pre-approval policy.

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PART IV
Item 14. Exhibits and Financial Statement Schedules
  (a)   Financial Statements and Exhibits
  (1)   The following financial statements of the Registrant are filed as part of this report
  a.   Independent Registered Public Accounting Firm Report dated March 25, 2010 (Ernst & Young LLP).
 
  b.   Balance Sheets at December 31, 2009 and 2008.
 
  c.   Statements of Income for the Years Ended December 31, 2009, 2008 and 2007.
 
  d.   Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007.
 
  e.   Statements of Stockholder’s Equity for the Years Ended December 31, 2009, 2008 and 2007.
 
  f.   Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007.
 
  g.   Notes to Financial Statements for the Years Ended December 31, 2009, 2008 and 2007.
  (2)   Not applicable.
  (3)   The following exhibits are filed as part of this report:

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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).
 

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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.)
 

41


 

     
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.)
 
10.12   Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K, File No. 33-34562, filed January 4, 2008.)
 
10.13   Non-Affiliated Broker-Dealer Wholesaling Agreement between ML Life Insurance Company of New York, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital, Inc. (Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 27, 2008.)
 
10.14   Selling Agreement between ML Life Insurance Company of New York, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 27, 2008.)
 
10.15   Keep Well Agreement between AEGON USA And ML Life Insurance Company of New York. (Incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 27, 2008.)
 
10.16   Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, File No. 33-34562, filed August 17, 2007.)
 
10.17   First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, File No. 33-34562, filed January 4, 2008.)
 
10.18   Principal Underwriting Agreement between Transamerica Capital, Inc. and ML Life Insurance Company of New York (Incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562,
33-60288, 333-48983, and 333-133224, filed March 26, 2009.)
 
24.1   Powers of Attorney are filed herewith.
 

42


 

     
31.1   Certification by the Chief Executive Officer of the Registrant pursuant to Rule 15d-14(a), is filed herewith.
 
31.2   Certification by the Chief Financial Officer of the Registrant pursuant to Rule 15d-14(a), is filed herewith.
 
32.1   Certification by the Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith.
 
32.2   Certification by the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith.

43


 

Management Report on Internal Control over Financial Reporting
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for MLLICNY to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control over financial reporting effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management assessed our internal control over financial reporting as of December 31, 2009, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on the assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.

44


 

INDEX TO FINANCIAL STATEMENTS
Independent Registered Public Accounting Firm Report
Balance Sheets at December 31, 2009 and 2008
Statements of Income for the Years Ended December 31, 2009, 2008 and 2007
Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
Statements of Stockholder’s Equity for the Years Ended December 31, 2009, 2008 and 2007
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
Notes to Financial Statements for the Years Ended December 31, 2009, 2008 and 2007

45


 

Report of Independent Registered Public Accounting Firm
The Board of Directors
ML Life Insurance Company of New York
We have audited the accompanying balance sheets of ML Life Insurance Company of New York as of December 31, 2009 and 2008, and the related statements of income, comprehensive income, stockholder’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ML Life Insurance Company of New York at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in response to new accounting standards, the Company changed its method of accounting for other-than-temporary impairments effective April 1, 2009.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 25, 2010

46


 

ML LIFE INSURANCE COMPANY OF NEW YORK
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS
                 
    Successor  
    December 31,  
(dollars in thousands, except share data)   2009     2008  
ASSETS
               
Investments
               
Fixed maturity available-for-sale securities, at estimated fair value (amortized cost: 2009 - $110,939; 2008 - $127,986)
  $ 113,927     $ 115,834  
Equity available-for-sale securities, at estimated fair value (cost: 2009 - $80; 2008 - $257)
    57       163  
Policy loans
    63,045       67,387  
 
           
Total investments
    177,029       183,384  
 
           
Cash and cash equivalents
    49,423       29,973  
Accrued investment income
    2,706       3,158  
Deferred policy acquisition costs
    360       373  
Deferred sales inducements
    130       165  
Value of business acquired
    30,982       41,525  
Goodwill
    500       500  
Federal income taxes — current
          1,443  
Federal income taxes — deferred
          5,183  
Reinsurance receivables
    1,782       680  
Receivable for investments sold — net
    65        
Other assets
    2,624       5,018  
Separate Accounts assets
    644,149       598,438  
 
           
Total Assets
  $ 909,750     $ 869,840  
 
           
LIABILITIES AND STOCKHOLDER’S EQUITY
               
Liabilities
               
Policyholder liabilities and accruals
               
Policyholder account balances
  $ 125,329     $ 135,062  
Future policy benefits
    18,486       19,872  
Claims and claims settlement expenses
    1,918       2,096  
 
           
 
    145,733       157,030  
 
           
Other policyholder funds
    157       204  
Federal income taxes — current
    368        
Federal income taxes — deferred
    618        
Affiliated payables — net
    235       49  
Other liabilities
    932       827  
Separate Accounts liabilities
    644,149       598,438  
 
           
Total Liabilities
    792,192       756,548  
 
           
Stockholder’s Equity
               
Common stock ( $10 par value; 220,000 shares authorized, issued and outstanding)
    2,200       2,200  
Additional paid-in capital
    128,638       128,638  
Accumulated other comprehensive income (loss), net of taxes
    2,050       (8,333 )
Retained deficit
    (15,330 )     (9,213 )
 
           
Total Stockholder’s Equity
    117,558       113,292  
 
           
Total Liabilities and Stockholder’s Equity
  $ 909,750     $ 869,840  
 
           
See Notes to Financial Statements

47


 

ML LIFE INSURANCE COMPANY OF NEW YORK
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF INCOME
                           
    For the Years Ended December 31,  
    Successor       Predecessor  
(dollars in thousands)   2009     2008       2007  
Revenues
                         
Policy charge revenue
  $ 14,774     $ 18,531       $ 20,782  
Net investment income
    9,900       11,066         11,246  
Net realized investment gains (losses)
                         
Total other-than-temporary impairment losses on securities
    (909 )     (520 )        
Portion of loss recognized in other comprehensive income
                   
 
                   
Net other-than-temporary impairment losses on securities recognized in income
    (909 )     (520 )        
Realized investment gains (losses), excluding other-than-temporary impairment losses on securities
    (2,054 )     1,302         1,141  
 
                   
Net realized investment gains (losses)
    (2,963 )     782         1,141  
 
                   
Total Revenues
    21,711       30,379         33,169  
 
                   
 
                         
Benefits and Expenses
                         
Interest credited to policyholder liabilities
    6,597       6,180         7,643  
Policy benefits (net of reinsurance recoveries: 2009 - $61; 2008 - $496; 2007 - $1,846)
    3,278       2,625         2,069  
Reinsurance premium ceded
    383       1,404         1,872  
Amortization of deferred policy acquisition costs
    117       31         2,184  
Amortization and impairment of value of business acquired
    10,800       9,025          
Amortization of other intangibles
          368          
Impairment charges
          9,879          
Insurance expenses and taxes
    5,980       5,544         3,942  
 
                   
Total Benefits and Expenses
    27,155       35,056         17,710  
 
                   
Income (Loss) Before Taxes
    (5,444 )     (4,677 )       15,459  
 
                   
 
                         
Federal Income Tax Expense (Benefit)
                         
Current
    561               3,786  
Deferred
    176       (2,464 )       1,062  
 
                   
Federal Income Tax Expense (Benefit)
    737       (2,464 )       4,848  
 
                   
Net Income (Loss)
  $ (6,181 )   $ (2,213 )     $ 10,611  
 
                   
See Notes to Financial Statements

48


 

ML LIFE INSURANCE COMPANY OF NEW YORK
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF COMPREHENSIVE INCOME
                           
    For the Years Ended December 31,  
    Successor       Predecessor  
(dollars in thousands)   2009     2008       2007  
Net Income (Loss)
  $ (6,181 )   $ (2,213 )     $ 10,611  
 
                   
 
                         
Other Comprehensive Income (Loss)
                         
Net unrealized gains (losses) on available-for-sale securities
                         
Net unrealized holding gains (losses) arising during the period
    12,600       (12,246 )       499  
Reclassification adjustment for (gains) losses included in net income
    2,629               (2 )
 
                   
 
    15,229       (12,246 )       497  
 
                   
Net unrealized other-than-temporary impairment gains (losses) on securities
                         
Net unrealized other-than-temporary impairment gains arising during the period
    79                
Reclassification adjustment for other-than-temporary impairment gains included in net income
    (33 )              
 
                   
 
    46                
 
                         
Adjustments
                         
Policyholder liabilities
    333       (83 )       (20 )
Deferred policy acquisition costs
    38       (38 )        
Value of business acquired
    392       (454 )        
Deferred federal income taxes
    (5,591 )     4,488         (167 )
 
                   
 
    (4,828 )     3,913         (187 )
 
                   
Total other comprehensive income (loss), net of taxes
    10,447       (8,333 )       310  
 
                   
Comprehensive Income (Loss)
  $ 4,266     $ (10,546 )     $ 10,921  
 
                   
See Notes to Financial Statements

49


 

ML LIFE INSURANCE COMPANY OF NEW YORK
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF STOCKHOLDER’S EQUITY
                           
    For the Years Ended December 31,  
    Successor       Predecessor  
(dollars in thousands)   2009     2008       2007  
Common Stock
  $ 2,200     $ 2,200       $ 2,200  
 
                         
Additional Paid-in Capital
                         
Balance at beginning of year
  $ 128,638     $ 128,638       $ 52,310  
Effect of push down accounting of AEGON USA, LLC’s purchase price on ML Life Insurance Company of New York’s net assets acquired
                  76,328  
 
                   
Balance at end of year
  $ 128,638     $ 128,638       $ 128,638  
 
                   
 
                         
Accumulated Other Comprehensive Income (Loss)
                         
Balance at beginning of year
  $ (8,333 )   $       $ (753 )
Total other comprehensive income (loss), net of taxes
    10,447       (8,333 )       310  
Cumulative effect of adoption of other-than-temporary impairment guidance (ASC 320)
    (64 )              
Effect of push down accounting of AEGON USA, LLC’s purchase price on ML Life Insurance Company of New York’s net assets acquired
                  443  
 
                   
Balance at end of year
  $ 2,050     $ (8,333 )     $  
 
                   
 
                         
Retained Earnings (Deficit)
                         
Balance at beginning of year
  $ (9,213 )   $       $ 34,009  
Net income (loss)
    (6,181 )     (2,213 )       10,611  
Cumulative effect of adoption of other-than-temporary impairment guidance (ASC 320)
    64                
Cash dividend paid to AEGON USA, LLC
          (7,000 )        
Cash dividend paid to Merrill Lynch Insurance Group, Inc.
                  (5,453 )
Effect of push down accounting of AEGON USA, LLC’s purchase price on ML Life Insurance Company of New York’s net assets acquired
                  (39,167 )
 
                   
Balance at end of year
  $ (15,330 )   $ (9,213 )     $  
 
                   
 
                         
Total Stockholder’s Equity
  $ 117,558     $ 113,292       $ 130,838  
 
                   
See Notes to Financial Statements

50


 

ML LIFE INSURANCE COMPANY OF NEW YORK
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS
                           
    For the Years Ended December 31,  
    Successor       Predecessor  
(dollars in thousands)   2009     2008       2007  
CASH FLOWS FROM OPERATING ACTIVITIES
                         
Net income (loss)
  $ (6,181 )   $ (2,213 )     $ 10,611  
Adjustment to reconcile net income (loss) to net cash and cash equivalents provided by operating activities:
                         
Changes in:
                         
Deferred policy acquisition costs
    51       (411 )       433  
Deferred sales inducements
    35       (165 )       (557 )
Value of business acquired
    10,800       9,025          
Other intangibles
          368          
Benefit reserves
    (598 )     (1,290 )       (592 )
Federal income tax accruals
    1,986       (3,178 )       1,062  
Claims and claims settlement expenses
    (178 )     (2,522 )       (3,883 )
Other policyholder funds
    (47 )     (785 )       310  
Other operating assets and liabilities, net
    1,968       1,091         (2,559 )
Amortization (accretion) of investments
    (188 )     (64 )       238  
Impairment charges
          9,879          
Interest credited to policyholder liabilities
    6,597       6,180         7,643  
Net realized investment (gains) losses
    2,963       (782 )       (1,141 )
 
                   
Net cash and cash equivalents provided by operating activities
    17,208       15,133         11,565  
 
                   
 
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                         
Sales of available-for-sale securities
    28,544       32,068         12,210  
Maturities of available-for-sale securities
    12,358       36,215         41,362  
Purchases of available-for-sale securities
    (24,370 )     (95,749 )       (19,808 )
Net settlements on futures contracts
    (1,849 )     1,273          
Policy loans on insurance contracts, net
    4,342       1,778         3,614  
 
                   
Net cash and cash equivalents provided by (used in) investing activities
    19,025       (24,415 )       37,378  
 
                   
 
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                         
Policyholder deposits
    2,907       9,090         32,544  
Policyholder withdrawals
    (19,690 )     (23,241 )       (51,580 )
Cash dividend paid to AEGON USA, LLC
          (7,000 )        
Cash dividend paid to Merrill Lynch Insurance Group, Inc.
                  (5,453 )
 
                   
Net cash and cash equivalents used in financing activities
    (16,783 )     (21,151 )       (24,489 )
 
                   
 
                         
Net increase (decrease) in cash and cash equivalents (1)
    19,450       (30,433 )       24,454  
Cash and cash equivalents, beginning of year
    29,973       60,406         35,952  
 
                   
Cash and cash equivalents, end of year
  $ 49,423     $ 29,973       $ 60,406  
 
                   
 
(1)   Included in net increase (decrease) in cash and cash equivalents is interest received (2009 — $0; 2008 — $6; 2007 — $0); interest paid (2009 — $1; 2008 — $9; 2007 — $74); federal income taxes paid (2009 — $100; 2008 — $1,443; 2007 — $5,686); and federal income taxes received (2009 — $1,350; 2008 — $729; 2007 — $0)
See Notes to Financial Statements

51


 

ML LIFE INSURANCE COMPANY OF NEW YORK
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
ML Life Insurance Company of New York (“MLLICNY” or the “Company”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. AEGON N.V. and its subsidiaries and joint ventures have life insurance and pension operations in over twenty countries in Europe, the Americas, and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations in a number of these countries.
On December 28, 2007 (the “acquisition date”), MLLICNY and its affiliate, Merrill Lynch Life Insurance Company (“MLLIC”) were acquired by AUSA for $0.13 billion and $1.12 billion, respectively, for a total price for both entities of $1.25 billion. Prior to the acquisition date, MLLICNY was a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc. (“MLIG”), which was an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. (“ML&Co.”).
The Company is a life insurance company, who conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company is domiciled in the State of New York and is currently licensed to sell insurance and annuities in nine states. During 2009, the Company, in addition to no longer issuing life insurance products, is no longer issuing variable annuity and market value adjusted annuity products.
Basis of Reporting
The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company also submits financial statements to insurance industry regulatory authorities, which are prepared on the basis of statutory accounting principles (“SAP”). The significant accounting policies and related judgments underlying the Company’s financial statements are summarized below.
On December 28, 2007, AUSA completed the acquisition of MLLICNY and its affiliate MLLIC. In accordance with GAAP guidance, the acquisition was accounted for by AUSA using the purchase method of accounting, which requires the assets and liabilities of the Company to be identified and measured at their estimated fair values as of the acquisition date. The estimated fair values are subject to adjustment of the initial allocation for a one-year period as more information relative to the fair values as of the acquisition date becomes available. See Note 2 for additional information on the adjustments to the initial purchase price allocation.
In addition, as required by the guidance, the purchase method of accounting applied by AUSA to the acquired assets and liabilities associated with the Company has been “pushed down” to the financial statements of the Company, thereby establishing a new basis of accounting. As a result, the Company follows AUSA’s accounting policies subsequent to the acquisition date. This new basis of accounting is referred to as the “successor basis”, while the historical basis of accounting is referred to as the “predecessor basis’’. In general, all 2009 and 2008 amounts are representative of the successor basis of accounting while the Statements of Income, Stockholder’s Equity, Comprehensive Income, and Cash Flows amounts for 2007 are representative of the predecessor basis of accounting. Financial statements included herein for periods prior and subsequent to the acquisition date are labeled “Predecessor” and “Successor”, respectively.
Certain reclassifications and format changes have been made to prior period financial statements, where appropriate, to conform to the current period presentation. These reclassifications have no effect on net income or stockholder’s equity of the prior years.
Accounting Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets, asset valuation allowances, deferred policy acquisition costs, deferred sales inducements, value of business acquired, other intangibles, goodwill, policyholder liabilities, income taxes, and potential effects of unresolved litigated matters.

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Investments
Fixed maturity and equity securities
The Company’s investments in fixed maturity and equity securities are classified as available-for-sale and reported at estimated fair value. The fair values of fixed maturity and equity securities are determined by management after taking into consideration several sources of data. The Company’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, those securities are submitted to brokers to obtain quotes. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.
Each month, the Company performs an analysis of the information obtained from third party services and brokers to ensure that the information is reasonable and produces a reasonable estimate of fair value. The Company considers both qualitative and quantitative factors as part of this analysis, including but not limited to, recent transactional activity for similar fixed maturities, review of pricing statistics and trends, and consideration of recent relevant market events.
For fixed maturity securities, premiums are amortized to the earlier of the call or maturity date, discounts are accreted to the maturity date, and interest income is accrued daily. For equity securities, dividends are recognized on the ex-dividend date. Investment transactions are recorded on the trade date. Subsequent to December 28, 2007, realized gains and losses on the sale or maturity of investments are determined on the first-in, first-out (“FIFO”) basis. Prior to December 28, 2007, realized gains and losses on the sale or maturity of investments were determined on the basis of specific identification.
Changes in the fair value of fixed maturity and equity securities are reported as a component of accumulated other comprehensive income (loss), net of taxes, on the Balance Sheets and are not reflected in the Statements of Income until a sale transaction occurs or when credit-related declines in estimated fair value are deemed other-than-temporary.
Other-than-temporary impairments (“OTTI”)
If management determines that a decline in the value of an available-for-sale security is other-than-temporary, an impairment loss is recognized. Management makes this determination through a series of discussions with the Company’s portfolio managers and credit analysts, and information obtained from external sources (i.e. company announcements, ratings agency announcements, or news wire services). For equity securities, the Company also considers the ability and intent to hold the investments for a period of time sufficient for a forecasted market price recovery up to or beyond the amortized cost of the investment. The factors that may give rise to a potential OTTI include, but are not limited to, i) certain credit-related events such as default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than cost or amortized cost for an extended period of time. 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. Management bases this determination on the most recent information available.
During the second quarter 2009, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance for the recognition and presentation of OTTI. The recognition provisions apply only to debt securities classified as available-for-sale and held-to-maturity, while the presentation and disclosure requirements apply to both debt and equity securities.
For equity securities, once management determines a decline in the value of an available-for-sale security is other-than-temporary, the cost basis of the equity security is reduced to its fair value, with a corresponding charge to earnings.
For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows. If the net present value is less than the amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount representing the credit loss, where the present value of cash flows expected to be collected is less than the amortized cost basis of the security, and an amount related to all other factors (referred to as the non credit portion). The credit loss is recognized in earnings and the non credit loss is recognized in other comprehensive income (“OCI”), net of applicable taxes and value of business acquired. Management records subsequent changes in the estimated fair value (positive and negative) of available-for-sale debt securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI.

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Policy loans
Policy loans on insurance contracts are stated at unpaid principal balances. The Company estimates the fair value of policy loans as equal to the book value of the loans. Policy loans are fully collateralized by the account value of the associated insurance contracts, and the spread between the policy loan interest rate and the interest rate credited to the account value held as collateral is fixed.
Derivative Instruments
Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, is calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and short-term investments with original maturities of three months or less. Cash and cash equivalents are primarily valued at amortized cost, which approximates fair value.
Deferred Policy Acquisition Costs (“DAC”)
Policy acquisition costs for variable annuities and variable life insurance contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of DAC.
Policy acquisition costs are principally commissions and a portion of certain other expenses relating to policy acquisition, underwriting and issuance that are primarily related to and vary with the production of new business. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. Policy acquisition costs can also arise from the acquisition or reinsurance of existing inforce policies from other insurers. These costs include ceding commissions and professional fees related to the reinsurance assumed. The deferred costs are amortized in proportion to the estimated future gross profits over the anticipated life of the acquired insurance contracts utilizing an interest methodology.
The most significant assumptions involved in the estimation of future gross profits are future net Separate Accounts performance, surrender rates, mortality rates and reinsurance costs. For variable annuities, the Company generally establishes a long-term rate of net Separate Accounts growth. If returns over a determined historical period differ from the long-term assumption, returns for future determined periods are calculated so that the long-term assumption is achieved. The result is that the long-term rate is assumed to be realized over a specified period. However, the long-term rate may be adjusted if expectations change. This method for projecting market returns is known as reversion to the mean, a standard industry practice. At December 31, 2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate. At December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate. Additionally, the Company may modify the rate of net Separate Accounts growth over the short term to reflect near-term expectations of the economy and financial market performance in which Separate Accounts assets are invested. Surrender and mortality rates for all variable contracts are based on historical experience and a projection of future experience.
Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the 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 returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.
At December 31, 2009 and 2008, variable annuities accounted for the Company’s entire DAC asset. See Note 6 to the Financial Statements for further discussion.
Deferred Sales Inducements (“DSI”)
The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner’s deposit. This amount may be subject to recapture under certain circumstances.

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Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the deferred sales inducement asset.
The expense and the subsequent capitalization and amortization are recorded as a component of policy benefits in the Statements of Income. At December 31, 2009 and 2008, variable annuities accounted for the Company’s entire DSI asset. See Note 6 to the Financial Statements for further discussion.
Value of Business Acquired (“VOBA”)
VOBA represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts inforce at the acquisition date. VOBA is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality, policyholder behavior, Separate Account performance, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. Revisions in estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross profits are less than the unamortized balance. In addition, the Company utilizes the reversion to the mean assumption, a common industry practice, in its determination of the amortization of VOBA. This practice assumes that the expectations for long-term appreciation in equity markets is not changed by minor short-term market fluctuations, but that it does change when large interim deviations have occurred. At December 31, 2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate. At December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate. See Note 5 to the Financial Statements for further discussion.
Other Intangibles
Other intangible assets acquired at the acquisition date are a distribution agreement, a tradename and a non-compete agreement. At December 31, 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co. distribution channel instead of continuing to sell new variable annuities on the Company. As a result of this decision, an impairment charge was taken for the entire unamortized other intangible balance at December 31, 2008. Prior to December 31, 2008, the tradename and the non-compete agreements were amortized on a straight-line basis over their useful life of five years. The distribution intangible was amortized over the expected economic benefit period and at a pace consistent with the expected future gross profit streams generated from the distribution agreement, which was thirty years. The entire asset amount had been allocated to annuities. See Note 5 to the Financial Statements for further discussion.
Goodwill
Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests conducted at least annually. Impairment testing is to be performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit represents the operating segment which is the level at which the financial information is prepared and regularly reviewed by management. The entire asset amount has been allocated to annuities. Goodwill is reviewed for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator, or unanticipated competition would cause the Company to review the carrying amounts of goodwill for impairment. At December 31, 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co. distribution channel instead of continuing to sell new variable annuities on the Company. As a result of this decision, an impairment charge was taken for the majority of the goodwill balance except for the amount related to the Company’s state licenses at December 31, 2008. See Note 5 to the Financial Statements for further discussion.

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Separate Accounts
The Company’s Separate Accounts consist of variable annuities and variable life insurance 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 Income. Mortality, guaranteed benefit fees, policy administration, maintenance, and withdrawal charges associated with Separate Accounts products are included in policy charge revenue in the Statements of Income.
Policyholder Account Balances
The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of the policyholder as of the Balance Sheet dates. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest-crediting rates for the Company’s fixed rate products are as follows:
                 
    2009   2008
Interest-sensitive life products
    4.00%       4.00%  
Interest-sensitive deferred annuities
    3.00% - 6.80 %     3.00% - 6.80 %
These rates may be changed at the option of the Company after initial guaranteed rates expire, unless contracts are subject to minimum interest rate guarantees.
Future Policy Benefits
The Company’s liability for future policy benefits consists of liabilities for immediate annuities and liabilities for certain guaranteed benefits contained in the variable insurance products the Company manufactures. Liabilities for immediate annuities are equal to the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment generally depends on policyholder mortality. Liabilities for guaranteed benefits for variable annuity and life insurance contracts are discussed in more detail in Note 7 of the Financial Statements. Interest rates used in establishing such liabilities are as follows:
                 
    2009   2008
Interest rates used for liabilities
    2.55% - 5.75 %     2.55% - 5.75 %
Revenue Recognition
Revenues for variable annuity contracts consist of policy charges for i) mortality and expense risks, ii) certain guaranteed benefits selected by the contract owner, iii) administration fees, iv) annual contract maintenance charges, and v) withdrawal charges assessed on contracts surrendered during the withdrawal charge period. Revenues for variable annuity contracts are recognized when policy charges are assessed or earned.
Revenues for variable life insurance contracts consist of policy charges for i) mortality and expense risks, ii) cost of insurance fees, iii) amortization of front-end and deferred sales charges, and iv) withdrawal charges assessed on contracts surrendered during the withdrawal charge period. Revenues for variable life insurance contracts are recognized when policy charges are assessed or earned.
Revenues for interest-sensitive annuity contracts (market value adjusted annuities, immediate annuities, and single premium deferred annuities) and interest-sensitive life insurance contracts (single premium whole life insurance) consist of i) investment income, ii) gains (losses) on the sale of invested assets, and iii) withdrawal charges assessed on contracts surrendered during the withdrawal charge period. Revenues for interest-sensitive annuity and life insurance contracts are recognized when investment income and investment sales are earned while revenues for contract charges are recognized when assessed or earned.

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Claims and Claims Settlement Expenses
Liabilities for claims and claims settlement expenses equal the death benefit (plus accrued interest) for claims that have been reported to the Company but have not settled and an estimate, based upon prior experience, for unreported claims.
Federal Income Taxes
The Company provides for income taxes on all transactions that have been recognized in the financial statements in accordance with GAAP guidance. Accordingly, deferred taxes are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are recognized in net income (loss) in the year during which such changes are enacted.
For federal income tax purposes, an election under Internal Revenue Code Section 338 was made by AUSA in connection with the purchase of the Company. As a result of this election, the income tax bases in the acquired assets and liabilities were adjusted as of the acquisition date resulting in a change to the related deferred income taxes.
Subsequent to acquisition, the Company files a separate federal income tax return for the years 2008 through 2012. Beginning in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax group. The results of operations of the Company through December 28, 2007 were included in the consolidated federal income tax return of ML&Co. The Company had entered into a tax-sharing agreement with ML&Co. whereby the Company calculated its current tax provision based on its operations and periodically remitted its current federal income tax liability to ML&Co. The tax-sharing agreement with ML&Co. was terminated on December 28, 2007. The Company has not entered into a new tax sharing agreement.
The Company is subject to taxes on premiums and is exempt from state income taxes in most states.
Subsequent Events
The financial statements are adjusted to reflect events that occurred between the balance sheet date and the date when the financial statements are issued, provided they give evidence of conditions that existed at the balance sheet date.
Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the financial statements themselves.
Recent Accounting Guidance
Current Adoption of Recent Accounting Guidance
On July 1, 2009, the FASB Accounting Standards CodificationTM (“Codification”) was launched as the single source of authoritative nongovernmental GAAP. Accounting guidance promulgated by the FASB is communicated through an Accounting Standards Update (“ASU”). An ASU provides the reason for the update and details the amendments to the Codification. Guidance in the Codification is organized by Topic, each representing a collection of related guidance (e.g., Financial Services—Insurance). Topics are further subdivided into Subtopics (e.g., Insurance Activities), and Sections (e.g., Recognition, Measurement, or Disclosure).
Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles
The Company adopted guidance that establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities as of the period ended September 30, 2009. All guidance contained in the Codification carries an equal level of authority. The adoption required updates to the Company’s financial statement disclosures, but did not have a material impact on the Company’s results of operations or financial position. This guidance was formerly known as Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.
ASC 320, Investments —Debt and Equity Securities
The Company adopted guidance that makes OTTI guidance for debt securities more operational and improves the presentation and disclosure of OTTI on debt and equity securities in the financial statements as of the period ended June 30, 2009. The guidance requires an entity to evaluate whether an impairment is other-than-temporary if the value of a debt security is less than its amortized cost basis at the balance sheet date.

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An OTTI is considered to have occurred if an entity: a) intends to sell the debt security, b) more likely than not will be required to sell the security before recovery of its amortized cost basis, or c) does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists), even if it does not intend to sell the security. In determining whether a credit loss exists, an entity should use its best estimate of the present value of cash flows expected to be collected from the debt security. The guidance provides a list of factors to be considered when estimating whether a credit loss exists and the period over which the debt security is expected to recover. If an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI should be recognized in earnings equal to the entire difference between the amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery, the OTTI should be separated into a) the amount representing the credit loss, which is recognized in earnings, and b) the amount related to all other factors, which is recognized in OCI, net of applicable taxes. A cumulative effect adjustment is required to the opening balance of retained earnings (net of related tax and VOBA effects) in the period of adoption with a corresponding adjustment to accumulated OCI to reclassify the non credit component of previously recognized OTTI on debt securities held at that date, provided the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost. Only the credit portion of OTTI will be accreted into income. The adoption resulted in a net increase to retained earnings and decrease to accumulated other comprehensive income (loss) of $64. See Note 4 to the Financial Statements for additional disclosures. This guidance was formerly known as FASB Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.
ASC 820, Fair Value Measurements and Disclosures
    The Company adopted guidance on measuring the fair value of certain alternative investments (i.e., investments in hedge funds, private equity funds, venture capital funds, offshore fund vehicles, funds of funds, and real estate funds) as of the period ended December 31, 2009 (ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)). The guidance applies to investments in entities where the fair value of the instrument is not readily determinable and the investment is in an entity that has all of the attributes of an investment company (as specified in ASC 946-10-15-2). If an investment is in scope, it permits, as a practical expedient, a reporting entity to use the investment’s net asset value (“NAV”) to estimate its fair value, provided that the NAV is calculated as of the reporting entity’s measurement date. The guidance prohibits the use of the NAV in estimating fair value when it is probable that an entity will sell the investment (or a portion thereof) at a price other than NAV. The guidance also requires enhanced disclosures by major category of investments about the nature and risks of investments within its scope. The adoption did not have a material impact on the Company’s financial statements.
 
    The Company adopted guidance, as of the period ended December 31, 2009, which clarified that when a quoted price in an active market for an identical liability is not available, an entity should measure fair value using one of the following approaches that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs: a) a valuation technique that uses the quoted price of the identical liability when traded as an asset; b) a valuation technique that uses quoted prices for similar liabilities or similar liabilities when traded as assets; or c) another valuation technique that is consistent with fair value measurement guidance (e.g., income approach or a market approach) (ASU 2009-05, Measuring Liabilities at Fair Value). The guidance also clarifies that an entity should not make a separate adjustment for restrictions on the transfer of a liability in estimating the liability’s fair value. The guidance also specifies that when measuring the fair value of a liability using the price of the liability when traded as an asset, the price should be adjusted for factors specific to the asset that are not applicable to the fair value measurement of the liability. The adoption did not have a material impact on the Company’s financial statements.
 
    The Company adopted guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly as of the period ended June 30, 2009. The guidance provides a list of factors that an entity should consider when determining whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared to normal market activity for that asset or liability. The guidance also requires interim disclosures of the inputs and valuation techniques used to measure fair value and disclosure of any changes to those inputs and valuation techniques during the period. The adoption did not have a material impact on the Company’s financial statements. This guidance was formerly known as FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. Upon adoption, this guidance superseded previous guidance formerly known as FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active.
 
    The Company adopted guidance requiring disclosures about fair value of financial instruments in interim reporting periods as well as annual periods as of the period ended June 30, 2009. The guidance requires an entity to disclose the methods and significant assumptions used to estimate fair value of financial instruments and to describe changes, if any, to those methods and assumptions during the period.

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      The adoption affected disclosures but did not impact the Company’s results of operations or financial position. This guidance was formerly known as FSP No. FAS 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments.
 
    On January 1, 2008, the Company adopted guidance providing a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. The guidance permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The adoption did not have a material impact on the Company’s financial statements. See Note 3 to the Financial Statements for additional disclosures. This guidance was formerly known as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
 
    On January 1, 2008, the Company adopted guidance that defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The adoption did not have a material impact on the Company’s financial statements. See Note 3 to the Financial Statements for additional disclosures. This guidance was formerly known as SFAS No. 157, Fair Value Measurements.
ASC 855, Subsequent Events
The Company adopted guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued as of the period ended June 30, 2009. The guidance required the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were issued or were available to be issued. The adoption did not impact the Company’s results of operations or financial position. This guidance was formerly known as SFAS No. 165, Subsequent Events.
In February 2010, the FASB issued revisions to the subsequent events guidance to eliminate the requirement for entities that file or furnish financial statements to the SEC to disclose the date through which subsequent events have been evaluated. However, the amended guidance retains the requirement that such an entity must evaluate subsequent events through the date on which the financial statements are issued. The amendments were effective upon issuance and the adoption did not impact the Company’s results of operations or financial position.
ASC 325-40, Investments—Other; Beneficial Interests in Securitized Financial Assets
The Company adopted guidance that amends impairment and related interest income measurement guidance to achieve more consistent determination of whether an OTTI has occurred for debt securities classified as available-for-sale or held-to-maturity as of the period ended December 31, 2008. The guidance permits the use of reasonable management judgment about the probability that the company will be able to collect all amounts due while previous guidance required the use of market participant assumptions which could not be overcome by management judgment. The guidance also retains and emphasizes the objective of an OTTI assessment and the related disclosure requirements included in guidance on debt and equity securities in ASC 320. The adoption had no material impact on the Company’s financial statements. This guidance was formerly known as FSP No. EITF 99-20-1, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20.
ASC 815, Derivatives and Hedging
    On January 1, 2009, the Company adopted guidance that amends and expands the disclosure requirements related to derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The adoption did not impact the Company’s results of operations or financial position. This guidance was formerly known as SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.
 
    The Company adopted guidance requiring disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments as of the period ended December 31, 2008. The amendments also require additional disclosure about the current status of the payment/performance risk of a guarantee. The adoption did not have a material impact on the Company’s financial statements. This guidance was formerly known as FSP No. FAS 133-1 and FASB Interpretation No. 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.

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ASC 805, Business Combinations
On January 1, 2009, the Company adopted guidance that establishes the principles and requirements for how the acquirer in a business combination: (a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure information that is decision-useful to users of financial statements in evaluating the nature and financial effects of the business combination. The adoption did not have a material impact on the results of operation or financial position. This guidance was formerly known as SFAS No. 141 (revised 2007), Business Combinations.
ASC 350, Intangibles—Goodwill and Other
On January 1, 2009, the Company adopted guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The guidance requires entities estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. The adoption did not impact the Company’s results of operations or financial position. This guidance was formerly known as FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.
Future Adoption of Recent Accounting Guidance
ASC 820, Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements, which includes new disclosures and clarifications of existing disclosures about fair value measurements. The guidance requires disclosure of significant transfers in and out of Levels 1 and 2 of the fair value hierarchy and reasons for the transfers. Additionally, the ASU clarifies the level of disaggregation for fair value disclosures, requiring disclosures for each class of assets and liabilities. The guidance clarifies that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2009. The Company will adopt the guidance on January 1, 2010, which affects disclosures and therefore will not impact the Company’s results of operations or financial position.
The ASU also requires separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs. This disclosure requirement is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. The Company will adopt the guidance on January 1, 2011, which affects disclosures and therefore will not impact the Company’s results of operations or financial position.
Note 2. 2008 Initial Purchase Price Allocation Adjustments
On December 28, 2007, the Company and its affiliate, MLLIC, were acquired by AUSA for $0.13 billion and $1.12 billion, respectively, for a total price for both entities of $1.25 billion. The allocation of the purchase price to the entities was based on their relative value. Since the actual results between the period December 28, 2007 and December 31, 2007 were not material, the Company utilized December 31, 2007 as the acquisition date.
In addition, on December 28, 2007, ML&Co. and AUSA entered into a transition services agreement whereby ML&Co. is to provide certain outsourced third-party services required for the normal operations of the business and other services necessary for the migration to AUSA’s infrastructure.
The purchase price was initially allocated to the assets acquired and liabilities assumed using management’s best estimate of their fair value as of the acquisition date. The Company made refinements during 2008 to the initial estimated fair values as additional information became available.

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The following adjustments as of December 31, 2008 were made to the initial purchase price allocation:
                         
    Purchase Price Allocation
    December 31,           December 31
    2007   Adjustments   2008 (a)
Value of business acquired, gross
  $ 44,024     $ 6,829     $ 50,853  
Goodwill
    6,882       (3,286 )     3,596  
Other intangibles
    8,330       (1,180 )     7,150  
Federal income taxes — current
    836       (107 )     729  
Reinsurance receivable
    925       26       951  
Other assets
    5,200       50       5,250  
 
                       
Policyholder account balances
    140,782       4,129       144,911  
Future policy benefits
    22,764       (3,566 )     19,198  
Federal income taxes — deferred
          1,769       1,769  
 
(a)   This reflects the December 31, 2008 balance before adjustments for unrealized gains (losses) on investments, amortization and/or impairments.
VOBA reflects the estimated fair value of inforce contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts inforce at the acquisition date. VOBA is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality, separate account performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience.
During the 4th quarter 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co. distribution channel instead of continuing to sell new variable annuities on the Company. As a result of this decision, an impairment charge was taken for the entire unamortized other intangible balance and the majority of the goodwill balance except for the amount related to the Company’s state licenses at December 31, 2008.
For purposes of calculating the VOBA and other intangible assets relating to the acquisition, management considered the Company’s weighted average cost of capital, as well as the weighted average cost of capital required by market participants. A discount rate of 9% and 11% were used for VOBA for the life and annuity segments, respectively. A discount rate of 12% was used to value the distribution agreement, the trade name and the non-compete agreement intangible assets. See Note 5 to the Financial Statements for further discussion on VOBA, Other Intangibles and Goodwill.
Note 3. Fair Value of Financial Instruments
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
Fair Value Hierarchy
The Company has categorized its financial instruments into a three level hierarchy which is based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

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Assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:
Level 1. Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2. Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets
b) Quoted prices for identical or similar assets or liabilities in non-active markets
c) Inputs other than quoted market prices that are observable
d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means
Level 3. Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis:
                                 
    December 31, 2009  
    Level 1     Level 2     Level 3     Total  
Assets
                               
Fixed maturity securities (a)
  $ 3,134     $ 108,577     $ 2,216     $ 113,927  
Equity securities (a)
          57             57  
Cash equivalents (b)
          47,114             47,114  
Separate Accounts assets (c)
    644,149                   644,149  
 
                       
Total assets
  $ 647,283     $ 155,748     $ 2,216     $ 805,247  
 
                       
 
                               
Liabilities
                               
Future policy benefits
                               
(embedded derivatives only) (d)
  $     $     $ (4,482 )   $ (4,482 )
 
                       
Total liabilities
  $     $     $ (4,482 )   $ (4,482 )
 
                       
                                 
    December 31, 2008  
    Level 1     Level 2     Level 3     Total  
Assets
                               
Fixed maturity securities (a)
  $ 2,316     $ 108,410     $ 5,108     $ 115,834  
Equity securities (a)
          163             163  
Cash equivalents (b)
          33,253             33,253  
Separate Accounts assets (c)
    598,438                   598,438  
 
                       
Total assets
  $ 600,754     $ 141,826     $ 5,108     $ 747,688  
 
                       
 
                               
Liabilities
                               
Future policy benefits (embedded derivatives only) (d)
  $     $     $ (3,179 )   $ (3,179 )
 
                       
Total liabilities
  $     $     $ (3,179 )   $ (3,179 )
 
                       

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(a)   Securities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasury and U.S. Government Agency securities. Securities are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the asset or prices for similar assets. Level 2 securities include fixed maturity securities and preferred stock for which the Company utilized pricing services and corroborated broker quotes. Securities are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 3 consists principally of fixed maturity securities whose fair value is estimated based on non-binding broker quotes.
 
(b)   Cash equivalents are primarily valued at amortized cost, which approximates fair value. Operating cash is not included in the abovementioned table.
 
(c)   Separate Accounts assets are carried at the net asset value provided by the fund managers.
 
(d)   The Company issued contracts containing guaranteed minimum withdrawal benefits riders (“GMWB”) and obtained reinsurance on guaranteed minimum income benefit riders (“GMIB reinsurance”). GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rates and actuarial assumptions. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy.
The Company’s Level 3 assets consist of securities whose fair value is estimated based on non-binding broker quotes. The following table provides a summary of the change in fair value of the Company’s Level 3 assets at December 31, 2009 and 2008:
                 
Fixed maturity securities   December 31, 2009     December 31, 2008  
Balance at beginning of year (a)
  $ 5,108     $ 1,244  
 
               
Total change in unrealized gains (losses) (b)
    (125 )     (1,166 )
Purchases
          3,002  
Sales
    (432 )      
Transfers into Level 3
    2,768       2,007  
Transfers out of Level 3
    (5,108 )      
Changes in valuation (c)
    5       21  
 
           
 
               
Balance at end of year (a)
  $ 2,216     $ 5,108  
 
           
 
(a)   Recorded as a component of fixed maturity available-for-sale securities in the Balance Sheets.
 
(b)   Recorded as a component of other comprehensive income (loss).
 
(c)   Recorded as a component of net investment income in the Statements of Income.
In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist in the determination of fair value. If those quotes can be corroborated by other market observable data, the investments will be classified as Level 2 investments. If not, the investments are classified as Level 3 due to the unobservable nature of the brokers’ valuation processes. The decrease in Level 3 securities from 2008 to 2009 is primarily due to securities being vendor priced (Level 2) at December 31, 2009 and an increase in market activity.
The Company’s Level 3 liabilities (assets) consist of provisions for GMWB and GMIB reinsurance. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.

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The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (“LIBOR”) forward curve. The credit spread is set by using the credit default swap (“CDS”) spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors).
For equity volatility, the Company uses a term structure with market based implied volatility inputs for the first five years. Correlations of market returns across underlying indices are based on actual observed market returns and their inter-relationships over a number of years preceding the valuation date. The volume of observable option trading from which volatilities are implied diminishes markedly after five years; and therefore, the Company uses a volatility curve which grades from actual implied volatilities for five years to a long-term forward rate assumptions of 25% in 2009 and 2008. The December 31, 2009 volatility assumption for the S&P 500 index in year 20 is approximately 25.3% expressed at spot rate. Assumptions on policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities. These assumptions are reviewed at each valuation date and updated based on historical experience and observable market data. The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at December 31, 2009 and 2008:
                                 
    December 31, 2009     December 31, 2008  
            GMIB             GMIB  
    GMWB     Reinsurance     GMWB     Reinsurance  
Balance at beginning of period (b)
  $ 4,270     $ (7,449 )   $ 595     $ (395 )
 
                               
Purchase price adjustment
                (267 )     (1,078 )
Changes in valuation (a)
    (3,007 )     1,704       3,942       (5,976 )
 
                       
 
                               
Balance at end of period (b)
  $ 1,263     $ (5,745 )   $ 4,270     $ (7,449 )
 
                       
 
(a)   Recorded as a component of policy benefits in the Statements of Income.
 
(b)   Recorded as a component of future policy benefits in the Balance Sheets.
During 2009 and 2008, change in valuation is principally being driven by the volatile equity market environment.
Note 4. Investments
Fixed Maturity and Equity Securities
The Company adopted revised guidance for the recognition and presentation of OTTI as of the period ended June 30, 2009. The prior requirement for management to assert that it has the intent and ability to hold an impaired debt security until recovery was replaced with the requirement that management assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis.
As permitted by the guidance, the Company recorded an increase of $64 to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on the Statement of Stockholder’s Equity to reclassify the non credit portion of previously other-than-temporarily impaired available-for-sale securities held as of April 1, 2009.
The following summarizes the components for this cumulative effect adjustment:
                         
            Net        
    Unrealized     Unrealized     Total  
    OTTI     Loss on     Cumulative  
    on Available-     Available-     Effect  
    For-Sale     For-Sale     Adjustment  
    Securities     Securities     in OCI  
Increase in amortized cost of available-for-sale securities
  $ 70     $ 131     $ 201  
Change in VOBA
          (102 )     (102 )
Income tax
    (24 )     (11 )     (35 )
 
                 
Net cumulative effect adjustment
  $ 46     $ 18     $ 64  
 
                 

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The cumulative effect adjustment was calculated for all available-for-sale securities held as of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, the Company did not intend to sell the security and it was not more likely than not that the Company would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received as of April 1, 2009, to the amortized cost basis of the available-for-sale securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective available-for-sale security in effect before recognizing any OTTI. In addition, because the carrying amounts of VOBA are adjusted for the effects of realized and unrealized gains and losses on available-for-sale securities, the Company recognized a true-up to the VOBA balances for this cumulative effect adjustment.
The following table summarizes the increase to the amortized cost of the available-for-sale securities as of April 1, 2009, resulting from the recognition of the cumulative effect adjustment:
         
Fixed maturity securities
       
Corporate securities
  $ 200  
Government and government agencies — United States
    1  
 
     
Total fixed maturity securities
  $ 201  
 
     
The amortized cost and estimated fair value of investments in fixed maturity securities and equity securities at December 31, 2009 and 2008 were:
                                         
    December 31, 2009  
                                    Estimated  
    Amortized     Gross Unrealized             Fair  
    Cost     Gains     Losses     OTTI (1)     Value  
Fixed maturity securities
                                       
Corporate securities
  $ 62,214     $ 3,609     $ (339 )   $     $ 65,484  
Asset-backed securities
    7,179       240       (205 )           7,214  
Commercial mortgage-backed securities
    25,788       363       (623 )           25,528  
Residential mortgage-backed securities
    9,024       331       (240 )           9,115  
Government and government agencies
                                       
United States
    3,194       1       (61 )           3,134  
Foreign
    3,540       92       (180 )           3,452  
 
                             
Total fixed maturity securities
  $ 110,939     $ 4,636     $ (1,648 )   $     $ 113,927  
 
                             
 
                                       
Equity securities — preferred stocks
                                       
Banking securities
  $ 80     $     $ (23 )   $     $ 57  
 
                             
Total equity securities
  $ 80     $     $ (23 )   $     $ 57  
 
                             
 
(1)   Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

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    December 31, 2008  
                                    Estimated  
    Amortized     Gross Unrealized             Fair  
    Cost     Gains     Losses     OTTI     Value  
Fixed maturity securities
                                       
Corporate securities
  $ 78,355     $ 642     $ (6,632 )   $     $ 72,365  
Asset-backed securities
    7,571       19       (793 )           6,797  
Commercial mortgage-backed securities
    24,802             (4,979 )           19,823  
Residential mortgage-backed securities
    11,008       157       (589 )           10,576  
Government and government agencies
                                       
United States
    2,200       116                   2,316  
Foreign
    4,050       167       (260 )           3,957  
 
                             
Total fixed maturity securities
  $ 127,986     $ 1,101     $ (13,253 )   $     $ 115,834  
 
                             
 
                                       
Equity securities — preferred stocks
                                       
Banking securities
  $ 80     $     $ (45 )   $     $ 35  
Other financial services securities
    177             (49 )           128  
 
                             
Total equity securities
  $ 257     $     $ (94 )   $     $ 163  
 
                             
Excluding investments in U.S. Government and government agencies, the Company is not exposed to any significant concentration of credit risk in its fixed maturity securities portfolio.
The amortized cost and estimated fair value of fixed maturity securities by investment grade at December 31, 2009 and December 31, 2008 were:
                                 
    December 31, 2009     December 31, 2008  
            Estimated             Estimated  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
Investment grade
  $ 105,980     $ 109,074     $ 120,799     $ 110,412  
Below investment grade
    4,959       4,853       7,187       5,422  
 
                       
 
                               
Total fixed maturity securities
  $ 110,939     $ 113,927     $ 127,986     $ 115,834  
 
                       
At December 31, 2009 and 2008, the estimated fair value of fixed maturity securities rated BBB- were $3,718 and $2,649, respectively, which is the lowest investment grade rating given by Standard & Poor’s (“S&P”).
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2009 and 2008 by expected maturity were:
                                 
    December 31, 2009   December 31, 2008
            Estimated           Estimated
    Amortized   Fair   Amortized   Fair
    Cost   Value   Cost   Value
Fixed maturity securities
                               
Due in one year or less
  $ 4,486     $ 4,511     $ 10,392     $ 10,373  
Due after one year through five years
    18,774       19,517       25,519       24,166  
Due after five years through ten years
    37,584       40,129       39,921       37,053  
Due after ten years
    8,103       7,912       8,773       7,046  
 
                       
 
    68,947       72,069       84,605       78,638  
Mortgage-backed securities and other asset-backed securities
    41,992       41,858       43,381       37,196  
 
                       
 
                               
Total fixed maturity securities
  $ 110,939     $ 113,927     $ 127,986     $ 115,834  
 
                    

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In the preceding table fixed maturity securities not due at a single maturity date have been included in the year of final maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The Company had investment securities with an estimated fair value of $909 and $998 that were deposited with insurance regulatory authorities at December 31, 2009 and 2008, respectively.
Unrealized Gains (Losses) on Fixed Maturity and Equity Securities
The Company’s investments in fixed maturity and equity securities are classified as available-for-sale and are carried at estimated fair value. Unrealized gains and losses on available-for-sale securities are included in stockholder’s equity as a component of accumulated other comprehensive income (loss), net of taxes.
The estimated fair value and gross unrealized losses and unrealized OTTI of fixed maturity and equity securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at December 31, 2009 and 2008 were as follows:
                         
    December 31, 2009  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
    Value     Cost     OTTI (1)  
Less than or equal to six months
                       
Fixed maturities
                       
Corporate securities
  $ 998     $ 998     $  
Residential mortgage-backed securities
    35       35        
Government and government agencies
                       
United States
    1,883       1,883        
Foreign
    2,193       2,281       (88 )
 
                 
Total fixed maturity and equity securities
    5,109       5,197       (88 )
 
                 
 
                       
Greater than six months but less than or equal to one year
                       
Fixed maturities
                       
Corporate securities
    281       315       (34 )
Asset-backed securities
    653       690       (37 )
Government and government agencies — United States
    1,000       1,061       (61 )
 
                 
Total fixed maturity and equity securities
    1,934       2,066       (132 )
 
                 
 
                       
Greater than one year
                       
Fixed maturities
                       
Corporate securities
    4,273       4,578       (305 )
Asset-backed securities
    1,563       1,731       (168 )
Commercial mortgage-backed securities
    5,955       6,579       (624 )
Residential mortgage-backed securities
    908       1,148       (240 )
Government and government agencies — foreign
    368       459       (91 )
Equity securities — banking securities
    57       80       (23 )
 
                 
Total fixed maturity and equity securities
    13,124       14,575       (1,451 )
 
                 
Total fixed maturity and equity securities
  $ 20,167     $ 21,838     $ (1,671 )
 
                 
 
(1)   Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

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    December 31, 2008  
                    Gross  
    Estimated             Unrealized  
    Fair     Amortized     Losses and  
    Value     Cost     OTTI  
Less than or equal to six months
                       
Fixed maturities
                       
Corporate securities
  $ 31,552     $ 35,444     $ (3,892 )
Asset-backed securities
    6,090       6,883       (793 )
Commercial mortgage-backed securities
    18,913       22,923       (4,010 )
Residential mortgage-backed securities
    1,506       1,630       (124 )
Government and government agencies — foreign
    998       1,258       (260 )
Equity securities — banking securities
    35       80       (45 )
 
                 
Total fixed maturity and equity securities
    59,094       68,218       (9,124 )
 
                 
 
                       
Greater than six months but less than or equal to one year
                       
Fixed maturities
                       
Corporate securities
    14,976       17,716       (2,740 )
Commercial mortgage-backed securities
    910       1,879       (969 )
Residential mortgage-backed securities
    888       1,353       (465 )
Equity securities — other financial services securities
    128       177       (49 )
 
                 
Total fixed maturity and equity securities
    16,902       21,125       (4,223 )
 
                 
Total fixed maturity and equity securities
  $ 75,996     $ 89,343     $ (13,347 )
 
                 
The total number of securities in an unrealized loss position was 29 and 126 at December 31, 2009 and 2008, respectively.
The estimated fair value, gross unrealized losses, OTTI and number of securities where the fair value had declined below amortized cost by greater than 20% at December 31, 2009 and greater than 20% and 40% at December 31, 2008 were as follows:
                                 
    December 31, 2009  
    Estimated     Gross                
    Fair     Unrealized             Number of  
    Value     Losses     OTTI     Securities  
Decline > 20%
                               
Greater than one year
  $ 2,407     $ (714 )   $       4  
 
                       
Total
  $ 2,407     $ (714 )   $       4  
 
                       
                                 
    December 31, 2008  
    Estimated     Gross                
    Fair     Unrealized             Number of  
    Value     Losses     OTTI     Securities  
Decline > 20%
                               
Less than or equal to six months
  $ 10,963     $ (3,982 )   $       16  
Greater than six months but less than or equal to one year
    4,261       (3,570 )           15  
 
                       
Total
  $ 15,224     $ (7,552 )   $       31  
 
                       
 
                               
Decline > 40%
                               
Less than or equal to six months
  $ 1,431     $ (1,341 )   $       6  
Greater than six months but less than or equal to one year
    2,673       (2,763 )           9  
 
                       
Total
  $ 4,104     $ (4,104 )   $       15  
 
                       
Unrealized gains (losses) incurred during 2009 and 2008 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. The Company has the ability and intent to hold the investments for a period of time sufficient for a forecasted market price recovery up to or beyond the amortized cost of the investment.

68


 

The components of net unrealized gain (loss) and OTTI included in accumulated other comprehensive income (loss), net of taxes were as follows:
                 
    December 31  
    2009     2008  
Assets
               
Fixed maturity securities
  $ 2,987     $ (12,152 )
Equity securities
    (23 )     (94 )
Deferred policy acquisitions costs
          (38 )
Value of business acquired
    (62 )     (454 )
 
           
 
    2,902       (12,738 )
 
           
 
               
Liabilities
               
Policyholder account balances
    251       (83 )
Federal income taxes — deferred
    (1,103 )     4,488  
 
           
 
    (852 )     4,405  
 
           
 
               
Stockholder’s equity
               
Accumulated other comprehensive income (loss), net of taxes
  $ 2,050     $ (8,333 )
 
           
The Company records certain adjustments to policyholder account balances in conjunction with the unrealized holding gains or losses on investments classified as available-for-sale. The Company adjusts a portion of these 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.
Policy Loans
Policy loans on insurance contracts are stated at unpaid principal balances. The Company estimates the fair value of policy loans as equal to the book value of the loans. The estimated fair value of the policy loans at December 31, 2009 and 2008 was $63,045 and $67,387, respectively. Policy loans are fully collateralized by the account value of the associated insurance contracts, and the spread between the policy loan interest rate and the interest rate credited to the account value held as collateral is fixed.
Derivatives
The Company uses derivatives to manage the capital market risk associated with the GMWB. The derivatives, which are S&P 500 Composite Stock Price Index futures contracts, are used to hedge the equity risk associated with these types of variable guaranteed products, in particular the claim and/or revenue risks of the liability portfolio. The Company will not seek hedge accounting on these hedges because, in most cases, the derivatives’ change in value will create a natural offset in the Statements of Income with the change in reserves. Net settlements on the futures occur daily. As of December 31, 2009, the Company had 20 outstanding short futures contracts with a notional value of $5,554. As of December 31, 2008, the Company had 10 outstanding short futures contracts with a notional value of $2,250.
Net Investment Income
Net investment income by source for the years ended December 31 was as follows:
                           
    Successor       Predecessor  
    2009     2008       2007  
Fixed maturity securities
  $ 6,731     $ 6,326       $ 5,727  
Policy loans on insurance contracts
    3,180       3,279         3,385  
Cash and cash equivalents
    178       1,638         2,300  
Equity securities
    12       38         71  
Other
                  12  
 
                   
Gross investment income
    10,101       11,281         11,495  
Less investment expenses
    (201 )     (215 )       (249 )
 
                   
Net investment income
  $ 9,900     $ 11,066       $ 11,246  
 
                   

69


 

Realized Investment Gains (Losses)
The Company considers fair value at the date of sale to be equal to proceeds received. Proceeds and gross realized investment gains (losses) from the sale of available-for-sale securities for the years ended December 31 were as follows:
                           
    Successor     Predecessor
    2009   2008     2007
Proceeds
  $ 28,544     $ 32,068       $ 12,210  
Gross realized investment gains
    564       461         1,268  
Gross realized investment losses
    (735 )     (481 )       (127 )
 
                         
Proceeds on available-for-sale securities sold at a realized loss
    7,878       18,277         7,619  
Net realized investment gains (losses) for the years ended December 31 were as follows:
                           
    Successor       Predecessor  
    2009     2008       2007  
Fixed maturity securities
  $ (904 )   $ (628 )     $ 1,141  
Equity securities
    (177 )     (15 )        
Derivatives
    (1,849 )     1,273          
Associated amortization expense of VOBA
    (33 )     152          
 
                   
Net realized investment gains (losses)
  $ (2,963 )   $ 782       $ 1,141  
 
                   
OTTI
If management determines that a decline in the value of an available-for-sale equity security is other-than-temporary, the cost basis is adjusted to estimated fair value and the decline in value is recorded as a net realized investment loss. For debt securities, the manner in which an OTTI is recorded depends on whether management intends to sell a security or it is more likely than not that it will be required to sell a security in an unrealized loss position before its anticipated recovery. If management intends to sell or more likely than not will be required to sell the debt security before recovery, the OTTI is recognized in earnings for the difference between amortized cost and fair value. If these criteria are not met, the OTTI is bifurcated into two pieces: a credit loss is recognized in earnings at an amount equal to the difference between the amortized cost of the debt security and its net present value, and a non credit loss is recognized in OCI for any difference between the fair value and the net present value of the debt security at the impairment measurement date.
The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts:
         
Balance, December 31, 2008
  $  
Credit losses remaining in retained earnings related to adoption of revised guidance on OTTI (ASC 320)
    69  
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period
    (69 )
Accretion of credit loss impairments previously recognized
    (2 )
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
    (1 )
Accretion previously recognized on securities which matured, paid down, prepaid or were sold during the period
    3  
 
     
Balance, December 31, 2009
  $  
 
     
For 2009, the Company recorded gross impairments of $909 and no associated amortization of VOBA. The Company adopted revised guidance on the recognition and presentation of OTTI as of June 30, 2009. The gross cumulative effect of this adoption was a $201 adjustment to retained earnings and amortized cost for the non credit related portion of previously recorded impairments on securities still in inventory at April 1, 2009. Of this, $70 related to non credit impairments recorded in income during the first quarter of 2009. For 2008, the Company recorded gross impairments of $626, and associated amortization of VOBA of $106. For 2007, the Company did not record any OTTI.

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Note 5. VOBA, Other Intangibles and Goodwill
VOBA reflects the estimated fair value of inforce contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts inforce at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, Separate Account performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. In addition, the Company utilizes the reversion to the mean assumption, a common industry practice, in its determination of the amortization of VOBA. At December 31, 2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate, while at December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate.
The carrying amount of VOBA for the years ended December 31 was as follows:
                 
    2009     2008  
Balance at beginning of year
  $ 41,525     $ 44,024  
 
               
Purchase price adjustment
          6,829  
Amortization expense
    (3,116 )     (2,239 )
Unlocking
    (519 )     (2,460 )
Impairment charge
    (7,165 )     (4,326 )
Adjustment related to realized (gains) losses on investments and OTTI
    (33 )     152  
Adjustment related to unrealized (gains) losses and OTTI on investments
    290       (454 )
 
           
 
               
Balance at end of year
  $ 30,982     $ 41,525  
 
           
During 2009, the Company, as a result of market improvements, experienced increased gross profits which increased amortization expense. During 2008, the Company experienced lower than expected gross profits as a result of market losses which reduced amortization expense and unlocking. In addition, in the first quarter 2009 and fourth quarter 2008, the Company recorded impairment charges as estimated future gross profits were less than the unamortized balance.
The estimated future amortization of VOBA from 2010 to 2014 is as follows:
         
2010
  $ 2,989  
2011
  $ 2,825  
2012
  $ 2,628  
2013
  $ 2,506  
2014
  $ 2,387  
Other intangibles include the estimated fair values of the distribution agreement, the trade name and the non-compete agreement acquired at the acquisition date. The Company reviews other intangible assets when certain events or circumstances exist, while goodwill is reviewed for impairment on an annual basis and on an interim basis when certain events or circumstances exist. However during the 4th quarter 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co. distribution channel instead of continuing to sell new variable annuities on MLLIC. As a result of this decision, an impairment charge was taken for the entire unamortized other intangible balance ($6,783) and the majority of the goodwill balance ($3,096) except for the amount related to the Company’s state licenses at December 31, 2008.
Note 6. DAC, DSI and UPCR
The Company utilizes the reversion to the mean assumption, a common industry practice, in its determination of the amortization of DAC. At December 31, 2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate, while at December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate.

71


 

The carrying amount of DAC and DSI for the years ended December 31 was as follows:
                 
    DAC     DSI  
Balance, January 1, 2008
  $     $  
 
               
Capitalization
    442       177  
Accretion
    11       1  
Unlocking
    (42 )     (13 )
Adjustment related to unrealized gains and OTTI on investments
    (38 )      
 
           
 
               
Balance, December 31, 2008
    373       165  
 
           
 
               
Capitalization
    65       5  
Amortization
    (139 )     (53 )
Unlocking
    22       13  
Adjustment related to unrealized losses and OTTI on investments
    39        
 
           
 
               
Balance, December 31, 2009
  $ 360     $ 130  
 
           
Equity market improvements in 2009 compared to 2008 caused higher amortization expense as a result of increasing gross profits. During 2008, the Company experienced lower than expected gross profits as a result of market losses which reduced amortization expense and unlocking.
Note 7. Variable Contracts Containing Guaranteed Benefits
Variable Annuity Contracts Containing Guaranteed Benefits
Prior to September 30, 2009, the Company issued variable annuity contracts in which the Company may have contractually guaranteed to the contract owner a guaranteed minimum death benefit (“GMDB”) and/or an optional guaranteed living benefit provision. The living benefit provisions offered by the Company included a guaranteed minimum income benefit (“GMIB”) and a guaranteed minimum withdrawal benefit (“GMWB”). Information regarding the general characteristics of each guaranteed benefit type is provided below:
    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.
 
    Contracts containing GMWB provisions provide the contract owner the ability to withdraw minimum annual payments regardless of the impact of market performance on the contract owner’s account value. In general, withdrawal percentages are based on the contract owner’s age at the time of the first withdrawal.

72


 

The Company had the following variable annuity contracts containing guaranteed benefits at December 31:
                         
    GMDB   GMIB   GMWB
2009
                       
Net amount at risk (a)
  $ 84,102     $ 337     $ 4,871  
 
                       
Average attained age of contract owners
    71       62       73  
 
                       
Weighted average period remaining until expected annuitization
    n/a     4.0  yrs     n/a  
 
                       
2008
                       
Net amount at risk (a)
  $ 167,799     $ 7,321     $ 11,327  
 
                       
Average attained age of contract owners
    69       62       73  
 
                       
Weighted average period remaining until expected annuitization
    n/a     6.1  yrs     n/a  
 
(a)   Net amount at risk for GMDB is defined as the current GMDB in excess of the contract owners’ account balance at the Balance Sheet date. Net amount at risk for GMIB is defined as the present value of the minimum guaranteed annuity payments available to the contract owner in excess of the contract owners’ account balance at the Balance Sheet date. Net amount at risk for GMWB is defined as the present value of the minimum guaranteed withdrawals available to the contract owner in excess of the contract owners’ account balance at the Balance Sheet date.
The Company records liabilities for contracts containing GMDB and GMIB provisions as a component of future policy benefits in the Balance Sheets. Changes in these guaranteed benefit liabilities are included as a component of policy benefits in the Statement of Income. The GMDB and GMIB liabilities are determined by projecting future expected guaranteed benefits under multiple scenarios for returns on Separate Accounts assets. The Company uses estimates for mortality and policyholder behavior assumptions based on actual and projected experience for each contract type. These estimates are consistent with the estimates used in the calculation of DAC. The Company regularly evaluates the estimates used and adjusts the GMDB and/or GMIB liability balances with a related charge or credit to earnings (“unlocking”), if actual experience or evidence suggests that earlier assumptions should be revised.
The changes in the variable annuity GMDB and GMIB liabilities for the years ended December 31 were as follows:
                 
    GMDB     GMIB  
Balance, January 1, 2008
  $ 2,221     $  
 
               
Purchase price adjustment
    (2,221 )      
Guaranteed benefits incurred
    1,127       491  
Guaranteed benefits paid
    (2,307 )      
Unlocking
    1,677       626  
 
           
 
               
Balance, December 31, 2008
    497       1,117  
 
           
 
               
Guaranteed benefits incurred
    2,301       1,262  
Guaranteed benefits paid
    (2,488 )      
Unlocking
    (3 )     167  
 
           
 
               
Balance, December 31, 2009
  $ 307     $ 2,546  
 
           
During 2009, the small decline in the GMDB liability was primarily due to equity market improvements partially offset by revisions to policyholder behavior assumptions. During 2009, the increase in the GMIB liability was primarily due to revisions to policyholder behavior assumptions partially offset by the favorable impact of improved equity markets in the latter half of 2009. The substantial increase in the GMDB and GMIB liabilities in 2008 was primarily due to significant market declines during the latter half of 2008.

73


 

At December 31, contract owners’ account balances by mutual fund class by guaranteed benefit provisions were comprised as follows:
                                                 
                            Money              
    Equity     Bond     Balanced     Market     Other     Total  
2009
                                               
GMDB Only
  $ 159,327     $ 63,585     $ 42,961     $ 18,679     $ 155     $ 284,707  
GMDB and GMIB
    82,236       22,879       25,241       4,378       1,030       135,764  
GMDB and GMWB
    10,395       1,979       4,567       25       167       17,133  
GMWB only
    10,972       2,066       4,269       223       270       17,800  
GMIB only
    4,117       941       1,276       46       84       6,464  
No guaranteed benefit
    1,957       721       1,515       222       39       4,454  
 
                                   
Total
  $ 269,004     $ 92,171     $ 79,829     $ 23,573     $ 1,745     $ 466,322  
 
                                   
 
                                               
2008
                                               
GMDB Only
  $ 147,508     $ 63,836     $ 40,367     $ 18,950     $ 104     $ 270,765  
GMDB and GMIB
    64,741       24,476       24,035       4,896       699       118,847  
GMDB and GMWB
    7,489       2,277       4,526       20       170       14,482  
GMWB only
    7,949       2,463       4,661       109       249       15,431  
GMIB only
    3,489       789       1,230       20       68       5,596  
No guaranteed benefit
    1,725       440       1,000       160       37       3,362  
 
                                   
Total
  $ 232,901     $ 94,281     $ 75,819     $ 24,155     $ 1,327     $ 428,483  
 
                                   
Variable Life Contracts Containing Guaranteed Benefits
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.
At December 31, contract owners’ account balances by mutual fund class for contracts containing GMDB provisions were distributed as follows:
                 
    2009     2008  
Balanced
  $ 80,251     $ 53,440  
Equity
    48,770       74,664  
Bond
    23,936       12,799  
Money Market
    24,870       29,052  
 
           
Total
  $ 177,827     $ 169,955  
 
           
Note 8. Federal Income Taxes
The following is a reconciliation of the provision for income taxes based on income (loss) before federal income taxes, computed using the federal statutory rate versus the reported provision for income taxes for the years ended December 31.

74


 

                           
    Successor       Predecessor  
    2009     2008       2007  
Provisions for income taxes computed at Federal statutory rate (35%)
  $ (1,905 )   $ (1,671 )     $ 5,411  
Increase (decrease) in income taxes resulting from:
                         
Dividend received deduction
    (700 )     (595 )       (407 )
Tax credits
    (151 )     (72 )       (156 )
Tax goodwill amortization
          (128 )        
Valuation allowance on deferred tax assets
    3,705                
Provision to return adjustment
    (608 )              
Uncertain tax positions
    343                
Other
    53       2          
 
                   
Federal income tax provision
  $ 737     $ (2,464 )     $ 4,848  
 
                   
Effective tax rate
    -14 %     53 %       31 %
The Company provides for deferred income taxes resulting from temporary differences that arise from recording certain transactions in different years for income tax reporting purposes than for financial reporting purposes. Deferred tax assets and liabilities were as follows:
                 
    December 31  
    2009     2008  
Deferred tax assets
               
DAC
  $ 11,362     $ 10,155  
Tax VOBA
    668       719  
Policyholder account balances
    14,871        
Tax credits
    629        
Investment adjustments
          5,227  
Net operating and capital loss carryforward
    2,487       3,724  
Intangible assets
    3,464       3,123  
Other
    705       111  
 
           
Total deferred tax assets
    34,186       23,059  
Valuation allowance
    (3,705 )      
 
           
Net deferred tax assets
    30,481       23,059  
 
           
 
               
Deferred tax liabilities
               
Book VOBA
    10,866       14,534  
DAC
    2,456       188  
Investment adjustments
    17,777        
Policyholder account balance
          3,154  
 
           
Total deferred tax liabilities
    31,099       17,876  
 
           
 
               
Total net deferred tax asset (liability)
  $ (618 )   $ 5,183  
 
           
The valuation allowance for deferred tax assets as of December 31, 2009 was $3,705. There was no valuation allowance at December 31, 2008. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, is not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of further taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.
The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined that there were no tax benefits that should not be recognized as of December 31, 2008. Additions as of December 31, 2009 are based on tax positions related to the prior year of $343, which primarily relates to uncertainty regarding the sustainability of certain deductions taken on the 2008 U.S. Federal income tax return. There were no additions based on tax positions related to the current year. To the extent these unrecognized tax benefits are ultimately recognized, they will not impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

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At December 31, 2009 and December 31, 2008, the Company had an operating loss carryforward for federal income tax purposes of $5,554 (net of the ASC 740 reduction of $981) and $10,639, respectively, with a carryforward period of fifteen years that expire at various dates up to 2024. In addition, at December 31, 2009, the Company also has a capital loss carryforward for federal income tax purposes of $570 with a carryforward period of five years that will expire at various dates up to 2014. At December 31, 2009, the Company had a foreign tax credit carryforward of $412 with a carryforward period of ten years that will expire at various dates up to 2019. Also at December 31, 2009, the Company had an Alternative Minimum Tax tax credit carryforward for federal income tax purposes of $217 with an indefinite carryforward period.
The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company did not recognize penalty expense in its financial statements as of December 31, 2009 and December 31, 2008. The Company recognized interest expense of $11 as of December 31, 2009. The Company did not recognize interest expense at December 31, 2008.
The Company files a separate federal income tax return for the years 2008 through 2012. Beginning in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax group. A tax return has been filed for 2008, but no examination by the Internal Revenue Service has commenced.
Note 9. Stockholder’s Equity and Statutory Accounting Principles
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 Commissioners (“NAIC”) statutory accounting principles as a component of prescribed or permitted practices by the State of New York.
The Company’s statutory net income (loss) for the years ended December 31, 2009, 2008 and 2007 was $22,257, ($13,112) and $19,969, respectively.
Statutory capital and surplus at December 31, 2009 and 2008 was $81,728 and $51,928, respectively. At December 31, 2009 and 2008, the Company doesn’t have any stockholder’s equity available for dividend distribution that would not require approval by the New York Insurance Department. During 2008, the Company paid $7,000 of dividends to AUSA.
The NAIC utilizes the Risk Based Capital (“RBC”) adequacy monitoring system. The RBC calculates the amount of adjusted capital that a life insurance company should hold based upon that company’s risk profile. As of December 31, 2009 and 2008, based on the RBC formula, the Company’s total adjusted capital level was well in excess of the minimum amount of capital required to avoid regulatory action.
Note 10. Reinsurance
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured life and to recover a portion of benefits paid by ceding mortality risk to other insurance enterprises or reinsurers under indemnity reinsurance agreements, primarily quota share coverage and coinsurance agreements. The maximum amount of mortality risk retained by the Company is approximately $1,000 on single and joint life policies. Effective second quarter of 2008, the Company began to recapture the majority of its life reinsurance, which is expected to be finalized in the first half of 2010.
Indemnity reinsurance agreements do not relieve the Company from its obligations to contract owners. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its reinsurers so as to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2009 and 2008, reinsurance receivables were $1,782 and $680, respectively, of which the majority related to the recapture of life reinsurance and refined calculations in conjunction with system conversions ($1,608 and $501, respectively). At December 31, 2009 and 2008, these reinsurance receivables were primarily from Swiss Re, Lincoln National Life Insurance Company, Reinsurance Group of America (“RGA”), Employers Reassurance Corporation (“ERAC”) and Munich American Reassurance Company. As of December 31, 2009, the Company held collateral under reinsurance agreements in the form of letters of credit and funds withheld totaling $260 that can be drawn upon for delinquent reinsurance receivables.

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At December 31, 2009, the Company had the following life insurance inforce:
                                         
                                    Percentage
            Ceded to   Assumed           of amount
    Gross   other   from other   Net   assumed to
    amount   companies   companies   amount   net
Life insurance inforce
  $ 429,011     $ 49,966     $ 1,175     $ 380,220       0.31 %
In addition, the Company seeks to limit its exposure to guaranteed benefit features contained in certain variable annuity contracts. Specifically, the Company reinsures certain GMIB and GMDB provisions to the extent reinsurance capacity is available in the marketplace. As of December 31, 2009, 58% and 15% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. As of December 31, 2008, 59% and 7% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.
Note 11. Related Party Transactions
As of December 31, 2009, the Company had the following related party agreements in effect:
The Company is party to a common cost allocation service agreement between AUSA companies in which various affiliated companies may perform specified administrative functions in connection with the operation of the Company, in consideration of reimbursement of actual costs of services rendered. During 2009 and 2008, the Company incurred $1,868 and $732, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.
The Company is party to intercompany short-term note receivables with the parent at various times during the year. At December 31, 2009 and 2008, the Company was not party to any outstanding intercompany short-term note receivable. During 2008, the Company received $6 of interest, which was included in net investment income.
AEGON USA Realty Advisors, Inc. acts as the manager and administrator for the Company’s real property assets and mortgage loans under an administrative and advisory agreement with the Company. Charges attributable to this agreement are included in net investment income. During 2009 and 2008, the Company did not incur any charges under this agreement.
AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During 2009 and 2008, the Company incurred $196 and $197, respectively, in expenses under this agreement. Charges attributable to this agreement are included in net investment income.
Transamerica Capital, Inc. provides wholesaling distribution services for the Company under a distribution agreement. During 2009 and 2008, the Company incurred $35 and $154, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.
Transamerica Capital, Inc. provides underwriting services for the Company under an underwriting agreement. During 2009 and 2008, the Company incurred $2,620 and $998, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.
Transamerica Asset Management, Inc. acts as the investment advisor for certain related party funds in the Company’s Separate Accounts under an administrative services agreement. Revenue attributable to this agreement is included in policy charge revenue. During 2009, the Company did not receive any revenue under this agreement. During 2008, the Company received $2 in revenue under this agreement.
The Company has a participation agreement with Transamerica Series Trust to offer certain funds in the Company’s Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said related party funds. The Company has entered into a distribution and shareholder services agreement for certain of the said funds. Revenue attributable to this agreement is included in policy charge revenue. During 2009 and 2008, the Company received $1 and $1, respectively, in revenue under this agreement.
The Company has a reinsurance agreement with Transamerica Life Insurance Company. During 2009 and 2008, the Company incurred $19 and $20, respectively, in reinsurance premium ceded expense under this agreement, respectively. There were no reinsurance recoveries on death claims incurred during 2009. During 2008, this expense was offset by $15 in reinsurance recoveries on death claims incurred.

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The Company has a service agreement with Western Reserve Life Assurance Co. of Ohio (“WRL”) whereby WRL will perform specified administrative functions in connection with the operation of the Company except to the extent that the services are performed for the Company by another party. During 2009, the Company incurred $149 in expenses under this agreement. During 2008, the Company did not incur any expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.
The Company is party to the purchasing of investments between various affiliated companies. The investments are purchased at fair value and are included in fixed maturity available-for-sale securities in the Balance Sheets. During 2009, the Company did not purchase any investments from affiliates. During 2008, the Company purchased $5,332 of fixed maturity available-for-sale securities from an affiliated company.
While management believes that the service agreements referenced above are calculated on a reasonable basis, they may not necessarily be indicative of the costs that would have been incurred with an unrelated third party. Affiliated agreements generally contain reciprocal indemnity provisions pertaining to each party’s representations and contractual obligations thereunder.
Prior to December 28, 2007, the Company had the following affiliated agreements in effect:
The Company and Merrill Lynch Insurance Group, Inc. (“MLIG”) were parties to a service agreement whereby MLIG agreed to provide certain accounting, data processing, legal, actuarial, management, advertising and other services to the Company. Expenses incurred by MLIG in relation to this service agreement were reimbursed by the Company on an allocated cost basis. Charges allocated to the Company by MLIG pursuant to the agreement were $3,369 for 2007. Charges attributable to this agreement were included in insurance expenses and taxes, except for investment related expenses, which were included in net investment income. The Company was allocated interest expense on its accounts payable to MLIG that approximates the daily federal funds rate. Total intercompany interest incurred was $74 for 2007. Intercompany interest was included in net investment income.
The Company had a general agency agreement with Merrill Lynch Life Agency Inc. (“MLLA”) whereby registered representatives of Merrill Lynch, Pierce, Fenner & Smith, Incorporated, who are the Company’s licensed insurance agents, solicit applications for contracts to be issued by the Company. MLLA was paid commissions for the contracts sold by such agents. Commissions paid to MLLA were $2,295 for 2007. Certain commissions were capitalized as DAC and were being amortized in accordance with the accounting policy discussed in Note 6. Charges attributable to this agreement were included in insurance expenses and taxes, net of amounts capitalized.
MLIG had entered into agreements with i) Roszel Advisors, LLC (“Roszel”), a subsidiary of MLIG, with respect to administrative services for the MLIG Variable Insurance Trust (“the Trust”) and ii) the former Merrill Lynch Investment Managers, L.P. (“MLIM”), now BlackRock, Inc, with respect to administrative services for the Merrill Lynch Series Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Mercury Variable Trust, (collectively, “the Funds”). Certain Separate Accounts of the Company may invest in the various mutual fund portfolios of the Trust and the Funds in connection with the variable life insurance and annuity contracts the Company had inforce. Under these agreements, Roszel and MLIM pay MLIG an amount equal to a percentage of the assets invested in the Trust and the Funds through the Separate Accounts. Revenue attributable to these agreements is included in policy charge revenue. The Company received from MLIG its allocable share of such compensation from Roszel in the amount of $198 during 2007.
Note 12. Commitments and Contingencies
State insurance laws generally require that all life insurers who are licensed to transact business within a state become members of the state’s life insurance guaranty association. These associations have been established for the protection of contract owners from loss (within specified limits) as a result of the insolvency of an insurer. At the time an insolvency occurs, the guaranty association assesses the remaining members of the association an amount sufficient to satisfy the insolvent insurer’s contract owner obligations (within specified limits). The Company has utilized public information to estimate what future assessments it will incur as a result of insolvencies. At December 31, 2009 the Company’s estimated liability for future guaranty fund assessments was $1. There was no estimated liability for future guaranty fund assessments at December 31, 2008. If future insolvencies occur, the Company’s estimated liability may not be sufficient to fund these insolvencies and the estimated liability may need to be adjusted. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability appropriately.

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In the normal course of business, the Company is subject to various claims and assessments. Management believes the settlement of these matters would not have a material effect on the financial position, results of operations or cash flows of the Company.
Note 13. Segment Information
In reporting to management, the Company’s operating results are categorized into two business segments: Annuity and Life Insurance. The Company’s Annuity segment consists of variable annuities and interest-sensitive annuities. The Company’s Life Insurance segment consists of variable life insurance products and interest-sensitive life insurance products. The accounting policies of the business segments are the same as those for the Company’s financial statements included herein. All revenue and expense transactions are recorded at the product level and accumulated at the business segment level for review by management. The “Other” category, presented in the following segment financial information, represents net revenues and net earnings on invested assets that do not support annuity or life insurance contract owner liabilities. Subsequent to the acquisition, management no longer considers “Other” a category for segment reporting purposes. It is impracticable to restate the prior period segment information as well as disclosing the information under both the old basis and the new basis of reporting. Therefore, the predecessor information is shown under the old basis, three segments — annuity, life insurance and other, while the successor information is shown under the new basis, two segments — annuity and life insurance.
The following tables summarize each business segment’s contribution to select Statements of Income categories for the years ended December 31.
                         
    Successor
    2009
            Life    
    Annuity   Insurance   Total
Net revenues (a)
  $ 9,306     $ 5,808     $ 15,114  
 
                       
Policy benefits (net of reinsurance)
    1,888       1,390       3,278  
 
                       
Federal income tax expense
    99       638       737  
 
                       
Net income (loss)
    (7,650 )     1,469       (6,181 )
                         
    Successor
    2008
            Life    
    Annuity   Insurance   Total
Net revenues (a)
  $ 15,527     $ 8,672     $ 24,199  
 
                       
Policy benefits (net of reinsurance)
    972       1,653       2,625  
 
                       
Federal income tax expense (benefit)
    (2,997 )     533       (2,464 )
 
                       
Net income (loss)
    (3,996 )     1,783       (2,213 )

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    Predecessor
    2007
            Life        
    Annuity   Insurance   Other   Total
Net revenues (a)
  $ 16,130     $ 7,252     $ 2,144     $ 25,526  
 
                               
Policy benefits (net of reinsurance)
    (124 )     2,193             2,069  
 
                               
Federal income tax expense
    3,199       898       751       4,848  
 
                               
Net income
    7,278       1,940       1,393       10,611  
 
(a)   Net revenues include total revenues net of interest credited to policyholder liabilities.
The following tables represent select Balance Sheet information at December 31:
                 
            Total  
    Total     Policyholder  
    Assets     Liabilities  
2009
               
Annuity
  $ 622,440     $ 74,177  
Life Insurance
    287,310       71,556  
 
           
Total
  $ 909,750     $ 145,733  
 
           
 
               
2008
               
Annuity
  $ 550,783     $ 80,497  
Life Insurance
    319,057       76,533  
 
           
Total
  $ 869,840     $ 157,030  
 
           

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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
 
(Registrant)
 
Date: March 25, 2010   By: *
 
      James D. Purvis
Vice President, Treasurer, and Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

         
Signatures   Title   Date
 
       
*
 
Lon J. Olejniczak
  Director and President   March 25, 2010
*
 
William Brown, Jr.
  Director   March 25, 2010
*
 
William L. Busler
  Director   March 25, 2010
*
 
Frank A. Camp
  Director and Secretary   March 25, 2010
*
 
Robert R. Frederick
  Director and Senior Vice President   March 25, 2010
*
 
Steven E. Frushtick
  Director   March 25, 2010
*
 
John T. Mallett
  Director and Vice President   March 25, 2010
*
 
Ronald F. Mosher
  Director   March 25, 2010
*
 
Cornelius H. Verhagen
  Director   March 25, 2010
*
 
Ronald L. Ziegler
  Director and Senior Vice President   March 25, 2010
*
 
James D. Purvis
  Vice President, Treasurer, and Chief Financial Officer   March 25, 2010
*
 
Eric J. Martin
  Vice President and Corporate Controller   March 25, 2010
/s/ Darin D. Smith
 
Darin D. Smith
  Vice President and Assistant Secretary   March 25, 2010
 
*By:   Darin D. Smith — Attorney-in-Fact pursuant to Powers of Attorney.

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     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

 
No annual report covering the Registrant’s last fiscal year or proxy
material has been or will be sent to Registrant’s security holder

82


 

     EXHIBIT INDEX

         
Exhibit No.   Description   Location

 
 
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.
 

E-1


 

         
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
  Incorporated 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.
 

E-2


 

         
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.
 

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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 the Registrant’s registration statement on Form S-1, File No. 33-60288, filed March 29, 1995.
 
10.12   Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc.   Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, File No. 33-34562, filed January 4, 2008.
 
10.13   Non-Affiliated Broker-Dealer Wholesaling Agreement between ML Life Insurance Company of New York, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital, Inc.   Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 27, 2008.
 
 
10.14   Selling Agreement between ML Life Insurance Company of New York, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc.   Incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 27, 2008.
 
 
10.15   Keep Well Agreement between AEGON USA And ML Life Insurance Company of New York   Incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 27, 2008.
 
 
10.16   Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc.   Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, File No. 33-34562, filed August 17, 2007.
 
10.17   First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc.   Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, File No. 33-34562, filed January 4, 2008.
 
10.18   Principal Underwriting Agreement between Transamerica Capital, Inc. and ML Life Insurance Company of New York.   Incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, filed March 26, 2009.
 
24.1   Powers of Attorney.   Exhibit 24.1
 
31.1   Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).   Exhibit 31.1
 
31.2   Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).   Exhibit 31.2
 
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.   Exhibit 32.1
 
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.   Exhibit 32.2

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EXHIBIT INDEX
 
24.1   Powers of Attorney
 
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.