<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission File Nos. 33-34562; 33-60288
ML LIFE INSURANCE COMPANY OF NEW YORK
(Exact name of Registrant as specified in its charter)
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New York 16-1020455
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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100 Church Street, 11th Floor
New York, New York 10080-6511
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(Address of Principal Executive Offices)
1 (212) 602-8250
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(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 whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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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/
APPLICABLE ONLY TO CORPORATE REGISTRANTS
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
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DOCUMENTS INCORPORATED BY REFERENCE
Preliminary Prospectus included in Post-Effective Amendment No. 4 to
the Registrant's registration statement on Form S-1, filed March 29, 1995,
pursuant to the Securities Act of 1933, File No. 33-60288 -- incorporated by
reference into Parts I and II of this report on Form 10-K; and Exhibits.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)
(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE> 2
PART I
Item 1. Business.
The Registrant is an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc., a corporation whose common stock is traded on the New York Stock
Exchange. The information set forth under the caption "A. History and
Business" in the preliminary prospectus contained in Post-Effective No. 4 to
Registrant's registration statement, filed March 29, 1995, pursuant to the
Securities Act of 1933, File No. 33-60288 (the "Prospectus"), is incorporated
herein by reference.
Item 2. Properties.
The information set forth under the caption "J. Properties" in the
Prospectus is incorporated herein by reference.
Item 3. Legal Proceedings.
The information set forth under the caption "Legal Proceedings" in the
Prospectus is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
Information called for by this item is omitted pursuant to General
Instruction J. of Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Registrant is a wholly-owned subsidiary of Merrill Lynch Insurance
Group, Inc., which is the sole record holder of Registrant's shares. Therefore,
there is no public trading market for Registrant's common stock. The Registrant
has declared no cash dividends on its 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, the Registrant's ability to pay
extraordinary dividends on its common stock is restricted. See Note 6 to the
Registrant's financial statements.
Item 6. Selected Financial Data.
Information called for by this item is omitted pursuant to General
Instruction J. of Form 10-K.
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Item 7. Management's Narrative Analysis of Results of
Operations.
The information set forth under the sub-caption "Results of Operations"
under the caption "C. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Prospectus is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements of Registrant are set forth in Part IV hereof
and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
Information called for by items 10 through 13 of this part is omitted
pursuant to General Instruction J. of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Financial Statements and Exhibits.
(1) The following financial statements of the Registrant are
filed as part of this report:
a. Independent Auditors' Report dated February 27, 1995.
b. Balance Sheets at December 31, 1994 and 1993.
c. Statements of Earnings for the Years Ended December
31, 1994, 1993 and 1992.
d. Statements of Stockholder's Equity for the Years
Ended December 31, 1994, 1993 and 1992.
e. Statements of Cash Flows for the Years Ended December
31, 1994, 1993 and 1992.
f. Notes to Financial Statements for the Years Ended
December 31, 1994, 1993 and 1992.
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(2) The following exhibits are filed as part of this report as
indicated below:
3.1 Certificate of Amendment and Restatement of Charter
of Royal Tandem Life Insurance Company.
(Incorporated by reference to Exhibit 3(a) to the
Registrant's registration statement on Form S-1,
File No. 33-34562, filed April 26, 1990.)
3.2 By-Laws of Royal Tandem Life Insurance Company.
(Incorporated by reference to Exhibit 3(b) to the
Registrant's registration statement on Form S-1,
File No. 33-34562, filed April 26, 1990.)
3.3 Certificate of Amendment of the Charter of ML Life
Insurance Company of New York. (Incorporated by
reference to Exhibit 3(c) to Post-Effective
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed
March 30, 1992.)
3.4 By-Laws of ML Life Insurance Company of New York.
(Incorporated by reference to Exhibit 3(d) to Post-
Effective Amendment No. 3 to the Registrant's
registration statement on Form S-1, File No.
33-34562, filed March 30, 1992.)
4.1 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
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<PAGE> 5
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed
March 30, 1992.)
4.6 IRA Endorsement, MLNY009 (Incorporated by reference
to Exhibit 4(d)(2) to Post-Effective Amendment No.
1 to the Registrant's registration statement on
Form S-1, File No. 33-60288, filed March 31, 1994).
4.7 Modified Guaranteed Annuity Contract
MLNY-AY-991/94. (Incorporated by reference to
Exhibit 4(a)(2) to Post-Effective Amendment No. 3
to the Registrant's registration statement on Form
S-1, File No. 33- 60288, filed December 7, 1994).
4.8 Qualified Retirement Plan Endorsement
MLNY-AYQ-991/94. (Incorporation by reference to
Exhibit 4(c)(2) to Post-Effective Amendment No. 3
to the Registrant's registration statement on Form
S-1, File No. 33- 60288, filed December 7, 1994).
10.1 General Agency Agreement between Royal Tandem Life
Insurance Company and Merrill Lynch Life Agency
Inc. (Incorporated by reference to Exhibit 10(a)
to Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-34562, filed October 16, 1990.)
10.2 Investment Management Agreement by and between
Royal Tandem Life Insurance Company and Equitable
Capital Management Corporation. (Incorporated by
reference to Exhibit 10(b) to Pre-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed
October 16, 1990.)
10.3 Shareholders' Agreement by and among The Equitable
Life Assurance Society of the United States and
Merrill Lynch & Co., Inc. and Tandem Financial
Group, Inc. (Incorporated by reference to Exhibit
10(c) to Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33- 34562, filed October 16, 1990.)
10.4 Service Agreement by and between Royal Tandem Life
Insurance Company and Tandem Financial Group, Inc.
(Incorporated by reference to Exhibit 10(d) to
Pre-Effective Amendment No. 1 to the Registrant's
registration statement on
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<PAGE> 6
Form S-1, File No. 33-34562, filed October 16,
1990.)
10.5 Service Agreement by and between Tandem Financial
Group, Inc. and Merrill Lynch & Co., Inc.
(Incorporated by reference to Exhibit 10(e) to
Pre-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-34562, filed October 16, 1990.)
10.6 Form of Investment Management Agreement by and
between Royal Tandem Life Insurance Company and
Merrill Lynch Asset Management, Inc. (Incorporated
by reference to Exhibit 10(f) to Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed
March 7, 1991.)
10.7 Assumption Reinsurance Agreement between Merrill
Lynch Life Insurance Company, Tandem Insurance
Group, Inc. and Royal Tandem Life Insurance Company
and Family Life Insurance Company. (Incorporated
by reference to Exhibit 10(g) to Post-Effective
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-34562, filed
March 30, 1992.)
10.8 Indemnity Agreement between ML Life Insurance
Company of New York and Merrill Lynch Life Agency,
Inc. (Incorporated by reference to Exhibit 10(h)
to Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S-1,
File No. 33-34562, filed March 30, 1992.)
10.9 Amended General Agency Agreement between ML Life
Insurance Company of New York and Merrill Lynch
Life Agency, Inc. (Incorporated by reference to
Exhibit 10(i) to Post-Effective Amendment No. 3 to
the Registrant's registration statement on Form
S-1, File No. 33-34562, filed March 30, 1992.)
10.10 Amended Management Agreement between ML Life
Insurance Company of New York and Merrill Lynch
Asset Management, Inc. (Incorporated by reference
to Exhibit 10(j) to the Registrant's registration
statement on Form S-1, File No. 33-60288, filed
March 30, 1993.)
10.11 Mortgage Loan Servicing Agreement between ML Life
Insurance Company of New York and Merrill
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<PAGE> 7
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.)
24.1 Power of attorney of Frederick J.C. Butler.
(Incorporated by reference to Exhibit 24(a) to
Post- Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.2 Power of attorney of Michael P. Cogswell.
(Incorporated by reference to Exhibit 24(b) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.3 Power of attorney of Sandra K. Cox. (Incorporated
by reference to Exhibit 24(c) to Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60288, filed
March 31, 1994.)
24.4 Power of attorney of Joseph E. Crowne.
(Incorporated by reference to Exhibit 24(d) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.5 Power of attorney of David M. Dunford.
(Incorporated by reference to Exhibit 24(e) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.6 Power of attorney of John C.R. Hele. (Incorporated
by reference to Exhibit 24(f) to Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60288, filed
March 31, 1994.)
24.7 Power of attorney of Robert L. Israeloff.
(Incorporated by reference to Exhibit 24(g) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.8 Power of attorney of Allen N. Jones. (Incorporated
by reference to Exhibit 24(h) to Post Effective
Amendment No. 1 to the
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<PAGE> 8
Registrant's registration statement on Form S-1,
File No. 33-60288, filed March 31, 1994.)
24.9 Power of attorney of Cynthia L. Kahn.
(Incorporated by reference to Exhibit 24(i) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.10 Power of attorney of Robert A. King. (Incorporated
by reference to Exhibit 24(j) to Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60288, filed
March 31, 1994.)
24.11 Power of attorney of Irving M. Pollack.
(Incorporated by reference to Exhibit 24(k) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.12 Power of attorney of Barry G. Skolnick.
(Incorporated by reference to Exhibit 24(l) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.13 Power of attorney of William A. Wilde.
(Incorporated by reference to Exhibit 24(m) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
24.14 Power of attorney of Anthony J. Vespa.
(Incorporated by reference to Exhibit 24(n) to
Post-Effective Amendment No. 1 to the Registrant's
registration statement on Form S-1, File No.
33-60288, filed March 31, 1994.)
28.1 Preliminary prospectus contained in Post-Effective
Amendment No. 4 to the Registrant's registration
statement, filed on March 29, 1995, pursuant to the
Securities Act of 1933, File No. 33-60288.
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(3) Not applicable.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter
of the fiscal year ended December 31, 1994.
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<PAGE> 10
INDEX TO FINANCIAL STATEMENTS
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Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . .
Statements of Earnings for the Years Ended December 31,
1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Stockholder's Equity for the Years Ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements for the Years Ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . .
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
ML Life Insurance Company of New York:
We have audited the accompanying balance sheets of ML Life
Insurance Company of New York (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Insurance Group, Inc., as of December
31, 1994 and 1993 and the related statements of earnings,
stockholder's equity and cash flows for each of the three years
in the period ended December 31, 1994. 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1994 and 1993 and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the
Company changed its method of accounting for certain investments
in debt and equity securities to conform with Statement of
Accounting Standards No. 115.
/s/Deloitte & Touche, LLP
February 27, 1995
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Dollars in Thousands)
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ASSETS 1994 1993
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INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $297,551; 1993 - $442,008) $ 286,078 $ 458,916
Equity securities available for sale, at estimated fair value
(cost: 1994 - $3,987; 1993 - $8,387) 4,301 7,195
Mortgage loans on real estate 7,941 17,627
Policy loans on insurance contracts 77,827 73,380
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Total Investments 376,147 557,118
CASH AND CASH EQUIVALENTS 20,915 27,464
ACCRUED INVESTMENT INCOME 7,354 10,164
DEFERRED POLICY ACQUISITION COSTS 31,031 24,036
FEDERAL INCOME TAXES - DEFERRED 9,749 10,468
REINSURANCE RECEIVABLES 605 1,685
OTHER ASSETS 3,265 3,765
SEPARATE ACCOUNTS ASSETS 471,656 410,613
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TOTAL ASSETS $ 920,722 $1,045,313
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</TABLE>
See notes to financial statements.
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LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
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LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 340,882 $ 523,382
Claims and claims settlement expenses 4,314 5,614
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Total policy liabilities and accruals 345,196 528,996
OTHER POLICYHOLDER FUNDS 1,532 1,200
OTHER LIABILITIES 2,113 5,641
FEDERAL INCOME TAXES - CURRENT 170 864
PAYABLE TO AFFILIATES - NET 4,242 5,223
SEPARATE ACCOUNTS LIABILITIES 471,656 410,613
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Total Liabilities 824,909 952,537
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STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 220,000 shares
authorized, issued and outstanding 2,200 2,200
Additional paid-in capital 83,006 83,006
Retained earnings 13,970 8,497
Net unrealized investment loss (3,363) (927)
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Total Stockholder's Equity 95,813 92,776
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 920,722 $1,045,313
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</TABLE>
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ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
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1994 1993 1992
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REVENUES:
Investment revenue:
Net investment income $ 32,679 $ 50,661 $ 65,378
Net realized investment gains (losses) (2,218) 6,131 (434)
Policy charge revenue 10,339 8,387 7,683
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Total Revenues 40,800 65,179 72,627
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account
balances 22,691 44,425 57,812
Market value adjustment expense 132 642 25
Policy benefits (net of reinsurance recoveries: 1994 - $715
1993 - $2,192; 1992 - $953) 1,620 1,729 594
Reinsurance premium ceded 1,240 1,182 1,070
Amortization of deferred policy acquisition costs 4,141 9,523 8,219
Insurance expenses and taxes 3,685 5,278 4,539
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Total Benefits and Expenses 33,509 62,779 72,259
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Earnings Before Federal Income
Tax Provision 7,291 2,400 368
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FEDERAL INCOME TAX PROVISION (BENEFIT):
Current (213) 2,842 2,373
Deferred 2,031 (2,250) (2,196)
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Total Federal Income Tax Provision 1,818 592 177
------------ ------------ ------------
NET EARNINGS $ 5,473 $ 1,808 $ 191
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
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Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
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BALANCE, JANUARY 1, 1992 $ 2,200 $ 83,006 $ 6,498 $ (1,073) $ 90,631
Net earnings 191 191
Net unrealized investment gain 1,425 1,425
----------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 1992 2,200 83,006 6,689 352 92,247
Net earnings 1,808 1,808
Net unrealized investment loss (1,279) (1,279)
----------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 1993 2,200 83,006 8,497 ( 927) 92,776
Net earnings 5,473 5,473
Net unrealized investment loss (2,436) (2,436)
----------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 1994 $ 2,200 $ 83,006 $ 13,970 $ (3,363) $ 95,813
=========== =========== =========== =========== =============
</TABLE>
See notes to financial statements.
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
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OPERATING ACTIVITIES:
Net earnings $ 5,473 $ 1,808 $ 191
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 4,142 9,523 8,219
Capitalization of policy acquisition costs (7,142) (7,252) (2,539)
Amortization of fixed maturity securities (312) 918 366
Net realized investment (gains) losses 2,218 (6,131) 434
Interest credited to policyholders' account balances 22,691 44,425 57,812
Provision (benefit) for deferred Federal
income tax 2,031 (2,250) (2,196)
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 2,810 3,857 (27)
Policy liabilities and accruals (1,300) 2,273 448
Federal income taxes - current (694) 173 873
Other policyholder funds 332 1,129 63
Payable to affiliates - net (981) (1,923) 10,149
Policy loans (4,447) (7,343) (12,342)
Other, net (1,947) 2,644 (2,501)
------------ ------------ ------------
by operating activities 22,874 41,851 58,950
------------ ------------ ------------
INVESTING ACTIVITIES:
Fixed maturity securities sold 123,518 166,033 177,835
Fixed maturity securities matured 92,499 280,484 195,691
Fixed maturity securities purchased (73,016) (251,522) (323,172)
Equity securities available for sale purchased (29) (109) (665)
Equity securities available for sale sold 4,665 2,885 11,886
Mortgage loans on real estate principal payments received 8,998 4,425 1,000
Mortgage loans on real estate acquired 0 0 (124)
------------ ------------ ------------
Net cash and cash equivalents provided by
investing activities 156,635 202,196 62,451
------------ ------------ ------------
</TABLE>
(Continued)
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Concluded) (Dollars In Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
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FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 56,297 $ 33,953 $ 5,985
Withdrawals (net of transfers to/from Separate Accounts) (242,355) (291,658) (105,082)
------------ ------------ ------------
Net cash and cash equivalents used
by financing activities (186,058) (257,705) (99,097)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,549) (13,658) 22,304
CASH AND CASH EQUIVALENTS:
Beginning of year 27,464 41,122 18,818
------------ ------------ ------------
End of year $ 20,915 $ 27,464 $ 41,122
============ ============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 482 $ 2,668 $ 1,500
Intercompany interest $ 352 $ 397 $ 801
</TABLE>
See notes to financial statements.
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
=================================================================
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: ML Life Insurance Company of New York (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co.").
The Company sells non-participating life insurance and annuity
products which comprise one business segment. The primary
products that the Company currently markets are immediate
annuities, market value adjusted annuities, variable life
insurance and variable annuities. The Company is licensed to
sell insurance in nine states, however, it currently limits its
marketing activities to the State of New York. The Company
markets its products solely through the retail network of
Merrill Lynch, Pierce, Fenner & Smith, Inc. ("MLPF&S"), a
wholly owned subsidiary of Merrill Lynch & Co..
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles for
stock life insurance companies.
Revenue Recognition: Revenues for the Company's interest
sensitive life, interest sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest crediting rates for
the Company's fixed rate products are as follows:
Interest sensitive life products 4.00% - 5.10%
Interest sensitive deferred annuities 4.00% - 8.39%
Immediate annuities 4.00% - 10.0%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are
unreported as of the valuation date.
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 reinsurance
to other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
Indemnity reinsurance agreements do not relieve the Company
from its obligations to policyholders. 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
<PAGE>
insolvencies. The Company
holds collateral under reinsurance agreements in the form of
letters of credit and amounts withheld totaling $236 that can
be drawn upon for delinquent reinsurance recoverables.
As of December 31, 1994, the Company had life insurance in-
force which was ceded to other life insurance companies of
$152,508.
Deferred Policy Acquisition Costs: Policy acquisition costs
for life and 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.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, which are primarily
related to and vary with the production of new business.
Certain costs and expenses reported in the statements of
earnings are net of amounts deferred. Policy acquisition costs
can also arise from the acquisition or reinsurance of existing
in-force policies from other insurers. These costs include
ceding commissions and professional fees related to the
reinsurance assumed.
Included in deferred policy acquisition costs are those costs
related to the acquisition by assumption reinsurance of
insurance contracts from unaffiliated insurers. The deferred
costs are amortized in proportion to the future gross profits
over the anticipated life of the acquired insurance contracts
utilizing an interest methodology.
In December 1990, the Company entered into an assumption
reinsurance agreement with an unaffiliated insurer. The
acquisition costs relating to this agreement are being
amortized over a twenty-year period using an effective interest
rate of 9.01%. This reinsurance agreement provides for payment
of contingent ceding commissions based upon the persistency and
mortality experience of the insurance contracts assumed. Any
payments made for the contingent ceding commissions will be
capitalized and amortized using an identical methodology as
that used for the initial acquisition costs. The following is
a reconciliation of the acquisition costs for the reinsurance
transaction for the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance $ 15,614 $ 16,925 $ 18,193
Capitalized amounts 1,447 843 533
Interest accrued 1,407 1,478 1,865
Amortization (3,545) (3,632) (3,666)
---------- ---------- ----------
Ending balance $ 14,923 $ 15,614 $ 16,925
========== ========== ==========
</TABLE>
The following table presents the expected amortization of these
deferred acquisition costs over the next five years. The
amortization may be adjusted based on periodic evaluation of
the expected gross profits on the reinsured policies.
1995 $2,160
1996 1,944
1997 1,512
1998 1,075
1999 1,017
Investments: Effective December 31, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). In compliance with SFAS No. 115,
the Company classified its investments in fixed maturity
securities and equity securities in the available for sale
category. These securities may be sold for the Company's
general liquidity needs, asset/liability management strategy,
credit dispositions and investment opportunities. These
securities are carried at estimated fair value with unrealized
gains and losses included in stockholder's equity. If
<PAGE>
a decline
in value of a security is determined by management to be other
than temporary, the carrying value is adjusted to the estimated
fair value at the date of this determination and recorded as
net realized investment gains (losses).
SFAS No. 115 permits fixed maturity securities to be carried at
amortized cost if the Company has both the ability and positive
intent to hold these securities to maturity. The Company has
determined that it can not guarantee that it will not have the
need or opportunity to sell any particular security in its
investment holdings. As such, the Company did not utilize this
classification as of December 31, 1994 or 1993. Additionally,
SFAS No. 115 requires that securities held for short-term sale
are to be carried at fair value with the change in fair value
being recorded as a component of earnings. The Company had no
securities at December 31, 1994 and 1993 that were held for this
purpose.
In compliance with a Securities and Exchange Commissions
("SEC") staff announcement, the Company has recorded certain
adjustments to deferred policy acquisition costs and
policyholders' account balances in conjunction with its
adoption of SFAS No. 115. The SEC requires that companies
adjust those assets and liabilities that would have been
adjusted had the unrealized investment gains or losses from
securities classified as available for sale actually been
realized with corresponding credits or charges reported
directly to shareholder's equity. The following reconciles the
net unrealized investment loss as of December 31,:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale $(11,473) $ 16,908
Equity securities available for sale 314 (1,192)
Deferred policy acquisition costs 3,177 (818)
Federal income taxes - deferred 1,812 502
---------- ----------
(6,170) 15,400
---------- ----------
Liabilities:
Policyholders' account balances 2,807 (16,327)
---------- ----------
Stockholder's equity:
Net unrealized investment loss $ (3,363) $ (927)
========== ==========
</TABLE>
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accrued to
the maturity date and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of identified cost.
Fixed maturity securities may contain securities which are
considered high yield. The Company defines high yield fixed
maturity securities as unsecured corporate debt obligations
which do not have a rating equivalent to Standard and Poor's
(or similar rating agency) BBB or higher, and are not
guaranteed by an agency of the federal government. Probable
losses are recognized in the period that a decline in value is
determined to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal
balances net of valuation allowances. Such valuation
allowances are based on the decline in value expected by
management to be realized on in-substance foreclosures of
mortgage loans and on mortgage loans which management believes
may not be collectible in full. In establishing valuation
allowances management considers, among other things, the
estimated fair value of the underlying collateral.
The Company recognizes income from mortgage loans on real
estate based on the cash payment interest rate of the loan,
which may be different from the accrual interest rate of the
loan for certain outstanding mortgage loans. The Company will
recognize a realized gain at the date of the satisfaction of
the loan at contractual terms
<PAGE>
for loans where there is a
difference between the cash payment interest rate and the
accrual interest rate. For all loans the Company stops accruing
income when an interest payment default either occurs or is
probable.
The Company has previously made commercial mortgage loans
collateralized by real estate. The return on and the ultimate
recovery of these loans and investments are generally dependent
on the successful operation, sale or refinancing of the real
estate. In many parts of the country, current real estate
markets are characterized by vacancy rates in excess of
historical averages, a lack of ready sources or credit for real
estate financing, reduced or declining real estate values, and
similar factors.
The Company employs a system to monitor the effects of current
and expected market conditions and other factors when assessing
the collectability of mortgage loans. When, in management's
judgment, these assets are impaired, appropriate losses are
recorded. Such estimates necessarily include assumptions,
which may include anticipated improvements in selected market
conditions for real estate, which may or may not occur. The
more significant assumptions management considers involve
estimates of the following: lease, absorption and sales rates;
real estate values and rates of return; operating expenses;
inflation; and sufficiency of any collateral independent of the
real estate. Management believes that the carrying value
approximates the fair value of these investments.
During 1993 the Financial Accounting Standards Board issued
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114") which was amended during 1994 by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". SFAS No. 114, as amended,
requires that for impaired loans, the impairment shall be
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or the
fair value of the collateral. Impairments of mortgage loans on
real estate are established as valuation allowances and
recorded to net realized investment gains or losses. SFAS No.
114, as amended, must be adopted for fiscal years beginning
after December 15, 1994. The Company has decided not to early
adopt this statement. The Company estimates that the impact on
both financial position and earnings from adopting SFAS No.
114, as amended, would be immaterial.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Federal Income Taxes: The Company accounts for Federal income
taxes in compliance with SFAS No. 109 "Accounting for Income
Taxes" ("SFAS No. 109") which requires an asset and liability
method in recording income taxes on all transactions that have
been recognized in the financial statements. SFAS No. 109
provides that deferred taxes be adjusted to reflect tax rates
at which future tax liabilities or assets are expected to be
settled or realized.
Separate Accounts: The Separate Accounts are established in
conformity with New York insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to General Account
claims only to the extent the value of such assets exceeds the
Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing
net deposits and accumulated net investment earnings less fees,
held for the benefit of policyholders, are shown as separate
captions in the balance sheets.
Postretirement Benefits Other Than Pensions: The Company
accounts for postretirement benefits in compliance with SFAS
No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS No. 106"). SFAS No. 106 requires
the accrual of postretirement benefits (such as health care
benefits) during the years an employee provides service.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments which approximates
the estimated fair value of these financial instruments as of
December 31, are:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale (1) $ 286,078 $ 458,916
Equity securities available for sale (1) 4,301 7,195
Mortgage loans on real estate (2) 7,941 17,627
Policy loans on insurance contracts (3) 77,827 73,380
Cash and cash equivalents (4) 20,915 27,464
Separate accounts assets (6) 471,656 410,613
---------- ----------
Total financial instruments recorded as assets $ 868,718 $ 995,195
========== ==========
Liabilities:
Payable to affiliates - net (5) $ 4,242 $ 5,223
---------- ----------
Total financial instruments recorded as liabilities $ 4,242 $ 5,223
========== ==========
</TABLE>
(1) For publicly traded securities, the estimated fair value
is determined using quoted market prices. For securities
without a readily ascertainable market value, the Company
has determined an estimated fair value using a discounted
cash flow approach, including provision for credit risk,
based upon the assumption that such securities will be
held to maturity. Such estimated fair values do not
necessarily represent the values for which these
securities could have been sold at the dates of the
balance sheets. At December 31, 1994 and 1993,
respectively, securities without a readily ascertainable
market value, having an amortized cost of approximately
$81,899 and $125,783, had an estimated fair value of
approximately $82,470 and $131,917, respectively.
(2) The estimated fair value of mortgage loans on real estate
approximates the carrying value. See Note 1 for a
discussion of the Company's valuation process.
(3) The Company estimates the fair market 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.
(4) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(5) The fair value of the Company's payables to affiliates is
estimated at carrying value. These borrowings are payable
on demand and bear a variable interest rate based on
LIBOR.
(6) Assets held in the Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3: INVESTMENTS
The amortized cost (cost for equity securities) and estimated
fair value of investments in fixed maturity securities and
equity securities as of December 31 are:
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 213,488 $ 1,764 $ 9,393 $ 205,859
Mortgage-backed securities 79,911 588 4,184 76,315
U.S. government and agencies 4,152 177 425 3,904
----------- ----------- ----------- -----------
Total fixed maturity securities
available for sale $ 297,551 $ 2,529 $ 14,002 $ 286,078
=========== =========== =========== ===========
Equity securities available for sale:
Common stocks $ 2,281 $ 72 $ 1,165 $ 1,188
Non-redeemable preferred stocks 1,706 1,782 375 3,113
----------- ----------- ----------- -----------
Total equity securities available for sale $ 3,987 $ 1,854 $ 1,540 $ 4,301
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1993
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 284,710 $ 13,726 $ 3,204 $ 295,232
Mortgage-backed securities 149,834 6,209 216 155,827
U.S. government and agencies 3,964 349 24 4,289
Municipals 3,500 68 0 3,568
----------- ----------- ----------- -----------
Total fixed maturity securities
available for sale $ 442,008 $ 20,352 $ 3,444 $ 458,916
=========== =========== =========== ===========
Equity securities available for sale:
Common stocks $ 2,392 $ 106 $ 438 $ 2,060
Non-redeemable preferred stocks 5,995 1,002 1,862 5,135
----------- ----------- ----------- -----------
Total equity securities available for sale $ 8,387 $ 1,108 $ 2,300 $ 7,195
=========== =========== =========== ===========
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by
contractual maturity are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 15,738 $ 15,891
Due after one year through five years 93,527 92,558
Due after five years through ten years 82,820 76,448
Due after ten years 25,555 24,866
----------- -----------
217,640 209,763
Mortgage-backed securities 79,911 76,315
----------- -----------
Total fixed maturity securities available
for sale $ 297,551 $ 286,078
=========== ===========
</TABLE>
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by rating
agency equivalent are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
AAA $ 65,797 $ 62,068
AA 57,337 57,000
A 37,430 34,682
BBB 105,549 101,820
Non-investment grade 31,438 30,508
---------- ----------
$ 297,551 $ 286,078
========== ==========
</TABLE>
Proceeds, gains and losses from the sale or maturity of fixed
maturity securities available for sale and held to maturity for
the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds $ 216,017 $ 446,517 $ 373,526
Realized investment gains 6,793 4,546 7,275
Realized investment losses 8,560 438 3,206
</TABLE>
The Company had investment securities of $982 and $1,118 held
on deposit with insurance regulatory authorities at December
31, 1994 and 1993, respectively.
The Company's investment in mortgage loans on real estate
consists principally of loans collateralized by commercial real
estate. At December 31, 1994, the Company's investment in
commercial real estate mortgage loans as measured by the
outstanding principal balance are for properties located in
California ($7,477 or 78.9%) and Pennsylvania ($2,000 or
21.1%).
<PAGE>
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1994
and 1993 are shown below:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Carrying value $ 3,939 $ 4,626
Valuation allowance 1,536 848
</TABLE>
Net investment income arose from the following sources for the
years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturity securities $ 28,255 $ 45,523 $ 59,036
Equity securities available for sale 0 113 499
Mortgage loans on real estate 975 1,924 2,309
Policy loans 3,680 3,487 3,029
Cash equivalents 659 476 1,034
Other 0 0 1,310
--------- --------- ---------
Gross investment income 33,569 51,523 67,217
Less expenses (890) (862) (1,839)
--------- --------- ---------
Net investment income $ 32,679 $ 50,661 $ 65,378
========= ========= =========
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances, for the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities $ (1,767) $ 4,108 $ 4,069
Equity securities available for sale 237 2,081 (2,710)
Mortgage loans on real estate (688) (58) (1,793)
---------- ---------- ----------
Net realized investment gains (losses) $ (2,218) $ 6,131 $ (434)
========== ========== ==========
</TABLE>
The following is a reconciliation of the change in valuation
allowances which have been established to reflect other than
temporary declines in estimated fair value of the following
classifications of investments for the years ended December 31,:
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to End
of Year Operations of Year
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage loans on real estate
1994 $ 848 $ 688 $ 1,536
1993 790 58 848
1992 0 790 790
</TABLE>
The Company held investments at December 31, 1994 of $4,600
which have been non-income producing for the preceding twelve
months.
<PAGE>
The Company has restructured the terms of certain of its
investments in mortgage loans on real estate during 1993.
During 1994, the Company did not restructure any investments.
The following table provides the amortized cost less valuation
allowances immediately prior to restructuring, gross interest
income that would have been earned had the loans been current
per their original terms ("Expected Income") and gross interest
income recorded during the year ("Actual Income") and equity
interests which are received in the restructuring:
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Mortgage loans on real estate:
Amortized cost less valuation allowance $ 5,475
Expected income 442
Actual Income 411
</TABLE>
NOTE 4: FEDERAL INCOME TAXES
The Company is taxed as a life insurance company according to
the Federal Income Tax Reform Act of 1986, as amended. The
Company's tax return is not consolidated with any other entity.
The following is a reconciliation of the provision for income
taxes based on income before taxes, computed using the Federal
statutory tax rate, with the provision for income taxes for the
years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 2,552 $ 840 $ 125
Increase (decrease) in income taxes resulting from:
Federal tax rate increase 0 (227) 0
Dividend received deduction (670) 0 0
Other (64) (21) 52
---------- ---------- ----------
Federal income tax provision $ 1,818 $ 592 $ 177
========== ========== ==========
</TABLE>
The Federal statutory rate for 1994, 1993 and 1992 was 35%, 35%
and 34%, respectively.
The Company provides for deferred income taxes resulting from
temporary differences which arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 887 $ (1,184) $ (2,094)
Policyholders' account balances 833 (969) 1,700
Investment adjustments 1,117 (100) (1,093)
Other (806) 3 (709)
--------- ---------- ----------
Deferred Federal income tax
provision (benefit) $ 2,031 $ (2,250) $ (2,196)
========= ========== ==========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 9,015 $ 9,848
Net unrealized investment gain (loss) 1,812 500
Investment adjustments 4,026 5,143
---------- ----------
Total deferred tax asset 14,853 15,491
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 5,170 4,283
Other (66) 740
---------- ----------
Total deferred tax liability 5,104 5,023
---------- ----------
Net deferred tax asset $ 9,749 $ 10,468
========== ==========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
NOTE 5: RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain data processing, legal,
actuarial, management, advertising and other services to the
Company. Expenses incurred by MLIG in relation to this service
agreement are reimbursed by the Company on an allocated cost
basis. Charges billed to the Company by MLIG pursuant to the
agreement were $4,025, $5,688 and $5,403 for the years ended
December 31, 1994, 1993 and 1992 respectively. The Company is
allocated interest expense on its accounts payable to MLIG which
approximates the daily Federal funds rate. Total intercompany
interest paid was $50, $69 and $122 for 1994, 1993 and 1992,
respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM") are
parties to a service agreement whereby MLAM has agreed to provide
certain invested asset management to the Company. The Company
pays a fee to MLAM for these services through the MLIG service
agreement. Charges attributable to this agreement and allocable
to the company by MLIG were $203, $265 and $339 for the years
ended December 31, 1994, 1993 and 1992, respectively.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S who are the Company's licensed insurance agents, solicit
applications for contracts to be issued by the Company. MLLA is
paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were approximately $5,329, $4,927, and
$1,469 for 1994, 1993 and 1992, respectively. Substantially all
of these fees were capitalized as deferred policy acquisition
costs and are being amortized in accordance with the policy
discussed in Note 1.
In connection with the acquisition of a block of variable life
insurance business from Monarch Life Insurance Company ("Monarch
Life"), the Company borrowed funds from Merrill Lynch & Co. to
partially finance the transaction. As of December 31, 1994 and
1993, the outstanding balance of these loans was approximately
$4,336 and $5,550, respectively. Approximately $1,214, $1,650
and $4,600 was repaid on these loans during 1994, 1993 and 1992,
respectively. Interest was calculated on these loans at LIBOR
plus 150 basis points. Intercompany interest paid on these loans
during 1994, 1993 and 1992 was approximately $302, $328 and $679,
respectively.
During 1994, 1993 and 1992, the Company assumption reinsured
certain policies previously indemnity reinsured by the Company's
affiliate, Merrill Lynch Life Insurance Company ("MLLIC"), and
directly written by Family Life Insurance Company ("Family
Life"), a former affiliate. These transactions resulted in the
transfer of approximately $11,860 and $2,000 of policy reserves
during 1993 and 1992, respectively. During 1994 certain
<PAGE>
adjustments to the 1993 assumption reinsurance transactions
resulted in a transfer of $9,129 of policy reserves from the
Company to MLLIC.
NOTE 6: STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
At December 31, 1994 and 1993, $42,612 and $30,125, respectively,
of stockholder's equity was available for distribution to MLIG.
Notice of intention to declare a dividend must be filed with the
New York Superintendent of Insurance who may disallow the
payment. No dividends were declared or paid during 1994, 1993 and
1992. Statutory capital and surplus at December 31, 1994 and
1993, was $64,913 and $57,333, respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial statements
by charging policy acquisition costs to expense as incurred,
establishing future policy benefit reserves using different
actuarial assumptions, not providing for deferred income taxes
and valuing securities on a different basis. The Company's
statutory net income for the years ended December 31, 1994, 1993
and 1992 was $3,816, $6,515 and $10,167, respectively.
The National Association of Insurance Commissioners ("NAIC") has
developed and implemented, effective December 31, 1993, the Risk
Based Capital ("RBC") adequacy monitoring system. The RBC
calculates the amount of adjusted capital which a life insurance
company should have based upon that company's risk profile. The
NAIC has established four different levels of regulatory action
with respect to the RBC adequacy monitoring system. Each of these
levels may be triggered if an insurer's total adjusted capital is
less than a corresponding level of RBC. These levels are as
follows:
For companies with capital levels which are below 100% of
the basic RBC level (company action level) calculated for
that company, the company must submit to the domiciliary
insurance commissioner, and implement, an approved plan to
increase adjusted capital to at least 100% of the basic
RBC.
For companies with capital levels which are below 75% of
the basic RBC level calculated for that company, an
examination of the company will be conducted by the
domiciliary insurance department and as a result of the
findings of the examination, corrective orders may be
issued.
For companies with capital levels which are below 50% of
the basic RBC level (authorized control level) calculated
for that company, the domiciliary insurance commissioner
will have the authority to place the company into
conservatorship or liquidation.
For companies with capital levels which are below 35% of
the basic RBC level calculated for that company, the
domiciliary insurance commissioner will be required to
place the company into conservatorship or liquidation.
As of December 31, 1994 and 1993, based on the RBC formula, the
Company's total adjusted capital level was 344% and 245%,
respectively, of the basic RBC level.
NOTE 7: 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
policyholders 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 policyholder obligations (within specified limits).
Based upon the public information available at this time,
management believes the Company has no material financial
obligations to state guaranty associations.
<PAGE>
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 or results of operations of the Company.
* * * * * *
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 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 29, 1995 By: /s/ Joseph E. Crowne
------------------------------------
Joseph E. Crowne
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*
---------------------- Chairman of the Board, President March 29, 1995
Anthony J. Vespa and Chief Executive Officer --------------
/s/ JOSEPH E. CROWNE
---------------------- Director, Senior Vice President, March 29, 1995
Joseph E. Crowne Chief Financial Officer, Chief --------------
Actuary and Treasurer
/s/ BARRY G. SKOLNICK
---------------------- Director, Senior Vice President March 29, 1995
Barry G. Skolnick and General Counsel* --------------
*
---------------------- Director and Senior Vice March 29, 1995
David M. Dunford President --------------
*
----------------------
John C.R. Hele Director and Senior March 29, 1995
Vice President --------------
*
----------------------
Michael P. Cogswell Director, Vice March 29, 1995
President and Senior --------------
Counsel
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C>
*
--------------------- Director March 29, 1995
Frederick J.C. Butler --------------
*
--------------------- Director March 29, 1995
Robert L. Israeloff --------------
*
--------------------- Director March 29, 1995
Allen N. Jones --------------
*
--------------------- Director March 29, 1995
Cynthia L. Kahn --------------
*
--------------------- Director March 29, 1995
Robert A. King --------------
*
--------------------- Director March 29, 1995
Irving M. Pollack --------------
*
--------------------- Director March 29, 1995
William A. Wilde --------------
</TABLE>
*Signing in his own capacity and as Attorney-in-Fact.
<PAGE> 13
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.
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
3.1 Certificate of Amendment and Restatement Incorporated by reference to Exhibit 3(a)
of Charter of Royal Tandem Life Insurance to the Registrant's registration statement
Company. on Form S-1, File No. 33-34562, filed
April 26, 1990.
3.2 By-Laws of Royal Tandem Life Insurance Incorporated by reference to Exhibit 3(b)
Company. to the Registrant's registration statement
on Form S-1, File No. 33-34562, filed
April 26, 1990.
3.3 Certificate of Amendment of the Charter of Incorporated by reference to Exhibit 3(c)
ML Life Insurance Company of New York. to Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-34562, filed March
30, 1992.
3.4 By-Laws of ML Life Insurance Company of Incorporated by reference to Exhibit 3(d)
New York. to Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-34562, filed March
30, 1992.
4.1 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.
</TABLE>
- E-1 -
<PAGE> 15
<TABLE>
<S> <C> <C>
4.2 Modified Guaranteed Annuity Contract Incorporated by reference to Exhibit 4(b)
Application. to Pre-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-34562, filed October
16, 1990.
4.3 Qualified Retirement Plan Endorsement. Incorporated by reference to Exhibit 4(c)
to Pre-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-34562, filed October
16, 1990.
4.4 IRA Endorsement. Incorporated by reference to Exhibit 4(d)
to Pre-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-34562, filed October
16, 1990.
4.5 Company Name Change Endorsement. Incorporated by reference to Exhibit 4(e)
to Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-34562, filed March
30, 1992.
4.6 IRA Endorsement, MLNY009. Incorporated by reference to Exhibit
4(d)(2) to Post-Effective Amendment No. 1
to the Registrant's registration statement
on Form S-1, File No. 33-60288, filed
March 31, 1994.
4.7 Modified Guaranteed Annuity Contract MLNY- Incorporated by reference to Exhibit
AY-991/94. 4(a)(2) to Post-Effective Amendment No. 3
to the Registrant's
</TABLE>
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<PAGE> 16
<TABLE>
<S> <C> <C>
registration statement on Form S-1,
File No. 33-60288, filed December 7, 1994.
4.8 Qualified Retirement Plan Endorsement Incorporated by reference to Exhibit
MLNY-AYQ-991/94. 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 Incorporated by reference to Exhibit 10(a)
Tandem Life Insurance Company and Merrill to Pre-Effective Amendment No. 1 to the
Lynch Life Agency Inc. Registrant's registration statement on
Form S-1, File No. 33-34562, filed October
16, 1990.
10.2 Investment Management Agreement by and Incorporated by reference to Exhibit 10(b)
between Royal Tandem Life Insurance to Pre-Effective Amendment No. 1 to the
Company and Equitable Capital Management Registrant's registration statement on
Corporation. Form S-1, File No. 33-34562, filed October
16, 1990.
10.3 Shareholders' Agreement by and among The Incorporated by reference to Exhibit 10(c)
Equitable Life Assurance Society of the to Pre-Effective Amendment No. 1 to the
United States and Merrill Lynch & Co., Registrant's registration statement on
Inc. and Tandem Financial Group, Inc. Form S-1, File No. 33-34562, filed October
16, 1990.
10.4 Service Agreement by and between Royal Incorporated by reference to Exhibit 10(d)
Tandem Life Insurance Company and Tandem to Pre-Effective Amendment No. 1 to the
Financial Group, Inc. Registrant's registration statement on
Form S-1, File No. 33-34562, filed October
16, 1990.
</TABLE>
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<PAGE> 17
<TABLE>
<S> <C> <C>
10.5 Service Agreement by and between Tandem Incorporated by reference to Exhibit 10(e)
Financial Group, Inc. and Merrill Lynch & to Pre-Effective Amendment No. 1 to the
Co., Inc. Registrant's registration statement on
Form S-1, File No. 33-34562, filed October
16, 1990.
10.6 Form of Investment Management Agreement by Incorporated by reference to Exhibit 10(f)
and between Royal Tandem Life Insurance to Post-Effective Amendment No. 1 to the
Company and Merrill Lynch Asset Registrant's registration statement on
Management, Inc. Form S-1, File No. 33-34562, filed March
7, 1991.
10.7 Assumption Reinsurance Agreement between Incorporated by reference to Exhibit 10(g)
Merrill Lynch Life Insurance Company, to Post-Effective Amendment No. 3 to the
Tandem Insurance Group, Inc. and Royal Registrant's registration statement on
Tandem Life Insurance Company and Family Form S-1, File No. 33-34562, filed March
Life Insurance Company. 30, 1992.
10.8 Indemnity Agreement between ML Life Incorporated by reference to Exhibit 10(h)
Insurance Company of New York and Merrill to Post-Effective Amendment No. 3 to the
Lynch Life Agency, Inc. Registrant's registration statement on
Form S-1, File No. 33-34562, filed March
30, 1992.
10.9 Amended General Agency Agreement between Incorporated by reference to Exhibit 10(i)
ML Life Insurance Company of New York and to Post-Effective Amendment No. 3 to the
Merrill Lynch Life Agency, Inc. Registrant's registration statement on
Form S-1, File No. 33-34562, filed March
30, 1992.
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C> <C>
10.10 Amended Management Agreement between ML Incorporated by reference to Exhibit 10(j)
Life Insurance Company of New York and to the Registrant's registration statement
Merrill Lynch Asset Management, Inc. on Form S-1, File No. 33-60288, filed
March 30, 1993.
10.11 Mortgage Loan Servicing Agreement between Incorporated by reference to Exhibit 10(k)
ML Life Insurance Company of New York and to the Registrant's registration statement
Merrill Lynch & Co., Inc. on Form S-1, File No. 33-_____, filed
March 29, 1995.
25.1 Power of attorney of Frederick J.C. Incorporated by reference to Exhibit 25(a)
Butler. to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.2 Power of attorney of Michael P. Cogswell. Incorporated by reference to Exhibit 25(b)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.3 Power of attorney of Sandra K. Cox. Incorporated by reference to Exhibit 25(c)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.4 Power of attorney of Joseph E. Crowne. Incorporated by reference to Exhibit 25(d)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
</TABLE>
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<PAGE> 19
<TABLE>
<S> <C> <C>
25.5 Power of attorney of David M. Dunford. Incorporated by reference to Exhibit 25(e)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.6 Power of attorney of John C.R. Hele. Incorporated by reference to Exhibit 25(f)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.7 Power of attorney of Robert L. Israeloff. Incorporated by reference to Exhibit 25(g)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.8 Power of attorney of Allen N. Jones. Incorporated by reference to Exhibit 25(h)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.9 Power of attorney of Cynthia L. Kahn. Incorporated by reference to Exhibit 25(i)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C> <C>
25.10 Power of attorney of Robert A. King. Incorporated by reference to Exhibit 25(j)
to Post-Effective Amendment No. 1 the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.11 Power of attorney of Irving M. Pollack. Incorporated by reference to Exhibit 25(k)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.12 Power of attorney of Barry G. Skolnick. Incorporated by reference to Exhibit 25(l)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.13 Power of attorney of William A. Wilde. Incorporated by reference to Exhibit 25(m)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
25.14 Power of Attorney of Anthony J. Vespa. Incorporated by reference to Exhibit 25(n)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60288, filed March
31, 1994.
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C> <C>
28.1 Preliminary prospectus contained in Post-
Effective Amendment No. 4 to the
Registrant's registration statement, filed
March 29, 1995, pursuant to the Securities Exhibit 28.1
Act of 1933, File No. 33-60288.
</TABLE>
- E-8 -
<PAGE> 1
PROSPECTUS
MAY 1, 1995
ML NY ASSET I(SM)
INDIVIDUAL MODIFIED GUARANTEED ANNUITY CONTRACT
ISSUED BY
ML LIFE INSURANCE COMPANY OF NEW YORK
Home Office: 100 Church Street, 11th Floor; New York, New York 10080-6511
Phone: (800) 333-6524
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
The contract described in this Prospectus (the "Contract") is issued by ML Life
Insurance Company of New York ("ML of New York") and is designed to provide
annuity payments in connection with retirement plans that may or may not qualify
for special federal income tax treatment under the Internal Revenue Code. The
Contract permits contract owners to make a single premium payment to be
accumulated at a guaranteed rate or rates of interest depending upon the
Guarantee Period or Periods selected by the contract owner. ML of New York may
offer Guarantee Periods of from one to ten years. ML of New York reserves the
right at any time to decrease or increase the number of Guarantee Periods
offered. An individual considering an investment should check with his or her
Financial Consultant to determine the availability of Guarantee Periods. At the
end of any Guarantee Period the accumulated value may be reinvested for one or
more new Guarantee Periods at the current interest rates then offered by ML of
New York. A WITHDRAWAL MADE PRIOR TO THE END OF A GUARANTEE PERIOD WILL BE
SUBJECT TO A MARKET VALUE ADJUSTMENT, WHICH COULD HAVE THE EFFECT OF EITHER
INCREASING OR DECREASING THE CONTRACT OWNER'S ACCOUNT VALUES.
THE PURCHASE OF THIS CONTRACT INVOLVES CERTAIN RISKS. BECAUSE IT IS A MODIFIED
GUARANTEED ANNUITY, THE CONTRACT IS SUBJECT TO A MARKET VALUE ADJUSTMENT IF,
PRIOR TO THE END OF A SELECTED GUARANTEE PERIOD, FUNDS ARE WITHDRAWN OR THE
CONTRACT IS SURRENDERED, THE CONTRACT IS ANNUITIZED OR A DEATH BENEFIT BECOMES
PAYABLE. OTHER THAN IN CERTAIN SITUATIONS, SUCH AS PAYMENT OF A DEATH BENEFIT, A
MARKET VALUE ADJUSTMENT COULD HAVE THE EFFECT OF DECREASING THE ACCOUNT VALUE.
THEREFORE, UNDER ANY OF THE CONDITIONS DESCRIBED ABOVE, CONTRACT OWNERS COULD
LOSE A SUBSTANTIAL PORTION OF THE MONEY THEY HAVE INVESTED. CONTRACT OWNERS
SHOULD CONSIDER THEIR INCOME NEEDS BEFORE PURCHASING A CONTRACT.
ALL WITHDRAWALS FROM AND SURRENDERS OF A CONTRACT ARE SUBJECT TO TAX, AND IF
TAKEN BEFORE AGE 59 1/2, MAY ALSO BE SUBJECT TO A 10% FEDERAL PENALTY TAX.
CONTRACT OWNERS SHOULD NOTE THAT THIS IS AN INTEGRATED ANNUITY CONTRACT FOR
INTERNAL REVENUE CODE PURPOSES. THEREFORE, IN DETERMINING THE EXTENT TO WHICH A
WITHDRAWAL IS SUBJECT TO TAX, THE ENTIRE ACCOUNT VALUE, NOT JUST THE VALUE OF
THE SUBACCOUNT FROM WHICH THE WITHDRAWAL IS MADE, WILL BE TAKEN INTO
CONSIDERATION.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
DEFINITIONS............................................................................ 3
CAPSULE SUMMARY OF THE CONTRACT........................................................ 5
ML LIFE INSURANCE COMPANY OF NEW YORK.................................................. 8
DESCRIPTION OF THE CONTRACT............................................................ 7
A. GENERAL....................................................................... 7
B. PREMIUMS...................................................................... 7
C. SELECTING THE GUARANTEE PERIOD................................................ 8
D. SUBACCOUNT AND ACCOUNT VALUES................................................. 8
E. SUBACCOUNT TRANSFERS.......................................................... 8
F. FIXING GUARANTEED INTEREST RATES.............................................. 9
G. WITHDRAWALS................................................................... 9
H. MARKET VALUE ADJUSTMENT....................................................... 10
I. WITHDRAWAL CHARGE............................................................. 12
J. PAYMENT ON DEATH.............................................................. 13
K. ANNUITY PROVISIONS............................................................ 14
L. OTHER PROVISIONS.............................................................. 16
DISTRIBUTION OF THE CONTRACTS.......................................................... 17
FEDERAL TAX CONSIDERATIONS............................................................. 17
PREMIUM TAXES.......................................................................... 22
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS............................. 22
MORE INFORMATION ABOUT ML LIFE INSURANCE COMPANY OF NEW YORK........................... 23
A. HISTORY AND BUSINESS.......................................................... 23
B. SELECTED FINANCIAL DATA....................................................... 24
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................... 24
D. REINSURANCE................................................................... 30
E. CONTRACT OWNER ACCOUNT BALANCES............................................... 30
F. INVESTMENTS................................................................... 30
G. COMPETITION................................................................... 30
H. CERTAIN AGREEMENTS............................................................ 30
I. EMPLOYEES..................................................................... 31
J. PROPERTIES.................................................................... 31
K. STATE REGULATION.............................................................. 32
DIRECTORS AND EXECUTIVE OFFICERS....................................................... 33
EXECUTIVE COMPENSATION................................................................. 34
LEGAL PROCEEDINGS...................................................................... 37
LEGAL MATTERS.......................................................................... 37
EXPERTS................................................................................ 37
REGISTRATION STATEMENT................................................................. 37
FINANCIAL STATEMENTS OF ML LIFE INSURANCE COMPANY OF NEW YORK.......................... 38
APPENDIX............................................................................... A-1
</TABLE>
------------------------
No person has been authorized to give any information or to make any
representation other than that contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any Contracts thereunder offered by this Prospectus in any jurisdiction
to anyone to whom it is unlawful to make such an offer or solicitation in such
jurisdiction.
2
<PAGE> 3
DEFINITIONS
account value: The sum of all subaccount values.
annuitant: The person on whose continuation of life annuity payments may depend.
annuitant's beneficiary: The person to whom payment is to be made upon the death
of the annuitant.
annuity: A series of predetermined periodic payments.
annuity date: The date shown in the Contract on which payment of an annuity
under the Contract will commence.
beneficiary: The person to whom payment is to be made on the death of the
contract owner or annuitant. There may be both a contract owner's beneficiary
and an annuitant's beneficiary if the owner is not an annuitant.
co-annuitant: If two persons are named as annuitants in the Contract, each is a
co-annuitant. In that case, "annuitant" means the co-annuitants, and death of
the annuitant refers to the death of the last co-annuitant.
Contract: The Contract described in and offered by this Prospectus.
contract anniversary: Each anniversary of the contract date.
contract date: The date on which a Contract is issued.
contract owner: The person to whom a Contract is issued.
contracts owner's beneficiary: A natural person to whom ownership of the
Contract passes upon the contract owner's death and to whom payment is to be
made on the death of the contract owner.
contract year: The year starting on the contract date or a contract anniversary
and ending on the day immediately prior to the next contract anniversary.
Guarantee Period: The period of years for which a rate of interest is guaranteed
to be credited to a subaccount.
Market Value Adjustment: A positive or negative adjustment made to subaccount
value. It is applied on withdrawal of all or part of the subaccount value prior
to the end of the Guarantee Period. If the annuity date is prior to the end of a
Guarantee Period, the Market Value Adjustment may be applied at the annuity
date. In addition, a Market Value Adjustment is applied in the event of payment
on the death of the contract owner or annuitant prior to the annuity date unless
the combined Market Value Adjustments of all affected subaccounts would reduce
the contract owner's account value. (See "Market Value Adjustment" on page 11.)
Maximum Guarantee Period Option: An option to have subaccount values
automatically transferred to a subaccount with a Guarantee Period equal to the
longest Guarantee Period then offered by ML of New York which (i) does not
exceed the length of the contract owner's longest Guarantee Period immediately
prior to transfer and (ii) ends on or prior to the annuity date. If the contract
owner's annuity date is less than one year from the date of transfer, the
subaccount value will be transferred to a subaccount with a one year Guarantee
Period.
Maximum Surrender Factors: Factors used in limiting the withdrawal charge.
Maximum Surrender Factors are: 10% in contract year 1; 9% in contract year 2; 8%
in contract year 3; 7% in contract year 4; 6% in contract year 5; 5% in contract
year 6; 4% in contract year 7; 3% in contract year 8; 2% in contract year 9; 1%
in contract year 10; and 0% in contract years 11 and later.
net account value: The sum of all net subaccount values.
net subaccount value: The subaccount value after adjustment for any Market Value
Adjustment and withdrawal charge applied in connection with a full withdrawal,
annuitization or the payment of death benefits upon the death of the contract
owner or annuitant prior to the annuity date.
nonqualified contract: A Contract issued in connection with a nonqualified plan.
3
<PAGE> 4
nonqualified plan: A retirement plan other than a qualified plan.
qualified contract: A Contract issued in connection with a qualified plan.
qualified plan: A retirement plan that receives favorable tax treatment under
Section 401, 403, 404, 408, 457 or any similar provision of the Internal Revenue
Code.
Renewal Date: The contract anniversary corresponding to the last day of each
current Guarantee Period, which is also the first day of any new Guarantee
Period to which subaccount value is transferred. Interest will be credited to
the current Guarantee Period until the business day prior to the Renewal Date.
Interest will be credited to any Guarantee Period to which subaccount value is
transferred beginning as of the Renewal Date.
subaccount: An account maintained under a Contract corresponding to a specified
interest rate and Guarantee Period selected by the contract owner.
subaccount value: An amount equal to that part of a single premium allocated by
the contract owner to a subaccount, or any reinvestment in a subaccount, plus
credited interest, as adjusted for any prior withdrawals and any prior Market
Value Adjustments and withdrawal charges.
withdrawal charge: A charge deducted from subaccount value upon a withdrawal
made prior to the end of a Guarantee Period.
4
<PAGE> 5
CAPSULE SUMMARY OF THE CONTRACT
THE CONTRACT
This Prospectus describes an individual modified guaranteed annuity contract
(the "Contract") issued by ML of New York. The Contract may be purchased by or
on behalf of any person acceptable to ML of New York (each, a "contract owner").
The Contract sets forth the contract owner's rights and benefits thereunder.
Values and benefits provided under the Contract, including annuity payments, are
funded by the general assets of ML of New York.
The Contract may be issued pursuant to nonqualified retirement plans or plans
qualifying for special tax treatment as "H.R. 10" plans, Individual Retirement
Annuities or Accounts, corporate pension and profit-sharing plans or Section 457
deferred compensation ("Section 457") plans.
APPLICATION AND PREMIUMS
The applicant must complete and return a Contract application to ML of New
York's Home Office. ML of New York reserves the right to reject any application.
The Contract permits the payment of a single premium. The minimum single premium
is $5,000.
THE SUBACCOUNTS
One or more subaccounts are maintained under the Contract. The minimum amount
which may be allocated to a subaccount is $5,000. A subaccount with a specified
Renewal Date is established for each specified interest rate and Guarantee
Period selected by the contract owner. A Guarantee Period is the period of years
for which a rate of interest is guaranteed. ML of New York may offer Guarantee
Periods of from one to ten years. ML of New York reserves the right at any time
to decrease or increase the number of guarantee periods offered, but no
Guarantee Period will exceed ten years. An individual considering an investment
should check with his or her Financial Consultant to determine the availability
of Guarantee Periods.
On the Renewal Date, a contract owner's subaccount value for that Guarantee
Period will be transferred to one or more subaccounts designated by the contract
owner. If ML of New York does not receive timely notice from the contract owner
designating the subaccounts to which the subaccount value is to be transferred,
the subaccount value will be transferred automatically to a subaccount with a
one-year Guarantee Period unless the Maximum Guarantee Period Option is chosen.
If the Maximum Guarantee Period Option has been chosen, the subaccount value
will be transferred to a new subaccount with a Guarantee Period equal to the
longest Guarantee Period then offered by ML of New York which (i) does not
exceed the length of the contract owner's longest Guarantee Period immediately
prior to transfer and (ii) ends on or prior to the annuity date.
CHARGES
ML of New York makes no deductions from each single premium. Except for the
Market Value Adjustment described below, the only charge made is a withdrawal
charge in the event all or part of a net subaccount value is withdrawn. The
withdrawal charge is equal to six months of interest on the amount withdrawn
based on the guaranteed interest rate of the subaccount from which the
withdrawal is made. In no event, however, will the withdrawal charge during the
first contract year exceed 10% of the amount withdrawn, declining by one
percentage point during each contract year thereafter. No withdrawal charge is
imposed in connection with withdrawals made after the end of the tenth contract
year. In addition, no charge is made for a withdrawal from a subaccount at the
Renewal Date if ML of New York receives written notice of the withdrawal from
the contract owner within 30 days prior to the Renewal Date. Also, no withdrawal
charge is imposed in the event of payment upon the death of a contract owner or
annuitant or, currently, upon annuitization. Premium taxes, if any, will be
deducted from the net account value at the annuity date. In those jurisdictions
that do not allow an insurance company to reduce its current taxable premium
income by the amount of any withdrawal, surrender or death benefit paid, ML of
New York will also deduct a charge for these taxes on any withdrawal, surrender
or death benefit effected under a Contract once regulatory approval has been
obtained.
5
<PAGE> 6
MARKET VALUE ADJUSTMENT
A Market Value Adjustment is applied to any withdrawal from a subaccount prior
to its Renewal Date. For Contracts issued after regulatory approval has been
obtained, it will also be applied at the annuity date with respect to any
subaccount if the annuity date is prior to the Renewal Date for that subaccount.
However, for Contracts issued before regulatory approval has been obtained, a
Market Value Adjustment will not be applied at the annuity date if (i) combined
Market Value Adjustments of all affected subaccounts would reduce the contract
owner's account value and (ii) annuity payments will be made for at least ten
years or a life contingency or life expectancy annuity option has been chosen.
In addition, a Market Value Adjustment will be applied in the event of payment
upon the death of the contract owner or annuitant prior to the annuity date
unless the combined effect of the Market Value Adjustments of all affected
subaccounts would reduce the account value. The amount of the Market Value
Adjustment is determined in accordance with the formula set forth on page 12 and
may be positive or negative.
ANNUITY PAYMENTS
Annuity payments will start on the annuity date. The contract owner selects the
annuity date and an annuity payment option in the application. The contract
owner may select a different annuity date or annuity payment option later.
On the annuity date, the net account value, less any applicable premium taxes,
is multiplied by ML of New York's then current annuity purchase rates to
determine the amount of each annuity payment. Currently, withdrawal charges do
not apply upon annuitization. The net account value is the sum of all net
subaccount values. In determining the net account value, a Market Value
Adjustment may be applied. If the net account value on the annuity date is less
than $2,000 ($3,500 for certain qualified Contracts), ML of New York may pay the
net account value in a lump sum in lieu of annuity payments. For tax
consequences of a lump sum payment, see "Federal Tax Considerations--Partial
Withdrawals and Surrenders" on page 20. If any annuity payment would be less
than $20, ML of New York may change the frequency of payments to intervals that
will result in payments of at least $20.
PAYMENT ON DEATH
If either the contract owner or the annuitant (if other than the owner) dies
prior to the annuity date, ML of New York will pay to the contract owner's
beneficiary or annuitant's beneficiary, as applicable, the greater of the
account value or the net account value on the date of death plus interest until
the date of payment at an annual rate determined by ML of New York from time to
time. In determining the net account value, no withdrawal charge will be
applied.
If the contract owner dies after the annuity date, any amounts remaining unpaid
will be paid to the contract owner's beneficiary pursuant to the same method of
distribution in force at the date of death. If the annuitant dies after the
annuity date, the annuitant's beneficiary may choose either to have any
guaranteed amounts remaining unpaid continue to be paid for the amount or period
guaranteed or to receive the present value of the remaining guaranteed payments
in a lump sum.
WITHDRAWALS
The contract owner may withdraw all or part of the net account value prior to
the earlier of the annuity date or the death of the annuitant. For partial
withdrawals, the amount withdrawn must be at least $500, the remaining
subaccount value, after adjustment for any Market Value Adjustment and
withdrawal charge, must be at least $1,000, and the remaining account value must
be at least $5,000. Withdrawals from qualified plans may be restricted. (See
"Qualified Plans" on page 21.) Withdrawals are subject to tax and prior to age
59 1/2 may also be subject to a 10% federal penalty tax. (See "Federal Tax
Considerations" on page 18.)
6
<PAGE> 7
REPORTS TO CONTRACT OWNERS
At least once each year prior to the annuity date, contract owners will be sent
a report outlining the owner's account value, subaccount values, Guarantee
Periods, withdrawal charges and Market Value Adjustments, if any, applied during
the year. The report will not include financial statements.
FREE LOOK RIGHT
When the contract owner receives the Contract, it should be reviewed carefully
to make sure it is what the contract owner intended to purchase. Generally,
within ten days after the contract owner receives the Contract, he or she may
return it for a refund. Some states allow a longer period of time to return the
Contract. The Contract must be delivered to ML of New York's Home Office or to
the Financial Consultant who sold it for a refund to be made. ML of New York
will then refund to the contract owner all premiums paid into the Contract. The
Contract will then be deemed void from the beginning.
ML LIFE INSURANCE COMPANY OF NEW YORK
ML Life Insurance Company of New York ("ML of New York") is a stock life
insurance company organized under the laws of the state of New York in 1973. ML
of New York is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"), a corporation whose common stock is traded on the New York
Stock Exchange.
ML of New York's Home Office address and phone number are 100 Church Street,
11th Floor, New York, New York 10080-6511, (800) 333-6524.
All communications concerning the Contract should be addressed to ML of New
York's Home Office.
DESCRIPTION OF THE CONTRACT
A. GENERAL
The Contract is an individual contract which may be issued to any applicant
acceptable to ML of New York. The Contract may be issued in connection with
either qualified or nonqualified plans. Qualified plans include "H.R. 10" plans,
Individual Retirement Annuities or Accounts, corporate pension and
profit-sharing plans and Section 457 deferred compensation plans.
Any applicant may purchase a Contract by completing an application and
forwarding payment of the single premium to ML of New York's Home Office. The
application is subject to ML of New York's acceptance. The rights and benefits
of a contract owner are set forth in the Contract. Provisions of any qualified
plan in connection with which the Contract is issued, however, may restrict a
person's eligibility to own the Contract, the minimum or maximum amount of the
single premium, and the owner's ability to exercise the rights and/or receive
the benefits provided under the Contract.
B. PREMIUMS
A Contract will be issued in consideration for the single premium paid by the
contract owner. The single premium must be at least $5,000. If the amount of the
single premium is more than $500,000, ML of New York reserves the right to limit
the amount of the premium. The premium will be allocated to one or more
subaccounts as selected by the contract owner. The minimum allocation to a
subaccount is $5,000. ML of New York will confirm its receipt of the payment and
the subaccounts established for each contract owner.
The Contract does not permit the payment of additional premiums. An application
for a separate Contract must accompany each single premium.
7
<PAGE> 8
C. SELECTING THE GUARANTEE PERIOD
The contract owner may select one or more Guarantee Periods for the single
premium or portion thereof. ML of New York may offer Guarantee Periods of from
one to ten years. ML of New York reserves the right at any time to decrease or
increase the number of Guarantee Periods offered, but no Guarantee Period
offered will exceed ten years. An individual considering an investment should
check with his or her Financial Consultant to determine the availability of
Guarantee Periods. ML of New York will establish a subaccount corresponding to
each guaranteed interest rate and Guarantee Period selected. Once a Guarantee
Period has been selected, it cannot be changed. Each subaccount will have a
Renewal Date corresponding to the end of the applicable Guarantee Period. The
contract owner may not transfer amounts from one subaccount to another prior to
the end of a Guarantee Period. The contract owner may, however, withdraw amounts
from a subaccount, subject to the restrictions described below and a Market
Value Adjustment and withdrawal charge. (See "Market Value Adjustment" on page
11 and "Withdrawal Charge" on page 13.) Withdrawals may have federal income tax
consequences, including a 10% penalty on amounts withdrawn. (See "Federal Tax
Considerations" on page 18.)
D. SUBACCOUNT AND ACCOUNT VALUES
A contract owner's account value is the sum of all of his or her subaccount
values. Each subaccount value is equal to the amount the contract owner
allocated to the subaccount (as part of the single premium or as part of the
reinvestment of subaccount value at the end of a Guarantee Period), plus the
interest credited thereto at the guaranteed rate, as adjusted for any prior
withdrawals, Market Value Adjustments or withdrawal charges. ML of New York
offers a guaranteed interest rate for each subaccount. The contract owner is
credited with the guaranteed interest rate in effect on the date ML of New York
receives his or her premium. The guaranteed interest rate will be credited to
the subaccount daily (except on a February 29th) to yield the quoted guaranteed
interest rate. Interest will be compounded annually on each contract
anniversary.
E. SUBACCOUNT TRANSFERS
On each subaccount's Renewal Date, the contract owner may transfer amounts in
that subaccount to one or more new subaccounts with new Guarantee Periods of any
length then offered by ML of New York. The amount transferred will be credited
with the interest rate in effect on the Renewal Date for the subaccount to which
the amount is transferred. Interest rates for the subaccounts to which transfers
are made are guaranteed to be the same as the initial guaranteed interest rates
being offered at the time of transfer on new Contracts. In the event that no
such guaranteed interest rate is available, the guaranteed interest rate will be
determined in the manner described in "Alternative Guaranteed Interest Rate" on
page 16. Transfers may not be made other than at the end of the applicable
Guarantee Period.
ML of New York will notify the contract owner of his or her right to transfer
amounts to new subaccounts at least 30 days prior to the Renewal Date. Prior to
the Renewal Date, the contract owner may advise ML of New York of the new
subaccounts to which the subaccount value is to be transferred. The minimum
amount that can be transferred to any one subaccount is the lesser of (i) $5,000
or (ii) the total subaccount value at the time of transfer. No withdrawal charge
or Market Value Adjustment is applied in connection with such transfers. Under
current administrative procedures, if instructions are not received by the fifth
business day after the Renewal Date, ML of New York will transfer the subaccount
value to a new subaccount with a one year Guarantee Period, unless the Maximum
Guarantee Period Option has been chosen by the contract owner. Subject to
contractual and federal tax restrictions, the contract owner may change his
annuity date so that the Guarantee Period of the new subaccount will end on or
prior to the annuity date. (See "Annuity Provisions--Change of Annuity Date or
Annuity Option" on page 15.)
The Maximum Guarantee Period Option may be selected at any time until the fifth
business day after the Renewal Date. If it has been chosen, as of the Renewal
Date the subaccount value will be transferred to a new subaccount with a
Guarantee Period equal to the longest Guarantee Period then offered by ML of New
York
8
<PAGE> 9
which (i) does not exceed the length of the contract owner's longest Guarantee
Period immediately prior to transfer and (ii) ends on or prior to the contract
owner's annuity date. Under this option, if the subaccount value cannot be
transferred to the longest Guarantee Period in which the contract owner's
account value is invested immediately prior to transfer because the Renewal Date
of that subaccount would occur after the contract owner's annuity date, the
subaccount value will be transferred to a subaccount with the next longest
Guarantee Period then offered by ML of New York with a Renewal Date on or prior
to the contract owner's annuity date. For example, assume that the Maximum
Guarantee Period Option is chosen, that a transfer occurs on March 1, 1996, that
the contract owner's annuity date is on August 1, 2001, and that the longest
Guarantee Period in which the contract owner's account value is invested is five
years. If ML of New York is then offering a five year Guarantee Period, the
subaccount value will be transferred to a subaccount with a five year Guarantee
Period, since the Renewal Date of that Guarantee Period will end prior to August
1, 2001. If, however, the longest Guarantee Period in which the contact owner's
account value is invested is six years or more, the subaccount value will be
transferred to a subaccount with a five year Guarantee Period (or, if ML of New
York is not then offering a five year Guarantee Period, the longest Guarantee
Period of less than five years then offered by ML of New York) since a
subaccount with a Guarantee Period of six years would end after August 1, 2001.
If the contract owner's annuity date is less than one year from the date of
transfer, ML of New York will transfer the subaccount value to a subaccount with
a one year Guarantee Period.
F. FIXING GUARANTEED INTEREST RATES
ML of New York does not have a specific formula for establishing the guaranteed
interest rates for the different Guarantee Periods. The determination made will
be influenced by, but not necessarily correspond to, interest rates available on
fixed income investments which ML of New York may acquire with the amounts it
receives as premiums under the Contracts. These amounts will be invested
primarily in investment-grade fixed income securities including: securities
issued by the United States Government or its agencies or instrumentalities,
which issues may or may not be guaranteed by the United States Government; debt
securities that have an investment grade, at the time of purchase, within the
four highest grades assigned by Moody's Investor Services, Inc. (Aaa, Aa, A or
Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally
recognized rating service; mortgage-backed securities collateralized by real
estate mortgage loans, or securities collateralized by other assets, that are
insured or guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association or the Government National Mortgage Association,
or that have an investment grade at the time of purchase within the four highest
grades described above; other debt investments; commercial paper; and cash or
cash equivalents. Contract owners will have no direct or indirect interest in
these investments. ML of New York will also consider other factors in
determining the guaranteed rates, including regulatory and tax requirements,
sales commissions and administrative expenses borne by ML of New York, general
economic trends and competitive factors. ML OF NEW YORK'S MANAGEMENT WILL MAKE
THE FINAL DETERMINATION OF THE GUARANTEED RATES IT DECLARES. ML OF NEW YORK
CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE INTEREST RATES. However, no
subaccount will ever have a guaranteed interest rate of less than 3% per year.
G. WITHDRAWALS
Subject to certain conditions, a contract owner may withdraw all or part of his
or her net account value or net subaccount value prior to the earlier of the
annuity date or death of the contract owner or annuitant upon written notice
received at ML of New York's Home Office before the annuity date. Withdrawals
are subject to tax, and prior to age 59 1/2 may also be subject to a 10% federal
penalty tax. (See "Federal Tax Considerations" on page 18.) For full withdrawal,
the withdrawal notice must be accompanied by the Contract. Under qualified
plans, withdrawals may be permitted only in circumstances specified in the plan,
the consent of the contract owner's spouse may be required, and under certain
Section 401 plans withdrawals attributable to contributions made pursuant to a
salary reduction agreement may be made only after the contract owner reaches age
59 1/2 and in other limited circumstances. (See "Qualified Plans" on page 21.)
9
<PAGE> 10
Partial withdrawals must be at least $500, and the net subaccount value
remaining after the withdrawal must be at least $1,000, unless the entire
subaccount value is withdrawn. The remaining account value must be at least
$5,000. Otherwise, the partial withdrawal will not be permitted. The contract
owner must specify the subaccounts from which the withdrawal is to be made. If
two or more subaccounts from which the withdrawal is to be made have the same
Guarantee Period, the contract owner must first withdraw from the subaccount
with the shortest period of time remaining in its Guarantee Period until that
subaccount has been depleted.
The amount of the withdrawal will be paid to the contract owner, and any Market
Value Adjustment will be made to, and any withdrawal charge will be deducted
from, the subaccounts from which the withdrawal is made. Immediately after a
partial withdrawal, the subaccount value will equal the subaccount value prior
to the withdrawal, plus or minus any applicable Market Value Adjustment, minus
any applicable withdrawal charge, and minus the amount withdrawn. In the case of
a request to withdraw the entire amount from a subaccount, the contract owner
receives the net subaccount value (which reflects any adjustments to the
subaccount value for the withdrawal charge and Market Value Adjustment applied
in connection with such withdrawal). Upon such full withdrawal, the subaccount
value is reduced by the amount withdrawn as well as any applicable withdrawal
charge, and the Market Value Adjustment is applied, thereby reducing the
subaccount value to zero. (See "Market Value Adjustment" on page 11 and
"Withdrawal Charge" on page 13.) The tables which appear in the Appendix
illustrate the effect of a full withdrawal from a subaccount on the subaccount
value.
ML of New York will send the contract owner a notice at least 45 days, but not
more than 75 days, prior to the Renewal Date of a subaccount. This notice will
inform the contract owner that he or she must notify ML of New York in writing
within 30 days prior to the Renewal Date if the owner intends to make a
withdrawal from the subaccount without application of a Market Value Adjustment
or withdrawal charge on the Renewal Date.
H. MARKET VALUE ADJUSTMENT
The Contract provides for the imposition of a Market Value Adjustment,
determined by application of the formula described below, in three
circumstances. First, whenever a contract owner makes a withdrawal from a
subaccount, other than one made at, and for which ML of New York has received
written notice prior to, the Renewal Date, a Market Value Adjustment will be
made.
Second, for Contracts issued after regulatory approval has been obtained, a
Market Value Adjustment will be applied at the annuity date to any subaccount if
the annuity date is prior to the end of the Guarantee Period for that
subaccount. For Contracts issued before regulatory approval has been obtained, a
Market Value Adjustment will not be applied at the annuity date if (i) combined
Market Value Adjustments of all affected subaccounts would reduce the contract
owner's account value and (ii) annuity payments will be made for at least ten
years or a life contingency or life expectancy annuity option has been chosen.
Contract owners should refer to their contracts to determine when a Market Value
Adjustment will be applied.
Third, a Market Value Adjustment is applied in the event of payment upon the
death of the contract owner or the annuitant prior to the annuity date unless
the combined Market Value Adjustments of all affected subaccounts would reduce
the contract owner's account value.
Because of the Market Value Adjustment provision of the Contract, the contract
owner bears the investment risk that the guaranteed interest rates offered by ML
of New York at the time the contract owner makes a withdrawal from a subaccount
or starts receiving annuity payments may be higher than the guaranteed interest
rate of the subaccount to which the Market Value Adjustment is applied, with the
result that the contract owner's subaccount value may be substantially reduced.
The Market Value Adjustment will depend on the remaining time in the Guarantee
Period of the subaccount from which the withdrawal is made or to which the
adjustment is being applied and on the relationship between the guaranteed
interest rate of the subaccount from which the withdrawal or payment, as
applicable, is made to the current guaranteed interest rates offered at the time
the Market Value Adjustment is applied.
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<PAGE> 11
The Appendix contains tables which illustrate the application of the Market
Value Adjustment in the context of full withdrawals from a hypothetical
subaccount. The Market Value Adjustment may result in either an increase or
decrease in subaccount value, depending on the relationship of (1) the current
guaranteed interest rate for a period equal to the time remaining in the
subaccount, which rate is interpolated from the rates currently offered by ML of
New York for subaccounts with Guarantee Periods closest to such period, to (2)
the guaranteed interest rate for the subaccount. If the current guaranteed
interest rate of (1) above is lower than the guaranteed rate of (2), application
of the Market Value Adjustment will result in an increase in subaccount value;
if (1) is higher than (2), application of the Market Value Adjustment will
result in a decrease in subaccount value. If the adjustment is positive, the
additional amount will be credited to the subaccount. If negative, the amount of
the adjustment will be deducted from the subaccount value and will be retained
by ML of New York for its own benefit.
The amount of the Market Value Adjustment is based on the relationship of the
current guaranteed interest rates offered at the time the Market Value
Adjustment is applied to the guaranteed interest rate credited to the subaccount
from which the withdrawal or payment, as applicable, is made. If the remaining
period of time in the Guarantee Period is a whole number of years, ML of New
York uses the guaranteed interest rate currently offered by it for a Guarantee
Period equal to the number of remaining years. If the remaining period of time
in the Guarantee Period is not a whole number of years, the interest rate is
derived from the guaranteed interest rates currently offered for the Guarantee
Periods nearest the remaining period of time. This derivation is by straight
line interpolation, except where the remaining period of time is less than one
year, in which case ML of New York uses the current guaranteed rate for a
Guarantee Period of one year. For example, if the remaining period is 4.75
years, the interpolated guaranteed interest rate will be equal to the sum of
one-fourth of the four year rate and three-fourths of the five year rate. If the
four year rate were 5.5% and the five year rate were 5.7%, the interpolated rate
would be 5.65% (5.5% times .25 plus 5.7% times .75).
The Market Value Adjustment is determined from the following formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1 + B n/365
A X [ 1- ( -------- ) ]
1 + C
</TABLE>
where "A" is (i) the amount withdrawn from the subaccount, in the case of a
partial withdrawal, or (ii) the net subaccount value, in the case of (a) a full
withdrawal from a subaccount, (b) a payment made due to the death of the
contract owner or annuitant prior to the annuity date or (c) annuitization; "B"
is the current guaranteed interest rate that ML of New York is offering for a
subaccount with a Guaranteed Period of a duration of years equal to "n"/365 or
that is interpolated for "n"/365 based on the guaranteed interest rates offered
for subaccounts nearest "n"/365 (if n/365 is less than 1, we will assume B is
equal to the rate for a one-year Guarantee Period); "C" is the guaranteed
interest rate for the subaccount; and "n" is the remaining number of days in the
Guarantee Period of the subaccount from which the withdrawal is made or to which
the adjustment is applied. In the event that no current guaranteed interest rate
is then being offered, "B" will be determined as described in "Alternative
Guaranteed Interest Rate" on page 16.
For example, assume that a withdrawal of $20,000 is made from a subaccount with
1,734 days (4.75 years) remaining in the Guarantee Period and a guaranteed
interest rate of 5.4%. Assume also that the current guaranteed interest rates
for Guarantee Periods of 4 and 5 years are 5.5% and 5.7%, respectively. "B" is
equal to 5.65%, the sum of 5.7% times .75 and 5.5% times .25. To calculate the
Market Value Adjustment, ML of New York divides the sum of 1.00 and "B," 1.0565,
by the sum of 1.00 and the guaranteed interest rate for the affected subaccount,
1.054. The resulting figure, 1.0023719, is then taken to the "n"/365 power, or
4.75 (1,734/365), which is 1.0113168. 1.0113168 is subtracted from 1.00 and the
resulting figure, -.0113168, is multiplied by the amount of the withdrawal,
$20,000, to give -$226.34. Since this figure is a negative number, it is
subtracted from the remaining subaccount value, together with any applicable
withdrawal charge. If "B" had been 5.15%, instead of 5.65%, the Market Value
Adjustment would have been +$224.33, which amount would have been added to the
remaining subaccount value.
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<PAGE> 12
The greater the difference in interest rates, the greater the effect of the
Market Value Adjustment. If in the above example "B" had been 7%, 8% and 9%, the
Market Value Adjustment would have been -$1,483.75, -$2,454.32, and -$3,459.19,
respectively. The Market Value Adjustment is also affected by the remaining
period in the Guarantee Period of the subaccount from which the withdrawal is
made, which is "n" in the formula. Thus, if in the first example above "n"/365
were 2.5 or 1.5, the Market Value Adjustment would have been -$118.81 or
-$71.20, respectively. Tables showing the impact of the Market Value Adjustment
and withdrawal charge on hypothetical contracts are set forth in the Appendix.
I. WITHDRAWAL CHARGE
A withdrawal charge is imposed if the contract owner makes a withdrawal from a
subaccount other than at the Renewal Date of a subaccount where prior written
notice is received at ML of New York's Home Office. Subject to the maximum
charges described below, the withdrawal charge is equal to one-half of the
guaranteed interest rate, based on the guaranteed interest rate of the
subaccount from which the withdrawal is made, multiplied by the amount
withdrawn. If a withdrawal results in distribution of the full net subaccount
value, the withdrawal charge is based on the net subaccount value and reflected
in the net subaccount value. Thus, if the guaranteed interest rate is 6% per
year, the withdrawal charge will be 3% of the amount withdrawn. In no event,
however, will the amount of the withdrawal charge assessed in connection with a
withdrawal made in a contract year exceed the product of the amount withdrawn
and the applicable Maximum Surrender Factor, as set forth below:
<TABLE>
<CAPTION>
CONTRACT YEAR FACTOR
------
<S> <C>
1................................................................ 10%
2................................................................ 9%
3................................................................ 8%
4................................................................ 7%
5................................................................ 6%
6................................................................ 5%
7................................................................ 4%
8................................................................ 3%
9................................................................ 2%
10............................................................... 1%
11 and later..................................................... 0%
</TABLE>
In the case of a full withdrawal, the withdrawal charge is reflected in the net
subaccount value distributed to the contract owner. In the case of a partial
withdrawal, the withdrawal charge will be deducted from the remaining subaccount
value of the subaccounts from which the withdrawal is made.
Currently withdrawal charges do not apply upon annuitization. However, ML of New
York reserves the right to apply the withdrawal charge on annuitization to any
subaccount if the annuity date is prior to the end of the Guarantee Period for
that subaccount. Withdrawal charges also do not apply to annuity payments, any
payment made due to the death of the annuitant or contract owner or any
withdrawal made from a subaccount on its Renewal Date if ML of New York receives
written notice of the withdrawal at its Home Office within 30 days prior to the
Renewal Date.
The application of the withdrawal charge may be illustrated by the following
example. Assume a partial withdrawal of $7,000 made from two subaccounts, one
with a Guarantee Period of five years and a guaranteed interest rate of 5.6%,
the other with a Guarantee Period of three years and a guaranteed interest rate
of 5.45%, and each having a subaccount Value of $5,000. Assume further that the
contract owner directs that the partial withdrawal should be taken from the
subaccount having the five year Guarantee Period to the maximum extent possible
and the remainder taken from the subaccount having the three year Guarantee
Period. Assume also that the Market Value Adjustment applied to the five year
Guarantee Period operates to reduce its value by 22.2% and that the adjustment
applied to the three year Guarantee Period operates to reduce its value by 17%.
The maximum withdrawal that can be taken from the subaccount with the five year
Guarantee Period is $4,000, since the Market Value Adjustment applied to the
$4,000 withdrawal reduces the subaccount value by
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<PAGE> 13
$888 (22.2% of $4,000) and the withdrawal charge of $112 (.056% divided by 2,
times $4,000) exhausts the remaining subaccount value. The remaining portion of
the requested withdrawal, $3,000, is deducted from the subaccount with the three
year Guarantee Period. Also deducted from that subaccount are the Market Value
Adjustment applicable to the $3,000 withdrawal, $510 (17% of $3,000), and the
withdrawal charge, $81.75 (5.45% divided by 2 times $3,000), resulting in a
remaining subaccount value of $1,408.25 If, however, a $3,000 withdrawal were
made in the tenth contract year, the applicable Maximum Surrender Factor (1%)
would be less than one-half of the guaranteed interest rate (5.45% divided by 2,
or 2.725%). The withdrawal charge, therefore, would be $30 (1% of $3,000).
J. PAYMENT ON DEATH
Death Prior to the Annuity Date. Subject to the rights of a contract owner's
surviving spouse in certain circumstances (described below), if the contract
owner or the annuitant (under a Contract where the owner is not an annuitant)
dies prior to the annuity date, ML of New York will pay to the contract owner's
beneficiary or the annuitant's beneficiary, as applicable, the greater of the
account value or the net account value on the date of death (the "death
benefit"). Interest will be credited on that value from the date of death until
the date of payment at a rate determined by ML of New York in its discretion. In
determining the net account value, no withdrawal charge will be applied. Payment
will be made upon receipt by ML of New York of proof of the death of the
contract owner or annuitant, as applicable, and, subject to the special rules
applicable to any contract owner's death (discussed below), will be made in a
lump sum unless an annuity option is chosen. If no annuity option is chosen by
the 60th day following receipt of the certified death certificate, ML of New
York reserves the right to automatically pay the death benefit in a lump sum.
In the event of a contract owner's death, the death benefit generally must be
distributed within five years of the death of the contract owner. The contract
owner's beneficiary may, however, elect to receive the death benefit pursuant to
a payment option under which payments commence within one year of the contract
owner's death and which does not extend beyond the life expectancy of the
beneficiary. In addition, if the surviving spouse of a deceased contract owner
is the contract owner's beneficiary, such spouse may choose to become the
contract owner and to continue the Contract in force on the same terms as before
the contract owner's death, in which event no death benefit is paid upon the
death of the deceased contract owner, and the spouse thereafter shall be the
contract owner and the annuitant. If the Contract names more than one contract
owner, the death of the contract owner will be deemed to occur when the first
contract owner dies.
If the contract owner is not the annuitant, the contract owner may irrevocably
elect, prior to the annuitant's death and prior to the annuity date, to continue
the Contract in force in the event of the annuitant's death prior to the annuity
date on the same terms as before the annuitant's death. If the contract owner
makes this election, no death benefit is paid upon the death of the annuitant,
and the person designated by the contract owner at the time of the election
shall become the annuitant upon the death of the original annuitant prior to the
annuity date. This option is available only if the contract owner is a natural
person or the Contract is issued in connection with a plan entitled to special
tax treatment under Sections 401 or 408 of the Internal Revenue Code.
If a beneficiary does not survive the contract owner or annuitant, as
applicable, the estate or heirs of the beneficiary have no rights under the
Contract. If no beneficiary survives the contract owner or annuitant, payment
will be made to the owner, if living, and if the contract owner is not living,
to the owner's estate.
If the contract owner is not an individual, the primary annuitant as determined
in accordance with Section 72(s) of the Internal Revenue Code (i.e., the
individual the events in the life of whom are of primary importance in affecting
the timing or amount of distributions under the Contract) will be treated as the
contract owner for purposes of these distribution requirements, and any change
in the primary annuitant will be treated as the death of the contract owner.
Death After the Annuity Date. If the contract owner dies after the annuity
date, any amounts remaining unpaid will be paid at least as rapidly as under the
same method of distribution in force at the date of death. If the annuitant dies
after the annuity date, the annuitant's beneficiary may choose either to have
any guaranteed amounts remaining unpaid continue to be paid for the amount or
period guaranteed or to receive the present
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<PAGE> 14
value of the remaining guaranteed payments in a lump sum. (See "Annuity
Provisions" below.) The present value will be determined using the interest rate
on which annuity payments were determined, and will be less than the sum of the
remaining guaranteed payments. If the annuitant's beneficiary dies while
guaranteed amounts remain unpaid, the present value of the remaining payments
will be paid in a lump sum to the beneficiary's estate.
K. ANNUITY PROVISIONS
General. Annuity payments will be paid to the contract owner and will commence
on the annuity date. The contract owner may or may not be the annuitant. The
contract owner designates the annuitant in the Contract application, and may
change the annuitant upon written notice to ML of New York. The contract owner
may also designate a co-annuitant, in which case the death of the annuitant is
deemed to occur when both co-annuitants are deceased.
The amount of monthly annuity payments, other than payments made pursuant to the
qualified plan option, will be determined by applying the net account value at
the annuity date, less any premium taxes, to the annuity option chosen, using ML
of New York's then current annuity rates. Currently, withdrawal charges do not
apply upon annuitization. Current annuity rates are guaranteed to be no less
favorable than the minimum guaranteed annuity rates shown in the annuity tables
contained in the Contract. Premium taxes imposed by states and local
jurisdictions currently range from 0% to 5% depending on the tax treatment of
the Contract. No premium taxes are currently imposed by the State of New York,
but ML of New York cannot guarantee that such taxes will not be assessed by New
York in the future. In determining the net account value, for Contracts issued
after regulatory approval has been obtained, a Market Value Adjustment will be
applied to any subaccount if the annuity date is prior to the end of the
Guarantee Period for that subaccount. However, for Contracts issued before
regulatory approval has been obtained, a Market Value Adjustment will not be
applied at the annuity date if (i) combined Market Value Adjustments of all
affected Subaccounts would reduce the contract holder's account value and (ii)
annuity payments will be made for at least ten years or a life contingency or
life expectancy annuity option has been chosen.
Selection of Annuity Date and Annuity Options. The contract owner may select
the annuity date and an annuity option in the Contract application. If the
contract owner does not select an annuity date or an annuity option, the annuity
date will be the first day of the next month after the annuitant's 75th birthday
and the annuity option will be a life annuity with a 10-year guarantee. The
annuity date must be the first day of a calendar month. It may not be later than
the first day of the next month after the annuitant's 85th birthday. (For
qualified Contracts, the annuity date generally may not be later than April 1 of
the year after the year in which the annuitant attains age 70 1/2.)
Change of Annuity Date or Annuity Option. The contract owner may change the
annuity date or the annuity option on written notice received at ML of New
York's Home Office at least 30 days prior to the annuity date. Changes of the
annuity date are subject to federal tax restrictions. (See "Federal Tax
Considerations" on page 18.)
Annuity Options. The contract owner may select any one of the following annuity
options or any other option satisfactory to the contract owner and ML of New
York. For qualified Contracts, certain restrictions may apply.
PAYMENTS OF A FIXED AMOUNT: Equal payments in the amount chosen will be made
until the net account value applied under this option is exhausted. The period
over which payments are made must be at least 5 years.
PAYMENTS FOR A FIXED PERIOD: Payments will be made for the period chosen. The
period must be at least 5 years.
*LIFE ANNUITY: Payments will be made for the life of the annuitant. Payments
will cease with the last payment due prior to the annuitant's death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS: Payments will be made
for the guaranteed period chosen (10 or 20 years) and as long thereafter as the
annuitant lives.
LIFE ANNUITY WITH GUARANTEED RETURN OF NET ACCOUNT VALUE: Payments will be made
until the sum of the annuity payments equals the net account value applied under
this option, and as long thereafter as the annuitant lives.
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*JOINT AND SURVIVOR LIFE ANNUITY: Payments will be made during the lifetimes of
the annuitant and a designated second person. Payments will continue as long as
either is living.
QUALIFIED PLAN OPTION: This option is available only under qualified Contracts
issued in connection with plans qualified under Section 401(a), 403, 404, 408 or
457 of the Internal Revenue Code. Payments may be based on (a) the life
expectancy of the annuitant, (b) the joint life expectancy of the annuitant and
his or her spouse, or (c) the life expectancy of the surviving spouse if the
annuitant dies before the annuity date. Payments will be made annually. Each
payment will be equal to the net account value as of the annuity date, plus
credited interest and minus aggregate annuity payments previously made, in each
case as of the first day of that calendar year, divided by the applicable
current life expectancy, as defined by Internal Revenue Service regulations.
Each subsequent payment will be made on the anniversary of the annuity date.
Interest will be credited at ML of New York's then current rate for this option.
The rate will not be less than that shown in the Contract. On death of the
measuring life or lives, any unpaid net account value will be paid to the
beneficiary in a lump sum.
*THESE OPTIONS ARE LIFE ANNUITIES UNDER WHICH IT IS POSSIBLE FOR THE CONTRACT
OWNER TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE ANNUITANT (OR THE ANNUITANT AND
A DESIGNATED SECOND PERSON) DIES AFTER THE FIRST PAYMENT, OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF THE ANNUITANT (OR THE ANNUITANT AND A DESIGNATED SECOND
PERSON) DIES AFTER THE SECOND PAYMENT, AND SO ON.
Minimum Annuity Payments. Annuity payments will be made monthly unless the
contract owner chooses less frequent payments or the qualified plan option;
provided that if any payment would be less than $20, ML of New York may change
the frequency so payments are at least $20 each. If the net account value to be
applied at the annuity date is less than $2,000 ($3,500 for certain qualified
Contracts), ML of New York may elect to pay that amount in a lump sum. (For tax
consequences of a lump sum payment, see "Federal Tax Considerations--Partial
Withdrawals and Surrenders" on page 20.)
Annuity Rates. Annuity rates will be no less favorable than those shown in the
annuity tables contained in the Contract. Those tables show the minimum
guaranteed amount of each monthly payment for each $1,000 applied according to
the age and sex of the annuitant at the annuity date. The tables are based on
the 1983 Table "a" projected forward to 1995 for Individual Annuity Valuation
with current mortality adjustments. When required by law, ML of New York will
use annuity tables that do not differentiate on the basis of sex.
The Contract contains a formula for adjusting the age of the annuitant based on
the annuity date for purposes of determining minimum monthly annuity payments.
If the annuity date is prior to the year 2000, there is no age adjustment. If
the annuity date is between the years 2000 and 2009, the annuitant's age is
reduced by one year. For each decade thereafter, the annuitant's age is reduced
one additional year. The maximum age adjustment is four years.
An age adjustment results in a reduction in the minimum monthly annuity payments
that would otherwise be made. Therefore, if the rates ML of New York is using
are the minimum rates shown in the annuity tables contained in the Contract, it
may be advantageous for the contract owner to designate an annuity date that
immediately precedes the date on which an age adjustment would occur under the
Contract. For example, the annuity payment rates in the annuity tables for an
annuitant with an annuity date in the year 2010 are the same as those for an
annuity date twelve months earlier, even though the annuitant is one year older,
because the new decade results in the annuitant's age being reduced by an
additional year. Current annuity rates, unlike the guaranteed rates, do not
involve any age adjustment.
Proof of Age, Sex and Survival. ML of New York may require satisfactory proof
of the age, sex or survival of any person on whose continued life any payment
under the Contract depends.
Misstatement of Age or Sex. If the age or sex of an annuitant is misstated,
annuity payments will be adjusted to reflect the correct age and sex. Any amount
overpaid as the result of such misstatement will be deducted from the next
payments due. Any amount underpaid will be paid in full with the next payment
due.
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L. OTHER PROVISIONS
Alternative Guaranteed Interest Rate. In the event that a current guaranteed
interest rate is not offered (i) upon transfer at the end of a Guarantee Period
or (ii) when a Market Value Adjustment is applied, the interest rate used will
be equal to the yield to maturity on Stripped United States Treasury Bills with
a maturity date in the same month (or, if unavailable, the next nearest
following month) as of the Renewal Date of the subaccount to which the transfer
is made or to which a Market Value Adjustment is applied. Such yield to maturity
is defined as the yield to maturity published in The Wall Street Journal
(Eastern Edition) on the date of such transfer or on which such Market Value
Adjustment is applied. If the yield to maturity is not published on such date,
the yield to maturity published on the most recent date immediately preceding
the date of the transfer or on which the Market Value Adjustment is applied will
be used.
Beneficiary. The beneficiary is the person or persons named in the Contract
application to whom payment is to be made upon the death of the contract owner
or annuitant. If the contract owner is not the annuitant, the contract owner may
name one beneficiary to receive payment on death of the contract owner (the
contract owner's beneficiary) and a different beneficiary to receive payment on
the death of the annuitant (the annuitant's beneficiary). The contract owner's
beneficiary must be a natural person. If the contract owner is the annuitant,
the contract owner may name only one beneficiary. Unless a beneficiary has been
irrevocably designated, the contract owner's beneficiary may be changed while
the owner is alive, and the annuitant's beneficiary may be changed while the
annuitant is alive. The change of a beneficiary who was named by the contract
owner irrevocably may only be made with the consent of the beneficiary. The
estate or heirs of a beneficiary who dies prior to the owner or annuitant have
no rights under the Contract. If no beneficiary survives the contract owner or
annuitant, payment will be made to the contract owner, if living, or to the
contract owner's estate if the contract owner has died. Certain restrictions
apply in the case of qualified Contracts.
Assignment. A collateral assignment by the contract owner of his or her rights
under the Contract as security for a debt is prohibited. The Contract may be
assigned upon written notice to ML of New York prior to the annuity date,
however, other than as collateral or security for a loan. If the Contract is
issued pursuant to a qualified plan, the contract owner's rights under the
Contract may not be assigned, pledged or transferred, unless permitted by law.
ML of New York assumes no responsibility for the validity of any such assignment
or for any actions taken by it prior to receipt of written notice of an
assignment. An assignment of the Contract may have federal income tax
consequences. (See "Federal Tax Considerations--Transfers, Assignments, or
Exchanges of a Contract" on page 21.)
Notices and Elections. All notices, changes and choices made by the contract
owner under the Contract must be in writing and signed by the proper party, or
given in another manner acceptable to ML of New York, and received at ML of New
York's Home Office to be effective. The selection of subaccounts in which the
subaccount value at the end of a Guarantee Period is to be invested or from
which partial withdrawals are to be made may be made by telephone. In addition,
choices regarding the Maximum Guarantee Period Option, pursuant to which ML of
New York transfers subaccount values in the absence of instructions from a
contract owner, may be made by telephone. ML of New York will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures may include, but are not limited to, possible recording of
telephone calls and obtaining appropriate identification before effecting any
telephone transactions. ML of New York will not be liable for following
telephone instructions that it reasonably believes to be genuine. Notices,
changes and choices relating to beneficiaries will take effect as of the date
signed unless ML of New York has already acted in reliance on the prior status.
Amendment of Contract. ML of New York may amend the Contract at any time, as
may be necessary to conform to any applicable law, regulation or ruling issued
by a government agency.
Deferral of Payments. All sums payable by ML of New York are payable at its
Home Office. ML of New York may require return of a Contract prior to making
payment. Payments of partial or full withdrawals may be deferred for up to six
months.
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Free Look Right. When the contract owner receives the Contract, it should be
reviewed carefully to make sure it is what the contract owner intended to
purchase. Generally within ten days after the contract owner receives the
Contract, he or she may return it for a refund. Some states allow a longer
period of time to return the Contract. The Contract must be delivered to ML of
New York's Home Office or to the Financial Consultant who sold it for a refund
to be made. ML of New York will then refund to the contract owner all premiums
paid into the Contract. The Contract will then be deemed void from the
beginning. If a contract owner exercises his or her free look right, that
contract owner may not submit another application with the same annuitant for
ninety days.
Guarantee of Contracts. The federal government or its instrumentalities does
not guarantee the Contracts. ML of New York backs the guarantees associated with
the Contracts.
DISTRIBUTION OF THE CONTRACTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the principal
underwriter of the Contract. It was organized in 1958 under the laws of the
state of Delaware and is registered as a broker-dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc. ("NASD"). MLPF&S' principal business address is World Financial
Center, 250 Vesey Street, New York, New York 10281.
Contracts are sold by registered representatives (Financial Consultants) of
MLPF&S who are also licensed through Merrill Lynch Life Agency, Inc. ("MLLA"),
as insurance agents for ML of New York. ML of New York has entered into a
distribution agreement with MLPF&S and a companion sales agreement with MLLA
through which agreements the Contracts are sold and the Financial Consultants
are compensated by MLLA and/or MLPF&S. The maximum commission paid to the
Financial Consultant is 2.0% of each premium. In addition, the maximum
compensation paid to the Financial Consultant for each reinvestment through the
tenth Contract Year is 1.8% of premium reinvested. The maximum additional
compensation paid to the Financial Consultant in each year beyond the tenth
Contract Year that the Contract remains in force is .28% of the account value.
Commissions may be paid in the form of non-cash compensation.
The maximum commission ML of New York will pay to MLLA to be used to pay
commissions to Financial Consultants is 3.5% of each premium.
MLPF&S may arrange for sales of the Contract by other broker-dealers who are
registered under the Securities Exchange Act of 1934 and are members of the
NASD.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following discussion is general and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon ML of New York's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of the
continuation of the present federal income tax laws or of the current
interpretation by the Internal Revenue Service. Moreover, no attempt has been
made to consider any applicable state or other tax laws.
ML OF NEW YORK DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
The Contract may be purchased on a non-qualified tax basis ("non-qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("qualified Contract"). The qualified Contracts were
designed for use by individuals whose premium payment is comprised solely of
proceeds from and/or contributions under retirement plans which are intended to
qualify as plans entitled to special income
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tax treatment under Section 401(a), 408, or 457 of the Internal Revenue Code.
The ultimate effect of federal income taxes on the amounts held under a
Contract, on annuity payments, and on the economic benefit to the contract
owner, the annuitant, or the beneficiary depends on the type of retirement plan,
on the tax and employment status of the individual concerned and on ML of New
York's tax status. In addition, certain requirements must be satisfied in
purchasing a qualified Contract with proceeds from a tax qualified plan and
receiving distributions from a qualified Contract in order to continue receiving
favorable tax treatment. Therefore, purchasers of qualified Contracts should
seek competent legal and tax advice regarding the suitability of a Contract for
their situation, the applicable requirements, and the tax treatment of the
rights and benefits of a Contract. The following discussion assumes that
qualified Contracts are purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special federal income tax
treatment.
TAXATION OF ML OF NEW YORK
ML of New York is taxed as a life insurance company under Part I of Subchapter L
of the Internal Revenue Code. The assets underlying the Contracts will be owned
by ML of New York. The income earned on such assets will be income to ML of New
York.
TAX STATUS OF THE CONTRACT
ML of New York believes that the Contract will be treated as an annuity contract
and that ML of New York will be treated as owning the assets supporting the
Contract for federal income tax purposes. ML of New York, however, reserves the
right to modify the Contracts as necessary to prevent the contract owner from
being considered the owner of the assets supporting the Contract for federal tax
purposes.
Furthermore, in order to be treated as an annuity contract for federal income
tax purposes, Section 72(s) of the Internal Revenue Code requires any
non-qualified Contract to provide that (a) if any contract owner dies on or
after the annuity commencement date but prior to the time the entire interest in
the Contract has been distributed, the remaining portion of such interest will
be distributed at least as rapidly as under the method of distribution being
used as of the date of that contract owner's death; and (b) if any contract
owner dies prior to the annuity commencement date, the entire interest in the
Contract will be distributed within five years after the date of the contract
owner's death. These requirements will be considered satisfied as to any portion
of the contract owner's interest which is payable to or for the benefit of a
"designated beneficiary" and which is distributed over the life of such
"designated beneficiary" or over a period not extending beyond the life
expectancy of that beneficiary, provided that such distributions begin within
one year of that contract owner's death. The contract owner's "designated
beneficiary" (referred to herein as the "contract owner's beneficiary") is the
person designated by such owner as a beneficiary and to whom the contract
owner's interest in the Contract passes by reason of death and must be a natural
person. However, if the contract owner's "designated beneficiary" is the
surviving spouse of the contract owner, the Contract may be continued with the
surviving spouse as the new contract owner. Solely for purposes of applying the
provisions of Section 72(s) of the Code, when non-qualified Contracts are held
by other than a natural person, the death of the annuitant is treated as the
death of the contract owner.
The non-qualified Contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Internal Revenue Code, although no
regulations interpreting these requirements have yet been issued. ML of New York
intends to review such provisions and modify them if necessary to assure that
they comply with the requirements of Internal Revenue Code Section 72(s) when
clarified by regulation or otherwise.
Other rules may apply to qualified Contracts.
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
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FEDERAL TAXES
a. In General
Section 72 of the Internal Revenue Code governs taxation of annuities in
general. ML of New York believes that a contract owner who is a natural person
generally is not taxed on increases in the value of a Contract until
distribution occurs by withdrawing all or part of the account value (e.g.,
partial withdrawals and surrenders) or as annuity payments under the annuity
option elected. For this purpose, the assignment, pledge, or agreement to assign
or pledge any portion of the account value (and in the case of a qualified
Contract, any portion of an interest in the qualified plan) generally will be
treated as a distribution. The taxable portion of a distribution (in the form of
a single sum payment or an annuity) is taxable as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the contract's account value
over the "investment in the contract" (discussed below) during the taxable year.
There are some exceptions to this rule and a prospective owner that is not a
natural person may wish to discuss these with a competent tax adviser.
The following discussion generally applies to Contracts owned by natural
persons.
b. Partial Withdrawals and Surrenders
In the case of a partial withdrawal or surrender under a qualified Contract,
under Section 72(e) of the Internal Revenue Code a ratable portion of the amount
received is taxable, generally based on the ratio of the "investment in the
contract" to the participant's total accrued benefit or balance under the
retirement plan. The "investment in the contract" generally equals the portion,
if any, of any premium payments paid by or on behalf of any individual under a
Contract which was not excluded from the individual's gross income. For
Contracts issued in connection with qualified plans, the "investment in the
contract" can be zero. Special tax rules may be available for certain
distributions from qualified Contracts.
In the case of a partial withdrawal under a non-qualified Contract before the
annuity date, under Internal Revenue Code Section 72(e) amounts received are
generally first treated as taxable income to the extent that the account value
immediately before the partial withdrawal (increased by the net excess, if any,
of the sum of all Market Value Adjustments that increase any subaccount value
over the sum of all Market Value Adjustments that decrease any subaccount value
which result from the partial withdrawal) exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
It is important to note that the Contract is an integrated annuity contract and
that therefore in determining the extent to which a withdrawal from one
subaccount is taxable, the account value and "investment in the contract" for
the entire Contract, not just the subaccount from which the withdrawal is made,
will be taken into account.
In the case of a surrender under a non-qualified Contract, under Section 72(e)
amounts received are generally treated as taxable income to the extent the net
amount received exceeds the "investment in the contract" at that time.
c. Annuity Payments
Although tax consequences may vary depending on the annuity option elected under
the Contract, under Internal Revenue Code Section 72(b), generally gross income
does not include that part of any amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity date. In this respect
(prior to recovery of the investment in the contract), there is generally no tax
on the amount of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each income
payment is taxable. In all cases, after the "investment in the contract" is
recovered, the full amount of any additional annuity payments is taxable.
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d. Penalty Tax on Certain Withdrawals
In the case of a distribution pursuant to a non-qualified Contract, there may be
imposed a federal penalty tax equal to 10% of the amount treated as taxable
income. In general, however, there is no penalty tax on distributions: (1) made
on or after the date on which the contract owner attains age 59 1/2; (2) made as
a result of death or disability of the contract owner; (3) received in
substantially equal periodic payments over the life or life expectancy of the
contract owner (or joint life or life expectancy of the contract owner and a
designated beneficiary). In certain circumstances, other exceptions may apply.
Other tax penalties may apply to certain distributions under a qualified
Contract.
e. Taxation of Death Benefit Proceeds
Amounts may be distributed from a Contract because of the death of the contract
owner, the annuitant, or the co-annuitant. Generally, such amounts are
includable in the income of the recipient as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a full surrender of the Contract,
as described above, or (2) if distributed under an annuity option, they are
taxed in the same manner as annuity payments, as described above.
f. Transfers, Assignments, or Exchanges of a Contract
A transfer of ownership of a Contract, the designation of an annuitant, payee or
other beneficiary who is not also the contract owner, or the exchange of a
Contract may result in certain tax consequences to the owner that are not
discussed herein. A contract owner contemplating any such transfer, assignment,
or exchange of a Contract should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
g. Multiple Contracts
All non-qualified annuity contracts entered into after October 21, 1988 that are
issued by ML of New York (or its affiliates) to the same owner during any
calendar year are treated as one annuity contract for purposes of determining
the amount includable in gross income under Section 72(e) of the Internal
Revenue Code. In addition, the Treasury Department has specific authority to
issue regulations that prevent the avoidance of Section 72(e) through the serial
purchase of annuity contracts or otherwise. Congress has also indicated that the
Treasury Department may have authority to treat the combination purchase of an
immediate annuity contract and a separate deferred annuity contract as a single
annuity contract under its general authority to prescribe rules as may be
necessary to enforce the income tax laws.
h. Withholding
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. As of January 1, 1993, ML of New York is generally required to
withhold on distributions under qualified Contracts.
i. Possible Changes in Taxation
In past years, legislation has been proposed that would have adversely modified
the federal taxation of certain annuities. For example, one such proposal would
have changed the tax treatment of non-qualified annuities that did not have
"substantial life contingencies" by taxing income as it is credited to the
annuity. Although, as of the date of this prospectus, Congress is not actively
considering any legislation regarding the taxation of annuities, there is always
the possibility that the tax treatment of annuities could change by legislation
or other means (such as Internal Revenue Service regulation, revenue rulings,
judicial decisions, etc.). Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change).
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j. Other Tax Consequences
As noted above, the foregoing discussion of the federal income tax consequences
under the Contract is not exhaustive and special rules are provided with respect
to other tax situations not discussed in this Prospectus. Further, the federal
income tax consequences discussed herein reflect ML of New York's understanding
of current law and the law, or its interpretation by the Internal Revenue
Service, may change. Federal estate and state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each contract owner
or recipient of the distribution. A competent tax adviser should be consulted
for further information.
QUALIFIED PLANS
The Contract is designed for use with several types of qualified plans. These
retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans. Adverse tax or other legal consequences to
the plan, to the participant or to both may result if the Contract is assigned
or transferred to any individual as a means to provide benefit payments, unless
the plan complies with all legal requirements applicable to such benefits prior
to transfer of the Contract. The tax rules applicable to contract owners in
qualified plans, including restrictions on contributions and benefits, taxation
of distributions, and any tax penalties, vary according to the type of plan and
the terms and conditions of the plan itself. Various tax penalties may apply to
contributions in excess of specified limits, aggregate distributions in excess
of $150,000 annually, distributions that do not satisfy specified requirements,
and certain other transactions with respect to qualified plans. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified plans. Contract owners, annuitants
and beneficiaries are cautioned that the rights of any person to any benefits
under qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the Contract. Some
retirement plans are subject to distribution and other requirements that are not
incorporated into ML of New York's administration procedures. Owners,
participants, and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. Following are brief descriptions of the
various types of qualified plans in connection with which ML of New York will
issue a Contract. When issued in connection with a qualified plan, a Contract
will be amended as necessary to conform to the requirements of the Internal
Revenue Code.
H.R. 10 Plans
The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly
referred to as "H.R. 10," permits self-employed individuals to establish
qualified plans for themselves and their employees. In order to establish such a
plan, a plan document, often in prototype form preapproved by the Internal
Revenue Service, is adopted and implemented by or for the self-employed person.
Purchasers of Contracts for use with H.R. 10 Plans should seek competent advice
regarding the suitability of the proposed plan documents and of the Contract to
their specific needs.
Individual Retirement Annuities and Individual Retirement Accounts
Section 408 of the Internal Revenue Code permits eligible individuals to
contribute to an individual retirement program known as an Individual Retirement
Annuity or Individual Retirement Account (each hereinafter referred to as
"IRA"). Also, distributions from certain other types of qualified plans may be
"rolled over" on a tax-deferred basis into an IRA. Sales of the Contracts for
use with or as IRAs may be subject to special disclosure requirements of the
Internal Revenue Service. Purchasers of the Contract for use with or as IRAs
will be provided with supplemental information required by the Internal Revenue
Service or other appropriate agency. Such purchasers will have the right to
revoke their purchase within 7 days of the earlier of the establishment of the
IRA or their purchase. Purchasers should seek competent advice as to the
suitability of the Contract for use with or as IRAs.
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Corporate Pension and Profit Sharing Plans
Section 401(a) of the Internal Revenue Code permits corporate employers to
establish various types of retirement plans for employees. Such retirement plans
may permit the purchase of the Contracts in order to provide benefits under the
plans. Corporate employers intending to use the Contracts in connection with
such plans should seek competent advice.
Section 457 Deferred Compensation ("Section 457") Plans
Under Section 457 of the Internal Revenue Code, employees and independent
contractors who perform services for tax-exempt employers may participate in a
Section 457 plan of their employer allowing them to defer part of their salary
or other compensation. The amount deferred and any income on such amount will
not be taxable until paid or otherwise made available to the employee.
The maximum amount that can be deferred under a Section 457 plan in any tax year
is ordinarily one-third of the employee's includable compensation, up to $7,500.
Includable compensation means earnings for services rendered to the employer
which is includable in the employee's gross income, but excluding any
contributions under the Section 457 plan or a Tax-Sheltered Annuity. During the
last three years before an individual attains normal retirement age additional
"catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase the Contracts.
Contracts will be issued to the employer, and all account values will be subject
to the claims of the employer's creditors. The employee has no rights or vested
interest in the Contract and is only entitled to payment in accordance with the
Section 457 plan provisions. Present federal income tax law does not allow
tax-free transfers or rollovers for amounts accumulated in a Section 457 plan
except for transfers to other Section 457 plans in certain limited cases.
PREMIUM TAXES
Various states, municipalities and jurisdictions impose a premium tax on annuity
premiums when they are received by an insurance company. In other jurisdictions,
a premium tax is paid on the contract value on the annuity date.
ML of New York will pay these taxes when due, and a charge for any premium taxes
imposed by a state, local government or jurisdiction will be deducted from the
contract value on the annuity date. In those jurisdictions that do not allow an
insurance company to reduce its current taxable premium income by the amount of
any withdrawal, surrender or death benefit paid, ML of New York will also deduct
a charge for these taxes on any withdrawal, surrender or death benefit effected
under a Contract once regulatory approval has been obtained. Contract owners
should refer to their Contracts. Premium tax rates vary from jurisdiction to
jurisdiction and currently range from 0% to 5%.
Premium tax rates are subject to change by law, administrative interpretations,
or court decisions. Premium tax amounts will depend on, among other things, the
participant's state or jurisdiction of residence, ML of New York's status within
that state or jurisdiction, and the premium tax laws of that state or
jurisdiction. No premium taxes are currently imposed by the state of New York,
but ML of New York cannot guarantee that such taxes will not be assessed by New
York in the future.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes fiduciary, prohibited transaction and other requirements with respect to
employee benefit plans to which it applies. In certain circumstances these
requirements may be applicable to the management of an insurance company
account. ML of New York believes that the account established for the Contracts
is a guaranteed contract separate account within the meaning of Prohibited
Transaction Class Exemption 81-82 and that assets attributed to the account will
not be treated as "plan assets", under regulations promulgated by the Department
of Labor. Prior to purchasing a Contract, however, the fiduciary responsible for
investments of a plan subject to ERISA should become fully informed regarding
the relevant terms of the Contract, including
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<PAGE> 23
the Market Value Adjustment and withdrawal charge, and should take account of
the anticipated liquidity needs of the plan in determining whether to purchase
the Contract.
MORE INFORMATION ABOUT ML LIFE INSURANCE COMPANY OF NEW YORK
A. HISTORY AND BUSINESS
ML of New York is a stock life insurance company organized under the laws of the
State of New York on November 28, 1973. ML of New York (originally named "Agway
Life Insurance Company") was purchased by The Equitable Life Assurance Society
of the United States ("The Equitable") for $9.5 million on May 21, 1986 and
renamed Royal Tandem Life Insurance Company. On September 11, 1991, Royal Tandem
Life Insurance Company changed its name to ML Life Insurance Company of New
York.
Prior to 1987, ML of New York was engaged in the business of issuing
non-participating whole life and term life insurance contracts. During 1987, ML
of New York entered into various agreements with Monitor Life Insurance Company
of New York ("Monitor") whereby Monitor initially coinsured and administered,
effective March 5, 1987, and then ultimately assumed, effective July 31, 1987,
ML of New York's ordinary non-participating individual life insurance and
annuity business.
On July 31, 1987, The Equitable sold 25% of its common stock interest in ML of
New York to Merrill Lynch & Co., Inc. ("Merrill Lynch") for approximately $3
million. Immediately following the sale, The Equitable and Merrill Lynch
simultaneously contributed their respective interests in the common stock of ML
of New York to the capital of Tandem Financial Group, Inc. ("TFG"). On October
11, 1989, Merrill Lynch purchased all of the shares of capital stock of TFG
owned by The Equitable for $86.3 million, and TFG became a wholly owned
subsidiary of Merrill Lynch. On September 6, 1990, TFG changed its name to
Merrill Lynch Insurance Group, Inc. ("MLIG"). ML of New York and its affiliate
Merrill Lynch Life Insurance Company ("Merrill Lynch Life") are direct wholly
owned subsidiaries of MLIG.
On November 14, 1990, ML of New York and Tandem Insurance Group, Inc. ("Tandem
Insurance," a life insurance company now merged with and into Merrill Lynch
Life) entered into an indemnity reinsurance and assumption agreement. Pursuant
to this agreement, on December 31, 1990, ML of New York and Tandem Insurance
reinsured on a 100% indemnity basis all variable life insurance policies (the
"reinsured policies") issued by Monarch Life Insurance Company ("Monarch Life")
and sold through affiliates of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"). As a result, ML of New York became obligated to
reimburse Monarch Life for its net amount at risk with regard to the reinsured
policies. In connection with the indemnity reinsurance, assets of approximately
$65 million supporting general account reserves were transferred from Monarch
Life to ML of New York.
On various dates through April 22, 1991, ML of New York and Tandem Insurance
assumed the reinsured policies wherever permitted by appropriate regulatory
authorities, replacing Monarch Life. In connection with the assumption, assets
and reserves associated with the reinsured policies of approximately $290
million were transferred to ML of New York, of which approximately $261 million
are held in the ML of New York Variable Life Separate Account. The aggregate
face amount of the reinsured policies assumed by ML of New York was
approximately $700 million.
Information pertaining to contract owner deposits, contract owner account
balances, and capital contributions can be found in ML of New York's financial
statements which are contained herein.
ML of New York is currently licensed to conduct life insurance and annuity
business in 9 states. It currently sells its annuity products and variable life
insurance products only in the state of New York. During 1994, annuity and life
insurance sales were made principally in New York (93%, as measured by total
contract owner deposits).
ML of New York's life insurance and annuity products will be sold only by
licensed agents through Merrill Lynch Life Agency Inc. ("MLLA") which is a
wholly owned subsidiary of MLPF&S, pursuant to a general agency agreement by and
between ML of New York and MLLA. Sales are made by career life insurance
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<PAGE> 24
agents whose sole responsibility is the sale and servicing of insurance, and by
Financial Consultants of MLPF&S who are also licensed as insurance agents. At
December 31, 1994, approximately 1,750 agents of MLLA were authorized to act for
ML of New York.
B. SELECTED FINANCIAL DATA
The following selected financial data for ML of New York should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
FOR THE PERIODS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net investment income.... $ 32,679 $ 50,661 $ 65,378 $ 69,965 $ 62,445
Earnings (Loss) Before
Federal Income Tax..... $ 7,291 $ 2,400 $ 368 $ (4,915) $ 3,658
Net Earnings (Loss)...... $ 5,473 $ 1,808 $ 191 $ (3,221) $ 2,430
Total Assets............. $920,722 $1,045,313 $1,102,688 $1,136,537 $772,697
Stockholder's Equity..... $ 95,813 $ 92,776 $ 92,247 $ 90,631 $ 67,409
</TABLE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Financial Statements and Notes
to Financial Statements included herein.
Business Environment
The current business environment remains challenging for the life insurance
industry. Major modifications to state regulations based on model laws of the
National Association of Insurance Commissioners ("NAIC"), and the process of
NAIC state accreditation are being debated and implemented by the NAIC. The
legal barriers which have historically excluded the banking industry from the
sale of insurance and annuity products are in the process of being removed
through both legislative and judicial processes. Competition remains keen as
innovative products are introduced to the marketplace by both traditional and
non-traditional competitors.
Interest rates that had fallen over the previous three years reaching
historically low levels during the first quarter of 1994, significantly
increased during the last three quarters of 1994. The equity markets have seen
significant price volatility during 1994 with ending values approximating those
at December 31, 1993. During 1994, the increasing interest rate environment
resulted in a reduction of debt refinancings in both the institutional and
individual sectors. There has been a significant reduction in the use of the
call feature on corporate bonds and reduced principal repayments of mortgage
backed securities. The increase in interest rates and, to a certain extent, the
lengthening of the duration of callable corporate bonds and mortgage backed
securities, has resulted in a general decline in the market value of fixed
maturity securities portfolios.
Within the insurance industry, variable life insurance and variable annuity
sales continued to be strong during 1994. The increase in the marginal
individual income tax rates during 1993 has benefited the insurance industry as
individual investors seek tax advantaged investment options. However, with the
increase in interest rates and the volatility in the equity markets, individual
investors looking to satisfy retirement and estate planning needs through tax
advantaged investments have shown increased interest in traditional interest
sensitive insurance products.
Summary
ML of New York sells variable and interest sensitive life insurance and annuity
products through Merrill Lynch & Co.'s retail network. ML of New York currently
sells its products only in the state of New York. ML of New York competes for
Merrill Lynch & Co.'s clients' life insurance and annuity business with non-
affiliated insurers whose products are also sold through Merrill Lynch & Co.'s
retail network as well as insurers
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<PAGE> 25
who solicit this business directly. The product lines which ML of New York
offers are highly competitive with most major life insurers offering similar
products. ML of New York competes with these insurers by integrating its
products into Merrill Lynch & Co.'s planning based financial management program.
ML of New York also seeks to provide superior customer service and financial
management to promote the competitiveness of its products. ML of New York's
customer service centers have established standards of performance that are
monitored on a regular basis. Managers and employees in the customer service
centers are periodically evaluated based on their performance in meeting these
standards. ML of New York's financial management is based on conservative
investment and liability management and regular monitoring of its risk profile.
ML of New York has strategically placed its marketing emphasis on the sale of
variable annuities, modified guaranteed annuities and variable life insurance
products. These products primarily address the retirement and estate planning
needs of Merrill Lynch & Co.'s clients.
Both interest sensitive and variable deferred annuities currently provide tax
advantages which similar non-insurance investments do not possess. Congress and
the President of the United States have the ability to limit or eliminate this
tax advantage. Such actions could have significant consequences on both the
insurance industry and particularly ML of New York in being able to compete with
non-insurance investment products.
ML of New York's variable annuity product provides tax deferred savings with the
opportunity for diversified investing in a wide selection of underlying mutual
fund portfolios. Deposits received from the sales of this product were $102
million, $114 million and $1 million for 1994, 1993 and 1992, respectively. A
significant portion of the deposits received from sales of the variable annuity
product were a result of tax-free exchanges from ML of New York's fixed rate
annuity products. For 1994 and 1993, approximately $62 million and $81 million,
respectively, of deposits were a result of tax-free exchanges.
ML of New York's modified guaranteed annuity product provides a guaranteed fixed
interest crediting rate for a period selected by the contract owner but imposes
a market value adjustment for withdrawals prior to the expiration of the
guarantee period. During 1994, as a result of the increasing interest rate
environment, there was renewed interest in the modified guaranteed annuity
product. Deposits received from the sales of this product were $45 million, $22
million and $40 million for 1994, 1993 and 1992, respectively. For 1994, 1993
and 1992, approximately $34 million, $15 million and $35 million, respectively,
of deposits were a result of tax free exchanges from ML of New York's fixed rate
annuity products.
ML of New York offers a variable life insurance product which provides life
insurance protection with the ability to allocate the cash value indirectly to
underlying diversified mutual fund portfolios. The variable life insurance
product was first introduced during December of 1992. Sales during both 1994 and
1993 were approximately $3 million annually.
During 1995, ML of New York is anticipating a significant decrease in sales
volume of its variable annuity product due to an expected reduction in tax-free
exchanges from the fixed rate annuity products. It is anticipated that modified
guaranteed annuity sales will continue to increase reflecting renewed investor
demand for fixed interest products resulting from the current interest rate
environment. Current initiatives for the more effective utilization of variable
life insurance in the estate and retirement planning of Merrill Lynch & Co.'s
clients are also anticipated to enhance variable life insurance sales over the
long term. ML of New York is also anticipating the introduction during 1995 of a
variable universal life product utilized primarily for estate planning purposes.
During 1994, 1993 and 1992, ML of New York had approximately $228 million, $304
million and $160 million, respectively, of fixed rate deferred annuities that
reached the expiration of their interest rate guarantee periods. At the
expiration of an interest rate guarantee period, the contract owner has an
option to either surrender the contract without incurring a surrender charge, or
to "renew" with an adjustment of the interest crediting rate to the prevailing
rate at the time of renewal. ML of New York has offered those contract owners
electing to surrender the opportunity to exchange their contract for either a
variable annuity or modified guaranteed annuity contract. The following table
summarizes the contract owners' selections for 1994, 1993 and 1992:
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<PAGE> 26
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
---- --- ---- --- ---- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Renewed with an adjustment to the applicable
interest crediting rate......................... $ 34 15 $ 76 25 $ 24 15
Exchanged into either the variable annuity product
or the modified guaranteed annuity product...... 110 48 101 33 40 25
Surrendered....................................... 85 37 127 42 96 60
---- --- ---- --- ---- ---
Total................................... $228 100 $304 100 $160 100
==== === ==== === ==== ===
</TABLE>
The rates of renewal, exchange and surrender experienced are consistent with
management's expectations. For 1995 and 1996, fixed rate deferred annuity
liabilities that will reach the expiration of their interest rate guarantee
period will decline significantly from the 1993 and 1994 levels to $45 million
and $8 million, respectively.
Financial Condition
At December 31, 1994, ML of New York's assets were $921 million, or $124 million
lower than the $1.045 billion at December 31, 1993. As previously discussed, ML
of New York experienced significant increases in both contract owner withdrawals
and deposits; the excess of withdrawals over deposits during 1994 being the
primary cause of the reduction in assets. ML of New York continued to
concentrate its marketing emphasis on the sale of variable products resulting in
the reallocation of assets from the general account to the separate account. As
of December 31, 1994 and 1993, ML of New York's percentage of separate accounts
assets to total assets was 51% and 39%, respectively. ML of New York anticipates
that the percentage of separate accounts assets to total assets will continue to
increase.
As a result of the rising interest rate environment during 1994, ML of New York
has experienced a reduction in the fair value of its available-for-sale
investment portfolios. At December 31, 1993, the unrealized gain recorded for
the fixed maturity securities available-for-sale portfolio was $17 million as
compared to a $11 million unrealized loss at December 31, 1994. After adjustment
of deferred policy acquisition costs, deferred federal income taxes and
policyholders' account balances the net increase in unrealized investment losses
during 1994 was $2 million.
ML of New York maintains a conservative investment portfolio. ML of New York's
investment in equity securities and mortgages are significantly below the
industry average. ML of New York has no real estate investments. The following
schedule identifies ML of New York's general account invested assets by type:
<TABLE>
<S> <C>
Investment Grade Fixed Maturity Securities........................................... 68%
Policy Loans......................................................................... 21%
Non-Investment Grade Fixed Maturity Securities....................................... 8%
Mortgages Loans on Real Estate....................................................... 2%
Equity Securities.................................................................... 1%
---
100%
===
</TABLE>
ML of New York's investment in collateralized mortgage obligations ("CMO") and
mortgage backed securities ("MBS") had a carrying value of $76 million as of
December 31, 1994. At December 31, 1994 approximately 60% of ML of New York's
CMO and MBS holdings were fully collateralized by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation. CMOs and MBS 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
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<PAGE> 27
investor is willing to accept. It is this level of risk that the investor is
willing to accept that determines the degree to which the yields on CMOs and MBS
securities will exceed the yields that can be obtained from similarly rated
corporate securities.
During 1993, the historical low interest rate environment resulted in ML of New
York experiencing increases in both calls of corporate bonds and accelerated
principal repayments of mortgage backed securities. However, during 1994, as a
result of the increasing interest rate environment, calls and principal
repayments declined significantly. During 1994 and 1993 approximately $70
million and $238 million, respectively, of proceeds from disposal of fixed
maturity securities was attributable to calls and mortgage backed security
repayments. This represented 32% and 53% for 1994 and 1993, respectively, of the
proceeds from disposal of fixed maturity securities. The net cash inflows from
the investment portfolios, including interest, calls, repayments and maturities,
were generally reinvested at lower yields during 1993 and higher yields during
1994, than the investments from which the cash inflows were generated.
As of December 31, 1994, ML of New York had 5,845 life insurance and annuity
contracts in-force with interest rate guarantees. The estimated average rate of
interest credited on behalf of contract owners was 5.45% during 1994. The
liabilities related to insurance contracts with interest rate guarantees were
supported by invested assets with an estimated effective yield of 7.82% during
1994.
Liquidity and Capital Resources
ML of New York'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. ML of New York 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.
ML of New York anticipates a significant reduction in liquidity requirements for
funding of contractual obligations as compared to the requirements of the
previous three years. This is a result of the significant decline in the amount
of fixed rate deferred annuities that will reach the expiration of their
interest rate guarantee periods during 1995 as compared to 1992 through 1994.
However, the level of anticipated sales of ML of New York's variable life and
annuity products will require that ML of New York maintain substantial liquidity
levels for the funding of sales commissions and other underwriting expenses. ML
of New York anticipates funding all its cash requirements utilizing cash from
operations, normal investment maturities and anticipated calls and repayments,
consistent with prior years. As of December 31, 1994, ML of New York's assets
included $216 million of cash, short-term investments and investment grade
publicly traded fixed maturity securities that could be liquidated if funds were
required.
In order to continue to market life insurance and annuity products, ML of New
York must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles in two
major respects; under statutory accounting practices, the acquisition costs of
new business are charged to expense and the required additions to statutory
reserves for new business in some cases may initially exceed the statutory
revenues attributable to such business. These practices result in a reduction of
statutory income and surplus at the time of recording new business.
The NAIC has developed and implemented effective December 31, 1993, the Risk
Based Capital ("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. The NAIC has established four different levels of
regulatory action with respect to the RBC adequacy monitoring system. Each of
these levels may be triggered if an insurer's total adjusted capital is less
than a corresponding level of RBC. (See Note 6 of the Notes to Financial
Statements for a complete explanation of these levels.) As of December 31, 1994
and 1993, based on the RBC formula, ML of New York's total adjusted capital
level was in excess of the minimum amount of capital required to avoid
regulatory action.
ML of New York believes that it will be able to fund the capital and surplus
requirements of projected new business from current statutory earnings and
existing statutory capital and surplus. If sales of new business
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<PAGE> 28
significantly exceed projections, ML of New York may have to look to its parent
and other affiliated companies to provide the capital or borrowings necessary to
support its current marketing efforts. ML of New York's future marketing efforts
could be hampered should its parent and/or affiliates be unwilling to commit
additional funding.
Results of Operations
ML of New York's gross earnings are principally derived from two sources; the
net income from investment of fixed rate life insurance and annuity contract
owner deposits less interest credited to contract owners, commonly known as
spread, and the charges imposed on variable life insurance and variable annuity
contracts. The costs associated with acquiring contract owner deposits are
amortized over the period in which ML of New York anticipates holding those
funds. In addition, ML of New York incurs expenses associated with the
maintenance of in-force contracts.
1994 compared to 1993
ML of New York recorded net earnings of $5 million and $2 million for 1994 and
1993, respectively.
Net investment income and interest credited to policyholders' account balances
for 1994 as compared to 1993 have declined by approximately $18 million and $22
million, respectively, resulting in a $4 million increase in interest spread.
The reductions in net investment income and interest credited to policyholders'
account balances are primarily attributable to the reduction in fixed rate
contracts in-force. The increase in interest spread is partially attributable to
the adjustment of the guaranteed interest crediting rate to the prevailing rate
on those contracts that have reached the end of their interest rate guarantee
period. Also contributing to the increase in spread was that net cash inflows
from the investment portfolios were generally reinvested at higher yields during
1994, than the investments from which the cash inflows were generated.
ML of New York experienced net realized investment losses of $2 million during
1994 as compared to net realized investment gains of $6 million during 1993.
During 1994 there was significant volatility in the debt markets with ending
values generally being lower at December 31, 1994 than they were at December 31,
1993. Reflecting the general declines in value, dispositions in the available
for sale portfolios resulted in substantially reduced net realized investment
gains during 1994 as compared to the same period during 1993.
Policy charge revenue increased approximately $2 million during the current year
as compared to 1993. This increase is primarily attributable to the 74% increase
in policyholders' account balances, as compared to December 31, 1993, of the
variable annuity product.
Amortization of deferred policy acquisition costs declined $5 million during the
current period as compared to 1993. ML of New York adjusts the amortization of
deferred policy acquisition costs based on realized investment gains recognized
on normal dispositions in ML of New York's investment portfolios. The decline in
realized investment gains during the current period as compared to 1993
contributed to the reduction in amortization of deferred acquisition costs.
Additionally, contributing to the decrease in amortization is a decline in fixed
annuity contracts in-force partially offset by the increase in the variable
annuity contracts in-force.
Insurance expenses and taxes decreased $2 million during the current period as
compared to 1993. The reduction in expenses is attributable to operational
efficiencies and the completion during 1993 of certain policy administration
system enhancements.
ML of New York's effective federal income tax rate was 25% during 1994 and 1993.
During 1994 ML of New York recorded an adjustment to prior years' tax
liabilities resulting in the reduction from the statutory 35% rate. During 1993
the Federal corporate income tax rate was increased from 34% to 35%. The
increased rate was utilized in revaluing the deferred tax asset and resulted in
an increase in the deferred tax benefit.
1993 compared to 1992
ML of New York reported net earnings of $2 million and $0 million for 1993 and
1992, respectively.
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<PAGE> 29
Net investment income and interest credited to policyholders' account balances
for 1993 as compared to 1992 declined by approximately $15 million and $13
million, respectively, resulting in a net decline in interest spread of $2
million. The decline in interest spread is attributable to the low interest rate
environment and a declining block of fixed rate life insurance and annuity
contracts partially offset by adjustment of the guaranteed interest crediting
rate on those contracts which have reached the end of their interest rate
guarantee period to the prevailing rate.
ML of New York experienced an increase in net realized investment gains of $6
million during 1993 as compared to 1992. Approximately $1 million of the
increase in net realized investment gains was attributable to sales of
investments to fund surrenders of ML of New York's modified guaranteed annuity
product. During 1992, ML of New York recorded a $1 million loss on the disposal
of a mortgage loan. There was a $1 million period to period reduction in the
amount of valuation allowances established for mortgage loans on real estate.
The remaining increase in realized investment gains is attributable to normal
trading activity in ML of New York's investment portfolios.
Policy charge revenue increased approximately $1 million during 1993 as compared
to 1992 primarily as a result of an increase in the number of variable annuity
contracts in-force due to current sales volume.
The market value adjustment expense is attributable to ML of New York's modified
guaranteed annuity product. This contract provision results in a market value
adjustment to the cash surrender value of those contracts which are surrendered
before the expiration of their interest rate guarantee period. Due to the
decline in interest rates, this market value adjustment has resulted in an
expense to ML of New York. ML of New York's modified guaranteed annuity has
experienced an increase in surrenders during 1993 as compared to 1992. Many of
these contract owners have exchanged their contracts for variable annuity
contracts sold by ML of New York or our competitors. The increase in surrender
activity has resulted in the $1 million increase in the market value adjustment
expense. Offsetting this expense were net realized investment gains attributable
to the sale of investments to fund the surrenders.
Policy benefits increased approximately $1 million from $1 million for 1992 to
$2 million for 1993 due to a period to period change in mortality experience. ML
of New York's reinsurance and risk retention programs have remained unchanged
between 1993 and 1992.
ML of New York adjusts the amortization of deferred policy acquisition costs
based on realized investment gains recognized on normal trading activity in ML
of New York's investment portfolios. The $1 million increase in amortization of
deferred policy acquisition costs is primarily attributable to the increase
during 1993 in realized investment gains.
Insurance expenses and taxes increased approximately $1 million during 1993 as
compared to 1992 as a result of expenses associated with increased levels of
contract holder activity. As previously discussed both sales of the Company's
variable annuity contract and surrender activity of the Company's fixed
annuities have increased substantially during 1993 as compared to 1992.
During 1993 the Federal corporate income tax rate was increased from 34% to 35%.
The increased rate was utilized in revaluing the deferred tax asset and resulted
in an increase in the deferred tax benefit.
Segment Information
ML of New York's operations consist of one business segment, which is the sale
of life insurance and annuity products. ML of New York is not dependent upon any
single customer, and no single customer accounted for more than 10% of its
revenues during 1994.
Inflation
ML of New York's operations have not been materially impacted by inflation and
changing prices during the preceding three years.
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<PAGE> 30
D. REINSURANCE
Portions of life insurance risks are reinsured with other companies. ML of New
York has reinsurance agreements with a number of other insurance companies for
individual life insurance. The maximum retention on any one life is
approximately $500,000.
E. CONTRACT OWNER ACCOUNT BALANCES
ML of New York records on its books liabilities for life insurance and annuity
products which are equal to the full accumulation value of such contracts plus a
mortality provision for life insurance products, which will be sufficient to
meet ML of New York's contract obligations at their maturities or in the event
of a contract owner's death.
F. INVESTMENTS
ML of New York makes investments in accordance with investment guidelines that
take into account investment quality, liquidity, and diversification, and
invests primarily in investment-grade fixed income assets such as
mortgage-backed securities, collateralized mortgage obligations and corporate
debentures. At December 31, 1994, invested assets consisted of $286 million in
fixed maturity securities available for sale, $78 million in policy loans, $8
million in commercial mortgages, and $4 million in equity securities. At
December 31, 1994, ML of New York's assets included $216 million of cash,
short-term investments and investment grade publicly traded fixed maturity
securities supporting contract guarantees.
At December 31, 1994 approximately $102 million was invested in fixed maturity
securities rated BBB by Standard and Poor's (or similar rating agency). Fixed
maturity securities rated BBB may have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity of the issuers to make principal and interest payments than is
the case with higher rated fixed maturity securities.
At December 31, 1994, approximately $31 million (10.7%) of ML of New York's
fixed maturity securities were invested in securities considered non-investment
grade. ML of New York defines non-investment grade as unsecured corporate debt
obligations which do not have a rating equivalent to Standard and Poor's (or
similar rating agency) BBB or higher, and are not guaranteed by an agency of the
federal government. Non-investment grade securities are speculative and are
subject to significantly greater risks related to the creditworthiness of the
issuers and the liquidity of the market for such securities. ML of New York
carefully selects, and closely monitors, such investments.
G. COMPETITION
ML of New York is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. There are approximately 1,800 stock, mutual and
other types of insurers in the life insurance business in the United States, a
number of which are substantially larger than ML of New York.
H. CERTAIN AGREEMENTS
Investment Management Agreements
ML of New York has entered into an investment management agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"), a subsidiary of Merrill Lynch, pursuant
to which MLAM provides investment management and related accounting services
with respect to ML of New York's publicly traded investments. ML of New York
pays a fee to MLAM for these services. ML of New York paid reimbursements of
$203,000, $265,000, and $339,000 during the years ended December 31, 1994, 1993,
and 1992, respectively, to MLAM for such services.
ML of New York and Equitable Capital Management Corporation ("ECMC"), a
registered investment adviser, were parties to an agreement pursuant to which
ECMC provided investment management and related
30
<PAGE> 31
accounting services to ML of New York. Under the agreement, ML of New York paid
ECMC fees based upon the type of asset managed. Through the first three quarters
of 1990 ECMC provided investment management services relating to publicly and
privately traded securities. During the fourth quarter of 1990 through 1991,
ECMC provided services relating only to privately traded securities. This
agreement was terminated in 1992. ML of New York paid fees of $50,000 during
1992 to ECMC for such services.
Mortgage Loan Servicing and Investment Advisory Agreements
ML of New York has entered into a mortgage loan servicing agreement with Merrill
Lynch, pursuant to which Merrill Lynch provides mortgage servicing and related
accounting services with respect to investments of ML of New York in real
estate, commercial mortgage loans, and mortgage loan participations. ML of New
York paid a fee of $33,000 during the year ended December 31, 1994 to Merrill
Lynch for such services.
ML of New York has entered into a mortgage loan servicing agreement with
Equitable Real Estate Investment Management, Inc. ("EREIM"), a wholly owned
subsidiary of The Equitable, pursuant to which EREIM provides real estate
investment advice and related accounting services to ML of New York. ML of New
York paid fees of $15,000 and $55,000 during 1993 and 1992, respectively, to
EREIM for such services. This agreement was terminated during 1993.
Service Agreement
ML of New York and MLIG are parties to a service agreement pursuant to which
MLIG has agreed to provide certain data processing, legal, actuarial,
management, advertising and other services to ML of New York. Expenses incurred
by MLIG in relation to this service agreement are reimbursed by ML of New York
on an allocated cost basis. Charges billed to ML of New York by MLIG pursuant to
the agreement were $4.0 million, $5.7 million, and $5.4 million during the years
ended December 31, 1994, 1993, and 1992, respectively.
General Agency Agreement
In addition, ML of New York has entered into a general agency agreement with
Merrill Lynch Life Agency, Inc. ("MLLA") pursuant to which registered
representatives of MLPF&S who are also ML of New York's licensed insurance
agents solicit applications for contracts issued by ML of New York. MLLA is paid
commissions for the contracts sold by such agents. Commissions paid to MLLA by
ML of New York under the general agency agreement were $5.3 million, $4.9
million, and $1.5 million during the years ended December 31, 1994, 1993, and
1992, respectively. (See "Distribution of the Contracts" on page 18.)
I. EMPLOYEES
ML of New York, by special agreement with the New York State Insurance
Department, is required to maintain at its principal office in New York
qualified personnel responsible for directing its daily operations including,
without limitation, general administrative services, record keeping, accounting,
underwriting, claims settlement and marketing. ML of New York has 11 such
employees, and the cost of their services is allocated to ML of New York.
Certain officers of ML of New York also perform services for affiliates of ML of
New York, and their salaries are allocated among ML of New York and such
affiliates. (See "Directors and Executive Officers" on page 35.)
J. PROPERTIES
ML of New York's principal office is located at 100 Church Street, 11th Floor,
New York, New York, where all of ML of New York's records are maintained. This
office space is leased from MLPF&S. In addition, personnel performing services
for ML of New York pursuant to its Management Services Agreement operate in MLIG
office space. Merrill Lynch Insurance Group Services, Inc. ("MLIGS"), an
affiliate of MLIG owns office space in Jacksonville, Florida. MLIGS also
subleases certain office space in Springfield, Massachusetts from Monarch Life
Insurance Company. MLIG occupies certain office space in Plainsboro, New Jersey
31
<PAGE> 32
through Merrill Lynch. An allocable share of the cost of each of these premises
is paid by ML of New York through the service agreement with MLIG.
K. STATE REGULATION
ML of New York is subject to the laws of the State of New York governing
insurance companies and to the regulations of the New York State Insurance
Department (the "Department"). A detailed financial statement in the prescribed
form (the "Annual Statement") is filed with the Department each year covering ML
of New York's operations for the preceding year and its financial condition as
of the end of that year. Regulation by the Department includes periodic
examination to determine contract liabilities and reserves so that the
Department may certify that these items are correct. ML of New York's books and
accounts are subject to review by the Department at all times. A full
examination of ML of New York's operations is conducted periodically by the
Department and under the auspices of the National Association of Insurance
Commissioners.
In addition, ML of New York is subject to regulation under the insurance laws of
other jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. ML of New York is required to file the Annual Statement
with supervisory agencies in each of the jurisdictions in which it conducts
business, and its operations and accounts are subject to examination by these
agencies at regular intervals.
The National Association of Insurance Commissioners ("NAIC") has adopted several
regulatory initiatives designed to improve the surveillance and financial
analysis regarding the solvency of insurance companies in general. These
initiatives include the development and implementation of a risk-based capital
formula for determining adequate levels of capital and surplus. Insurance
companies are required to calculate their risk-based capital in accordance with
this formula and to include the results in their Annual Statement. It is
anticipated that these standards will have no significant effect upon ML of New
York. For additional information about the Risk-Based Capital adequacy
monitoring system and ML of New York, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources", page 27.
In addition, many states regulate affiliated groups of insurers, such as ML of
New York and its affiliates, under insurance holding company legislation. Under
such laws, intercompany transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfers and payments in relation to the financial positions of the
companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred by other insurance companies which have become insolvent. Most of these
laws provide that an assessment may be excused or deferred if it would threaten
an insurer's own financial strength. For information regarding ML of New York's
estimated liability for future guaranty fund assessments, see Note 7 of Notes to
Financial Statements.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of ML of New York are subject
to various federal securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
32
<PAGE> 33
DIRECTORS AND EXECUTIVE OFFICERS
ML of New York's directors and executive officers and their positions with the
Company are as follows:
<TABLE>
<CAPTION>
NAME (AGE) POSITION(S) WITH THE COMPANY
------------------------------------------- ------------------------------------------------
<S> <C>
Anthony J. Vespa (53)...................... Chairman of the Board, President, and Chief
Executive Officer
Joseph E. Crowne (48)...................... Director, Senior Vice President, Chief Financial
Officer, Chief Actuary, and Treasurer
Barry G. Skolnick (43)..................... Director, Senior Vice President, General Counsel
and Secretary
Michael P. Cogswell (40)................... Director, Vice President, and Senior Counsel
David M. Dunford (46)...................... Director, Senior Vice President and Chief
Investment Officer
John C.R. Hele (36)........................ Director and Senior Vice President
Frederick J.C. Butler (53)................. Director
Robert L. Israeloff (56)................... Director
Allen N. Jones (52)........................ Director
Cynthia L. Kahn (39)....................... Director
Robert A. King (56)........................ Director
Irving M. Pollack (77)..................... Director
William A. Wilde (52)...................... Director
Robert J. Boucher (49)..................... Senior Vice President, Variable Life
Administration
Margaret M. Toni (30)...................... Vice President, Administrative Manager and
Assistant Secretary
</TABLE>
Each director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and shall have qualified. Some
directors have held various executive positions with insurance company
subsidiaries of the Company's indirect parent, Merrill Lynch & Co., Inc. From
time to time during 1993, legal services were performed by the law firm of
Rogers & Wells for ML of New York. Cynthia L. Kahn is a partner of this law
firm.
The principal positions of the Company's directors and executive officers for
the past five years are listed below:
Mr. Vespa joined ML of New York in February 1994. Since February 1994, he has
held the position of Senior Vice President of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. From February 1991 to February 1994, he held the position of
District Director and First Vice President of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. From September 1988 to February 1991, he held the position
of Senior Resident Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
Mr. Crowne joined ML of New York in June 1991. From January 1989 to May 1991, he
was a Principal with Coopers & Lybrand.
Mr. Skolnick joined ML of New York in November 1989. He joined Merrill Lynch,
Pierce, Fenner & Smith Incorporated in July 1984. Since May 1992, he has held
the position of Assistant General Counsel of Merrill Lynch & Co., Inc. and First
Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Prior to
May 1992, he held the position of Senior Counsel of Merrill Lynch & Co., Inc.
Mr. Dunford joined ML of New York in July 1990. He joined Merrill Lynch, Pierce,
Fenner & Smith Incorporated in September 1989.
Mr. Butler joined ML of New York in April 1991. Since November 1991 he has held
the position of Chairman of Butler, Chapman & Co., Inc. Prior to April 1991, he
served as Managing Director of the Investment Banking Division of Merrill Lynch
& Co., Inc.
33
<PAGE> 34
Mr. Cogswell has been with ML of New York since November of 1990. Prior to
November of 1990, he was an Assistant Counsel of UNUM Life Insurance Company.
Mr. Hele joined ML of New York in September 1990. He joined Merrill Lynch,
Pierce, Fenner & Smith Incorporated in August 1988.
Mr. Israeloff joined ML of New York in April 1991. Since 1964, he has been
Chairman and Executive Partner of Israeloff, Trattner & Co., CPAs, P.C., a
public accounting firm.
Mr. Jones joined ML of New York in June 1992. Since May 1992, he has held the
position of Senior Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. From June 1992 to February 1994, he held the position of Chairman
of the Board, President, and Chief Executive Officer of ML of New York. From
January 1992 to June 1992, he held the position of First Vice President of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. From January 1991 to January
1992, he held the position of District Director of Merrill Lynch, Pierce, Fenner
& Smith Incorporated. Prior to January 1991, he held the position of Senior
Regional Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Ms. Kahn joined ML of New York in November 1993. She is a partner at the law
firm of Rogers & Wells. She has been associated with Rogers & Wells since 1984.
Mr. King joined ML of New York in April 1991. Since February 1991, he has been
Vice President for Finance at Marymount College, Tarrytown, New York. From March
1973 until February 1991, he served as Managing Director of Merrill Lynch
Capital Markets.
Mr. Pollack joined ML of New York in April 1991. In 1980, he retired from the
Securities and Exchange Commission after thirty years of service, and having
served as an SEC Commissioner from 1974 to 1980. Since 1980, he has practiced
law and been a private consultant in the securities and capital markets fields.
Mr. Wilde joined ML of New York in March 1991. He joined Merrill Lynch, Pierce,
Fenner & Smith Incorporated in 1976. Since 1985, he has been a Director and Vice
President of Merrill Lynch Life Agency Inc.
Mr. Boucher joined ML of New York in May 1992. Prior to May 1992, he held the
position of Vice President of Monarch Financial Services, Inc. (formerly Monarch
Resources, Inc.).
Ms. Toni has been with ML of New York since March 1995. Prior to March 1990, she
held the position of Supervisor of Financial Disbursements of Merrill Lynch
Insurance Group, Inc.
No shares of ML of New York are owned by any of its directors or officers, as it
is a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc. The
directors and officers of ML of New York, both individually and as a group, own
less than one percent of the outstanding shares of common stock of Merrill Lynch
& Co., Inc.
EXECUTIVE COMPENSATION
Certain executive officers and directors of ML of New York also perform services
for affiliates of ML of New York, and the salaries of all such individuals are
allocated among ML of New York and such affiliates.
34
<PAGE> 35
COMPENSATION TABLES AND OTHER INFORMATION
The following tables set forth information with respect to the Chief Executive
Officer of ML of New York. Annual Salary and Bonus for the next four most highly
compensated executive officers did not exceed $100,000 for the fiscal year ended
December 31, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(1)
----------------------------------
AWARDS PAYOUTS
--------------- ---
RESTRICTED LONG-TERM ALL
ANNUAL COMPENSATION STOCK SECURITIES INCENTIVE OTHER
NAME AND ----------------------- AWARDS UNDERLYING PLAN COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS (2)(3)(4) OPTIONS PAYOUTS SATION
----------------------------------- ---- ------ ------- ------ --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 1994 $5,072 $21,368 $3,885 435 $ 0 $583(5)
Chairman of the Board,
President and Chief
Executive Officer
(since February 1994)
</TABLE>
---------------
(1) Awards were made in January or February of the succeeding fiscal year for
performance in the year indicated.
(2) Amounts shown are for awards granted in February 1995 for performance in
1994. Awards shown include equal number of Restricted Shares and Restricted
Units. All awards have been valued for this table using closing prices of
Merrill Lynch & Co. Common Stock on the Consolidated Transaction Reporting
System on the dates of grant of such awards; the closing price on February
1, 1995, the effective date of the grant for performance in 1994, was
$37.25. Shares and units granted in February 1995 vest three years following
grant and are restricted from transferability for an additional two years
after vesting.
(3) Dividends are paid on unvested Restricted Shares and dividend equivalents
are paid on unvested Restricted Units. Such dividends and dividend
equivalents are equal in amount to the dividends paid on shares of Merrill
Lynch & Co. Common Stock.
(4) The number and value of Restricted Shares and Restricted Units held by the
Chief Executive Officer named in the table as of December 31, 1994 is as
follows: Mr. Vespa (0 shares and 0 units). These amounts do not include
Restricted Shares and Restricted Units awarded in 1995 for performance in
1994.
(5) Amount shown for 1994 consists of the following: (i) contributions made in
1994 by ML of New York to account of employee under the 401(k) Savings &
Investment Plan ($49); and (ii) allocations made in 1994 to account of
employee under the defined contribution retirement program (including
allocations and cash payments made because of limitations imposed by the
Internal Revenue Code) ($534).
35
<PAGE> 36
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE DATE
FISCAL OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME YEAR(1) GRANTED FISCAL YEAR ($ PER SHARE) DATE(2) VALUE(3)
---------------------- ------- ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 1994 435 .01% $ 35.1875 1/26/2005 $4,156
</TABLE>
---------------
(1) Reflects awards made in January 1995 for performance in 1994.
(2) All options are exercisable as follows: 25% after one year, 50% after two
years, 75% after three years, and 100% after four years.
(3) Valued using a modified Black-Scholes option pricing model. The exercise
price of each option ($35.1875) is equal to the average of the high and low
prices on the Consolidated Transaction Reporting System of a share of
Merrill Lynch & Co. Common Stock on January 25, 1995, the date of grant. The
assumptions used for the variables in the model were: 25% volatility (which
is the volatility of the Common Stock for the 36 months preceding grant); a
7.91% risk-free rate of return (which is the yield as the date of grant on a
U.S. Treasury Strip (zero-coupon bond) maturing in February 2005 as quoted
in The Wall Street Journal); a 2.6% dividend yield (which was the dividend
yield on the date of grant); and a 10-year option term (which is the term of
the option when granted). A discount of 25% was applied to the option value
yielded by the model to reflect the non-marketability of employee options.
The actual gain executives will realize on the options will depend on the
future price of the Common Stock and cannot be accurately forecast by
application of an option pricing model.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 0 $0 0 0 $ 0 $ 0
</TABLE>
Directors of ML of New York who are also officers of ML of New York receive no
compensation in connection with their service as directors of ML of New York. ML
of New York pays to each director who is not also an officer of ML of New York a
fee of $500 per meeting. In addition, ML of New York reimburses expenses of
directors related to their service as directors of ML of New York. ML of New
York paid fees of $8,000 to Mr. Butler, $7,500 to Mr. Israeloff, $14,000 to Ms.
Kahn, $14,000 to Mr. King, and $8,000 to Mr. Pollack, each a director who was
not an officer of ML of New York, for services rendered to ML of New York in
1994. Total expense reimbursements in 1994 were $771.
36
<PAGE> 37
LEGAL PROCEEDINGS
There is no material pending litigation to which ML of New York 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 ML of New York of which it
has any knowledge.
LEGAL MATTERS
The organization of ML of New York, its authority to issue the Contracts, and
the validity of the form of the Contracts have been passed upon by Barry G.
Skolnick, ML of New York's Senior Vice President and General Counsel.
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on certain
matters relating to federal securities laws.
EXPERTS
The financial statements of ML of New York as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31, 1994, included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing. Deloitte & Touche LLP's principal business address
is Two World Financial Center, New York, New York 10281-1433.
REGISTRATION STATEMENT
Registration statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 that relate to the Contract. This
Prospectus does not contain all of the information in the registration
statements as permitted by Securities and Exchange Commission regulations. The
omitted information can be obtained from the Securities and Exchange
Commission's principal office in Washington, D.C., upon payment of a prescribed
fee.
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
ML Life Insurance Company of New York:
We have audited the accompanying balance sheets of ML Life
Insurance Company of New York (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Insurance Group, Inc., as of December
31, 1994 and 1993 and the related statements of earnings,
stockholder's equity and cash flows for each of the three years
in the period ended December 31, 1994. 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1994 and 1993 and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the
Company changed its method of accounting for certain investments
in debt and equity securities to conform with Statement of
Accounting Standards No. 115.
/s/Deloitte & Touche, LLP
February 27, 1995
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
ASSETS 1994 1993
----------- -----------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $297,551; 1993 - $442,008) $ 286,078 $ 458,916
Equity securities available for sale, at estimated fair value
(cost: 1994 - $3,987; 1993 - $8,387) 4,301 7,195
Mortgage loans on real estate 7,941 17,627
Policy loans on insurance contracts 77,827 73,380
----------- -----------
Total Investments 376,147 557,118
CASH AND CASH EQUIVALENTS 20,915 27,464
ACCRUED INVESTMENT INCOME 7,354 10,164
DEFERRED POLICY ACQUISITION COSTS 31,031 24,036
FEDERAL INCOME TAXES - DEFERRED 9,749 10,468
REINSURANCE RECEIVABLES 605 1,685
OTHER ASSETS 3,265 3,765
SEPARATE ACCOUNTS ASSETS 471,656 410,613
----------- -----------
TOTAL ASSETS $ 920,722 $1,045,313
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
==============================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
----------- -----------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 340,882 $ 523,382
Claims and claims settlement expenses 4,314 5,614
----------- -----------
Total policy liabilities and accruals 345,196 528,996
OTHER POLICYHOLDER FUNDS 1,532 1,200
OTHER LIABILITIES 2,113 5,641
FEDERAL INCOME TAXES - CURRENT 170 864
PAYABLE TO AFFILIATES - NET 4,242 5,223
SEPARATE ACCOUNTS LIABILITIES 471,656 410,613
----------- -----------
Total Liabilities 824,909 952,537
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 220,000 shares
authorized, issued and outstanding 2,200 2,200
Additional paid-in capital 83,006 83,006
Retained earnings 13,970 8,497
Net unrealized investment loss (3,363) (927)
----------- -----------
Total Stockholder's Equity 95,813 92,776
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 920,722 $1,045,313
=========== ===========
</TABLE>
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 32,679 $ 50,661 $ 65,378
Net realized investment gains (losses) (2,218) 6,131 (434)
Policy charge revenue 10,339 8,387 7,683
------------ ------------ ------------
Total Revenues 40,800 65,179 72,627
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account
balances 22,691 44,425 57,812
Market value adjustment expense 132 642 25
Policy benefits (net of reinsurance recoveries: 1994 - $715
1993 - $2,192; 1992 - $953) 1,620 1,729 594
Reinsurance premium ceded 1,240 1,182 1,070
Amortization of deferred policy acquisition costs 4,141 9,523 8,219
Insurance expenses and taxes 3,685 5,278 4,539
------------ ------------ ------------
Total Benefits and Expenses 33,509 62,779 72,259
------------ ------------ ------------
Earnings Before Federal Income
Tax Provision 7,291 2,400 368
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current (213) 2,842 2,373
Deferred 2,031 (2,250) (2,196)
------------ ------------ ------------
Total Federal Income Tax Provision 1,818 592 177
------------ ------------ ------------
NET EARNINGS $ 5,473 $ 1,808 $ 191
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1992 $ 2,200 $ 83,006 $ 6,498 $ (1,073) $ 90,631
Net earnings 191 191
Net unrealized investment gain 1,425 1,425
----------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 1992 2,200 83,006 6,689 352 92,247
Net earnings 1,808 1,808
Net unrealized investment loss (1,279) (1,279)
----------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 1993 2,200 83,006 8,497 ( 927) 92,776
Net earnings 5,473 5,473
Net unrealized investment loss (2,436) (2,436)
----------- ----------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 1994 $ 2,200 $ 83,006 $ 13,970 $ (3,363) $ 95,813
=========== =========== =========== =========== =============
</TABLE>
See notes to financial statements.
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 5,473 $ 1,808 $ 191
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 4,142 9,523 8,219
Capitalization of policy acquisition costs (7,142) (7,252) (2,539)
Amortization of fixed maturity securities (312) 918 366
Net realized investment (gains) losses 2,218 (6,131) 434
Interest credited to policyholders' account balances 22,691 44,425 57,812
Provision (benefit) for deferred Federal
income tax 2,031 (2,250) (2,196)
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 2,810 3,857 (27)
Policy liabilities and accruals (1,300) 2,273 448
Federal income taxes - current (694) 173 873
Other policyholder funds 332 1,129 63
Payable to affiliates - net (981) (1,923) 10,149
Policy loans (4,447) (7,343) (12,342)
Other, net (1,947) 2,644 (2,501)
------------ ------------ ------------
by operating activities 22,874 41,851 58,950
------------ ------------ ------------
INVESTING ACTIVITIES:
Fixed maturity securities sold 123,518 166,033 177,835
Fixed maturity securities matured 92,499 280,484 195,691
Fixed maturity securities purchased (73,016) (251,522) (323,172)
Equity securities available for sale purchased (29) (109) (665)
Equity securities available for sale sold 4,665 2,885 11,886
Mortgage loans on real estate principal payments received 8,998 4,425 1,000
Mortgage loans on real estate acquired 0 0 (124)
------------ ------------ ------------
Net cash and cash equivalents provided by
investing activities 156,635 202,196 62,451
------------ ------------ ------------
</TABLE>
(Continued)
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Concluded) (Dollars In Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits $ 56,297 $ 33,953 $ 5,985
Withdrawals (net of transfers to/from Separate Accounts) (242,355) (291,658) (105,082)
------------ ------------ ------------
Net cash and cash equivalents used
by financing activities (186,058) (257,705) (99,097)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,549) (13,658) 22,304
CASH AND CASH EQUIVALENTS:
Beginning of year 27,464 41,122 18,818
------------ ------------ ------------
End of year $ 20,915 $ 27,464 $ 41,122
============ ============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 482 $ 2,668 $ 1,500
Intercompany interest $ 352 $ 397 $ 801
</TABLE>
See notes to financial statements.
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
=================================================================
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: ML Life Insurance Company of New York (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co.").
The Company sells non-participating life insurance and annuity
products which comprise one business segment. The primary
products that the Company currently markets are immediate
annuities, market value adjusted annuities, variable life
insurance and variable annuities. The Company is licensed to
sell insurance in nine states, however, it currently limits its
marketing activities to the State of New York. The Company
markets its products solely through the retail network of
Merrill Lynch, Pierce, Fenner & Smith, Inc. ("MLPF&S"), a
wholly owned subsidiary of Merrill Lynch & Co..
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles for
stock life insurance companies.
Revenue Recognition: Revenues for the Company's interest
sensitive life, interest sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest crediting rates for
the Company's fixed rate products are as follows:
Interest sensitive life products 4.00% - 5.10%
Interest sensitive deferred annuities 4.00% - 8.39%
Immediate annuities 4.00% - 10.0%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are
unreported as of the valuation date.
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 reinsurance
to other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
Indemnity reinsurance agreements do not relieve the Company
from its obligations to policyholders. 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
<PAGE>
insolvencies. The Company
holds collateral under reinsurance agreements in the form of
letters of credit and amounts withheld totaling $236 that can
be drawn upon for delinquent reinsurance recoverables.
As of December 31, 1994, the Company had life insurance in-
force which was ceded to other life insurance companies of
$152,508.
Deferred Policy Acquisition Costs: Policy acquisition costs
for life and 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.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, which are primarily
related to and vary with the production of new business.
Certain costs and expenses reported in the statements of
earnings are net of amounts deferred. Policy acquisition costs
can also arise from the acquisition or reinsurance of existing
in-force policies from other insurers. These costs include
ceding commissions and professional fees related to the
reinsurance assumed.
Included in deferred policy acquisition costs are those costs
related to the acquisition by assumption reinsurance of
insurance contracts from unaffiliated insurers. The deferred
costs are amortized in proportion to the future gross profits
over the anticipated life of the acquired insurance contracts
utilizing an interest methodology.
In December 1990, the Company entered into an assumption
reinsurance agreement with an unaffiliated insurer. The
acquisition costs relating to this agreement are being
amortized over a twenty-year period using an effective interest
rate of 9.01%. This reinsurance agreement provides for payment
of contingent ceding commissions based upon the persistency and
mortality experience of the insurance contracts assumed. Any
payments made for the contingent ceding commissions will be
capitalized and amortized using an identical methodology as
that used for the initial acquisition costs. The following is
a reconciliation of the acquisition costs for the reinsurance
transaction for the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance $ 15,614 $ 16,925 $ 18,193
Capitalized amounts 1,447 843 533
Interest accrued 1,407 1,478 1,865
Amortization (3,545) (3,632) (3,666)
---------- ---------- ----------
Ending balance $ 14,923 $ 15,614 $ 16,925
========== ========== ==========
</TABLE>
The following table presents the expected amortization of these
deferred acquisition costs over the next five years. The
amortization may be adjusted based on periodic evaluation of
the expected gross profits on the reinsured policies.
1995 $2,160
1996 1,944
1997 1,512
1998 1,075
1999 1,017
Investments: Effective December 31, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). In compliance with SFAS No. 115,
the Company classified its investments in fixed maturity
securities and equity securities in the available for sale
category. These securities may be sold for the Company's
general liquidity needs, asset/liability management strategy,
credit dispositions and investment opportunities. These
securities are carried at estimated fair value with unrealized
gains and losses included in stockholder's equity. If
<PAGE>
a decline
in value of a security is determined by management to be other
than temporary, the carrying value is adjusted to the estimated
fair value at the date of this determination and recorded as
net realized investment gains (losses).
SFAS No. 115 permits fixed maturity securities to be carried at
amortized cost if the Company has both the ability and positive
intent to hold these securities to maturity. The Company has
determined that it can not guarantee that it will not have the
need or opportunity to sell any particular security in its
investment holdings. As such, the Company did not utilize this
classification as of December 31, 1994 or 1993. Additionally,
SFAS No. 115 requires that securities held for short-term sale
are to be carried at fair value with the change in fair value
being recorded as a component of earnings. The Company had no
securities at December 31, 1994 and 1993 that were held for this
purpose.
In compliance with a Securities and Exchange Commissions
("SEC") staff announcement, the Company has recorded certain
adjustments to deferred policy acquisition costs and
policyholders' account balances in conjunction with its
adoption of SFAS No. 115. The SEC requires that companies
adjust those assets and liabilities that would have been
adjusted had the unrealized investment gains or losses from
securities classified as available for sale actually been
realized with corresponding credits or charges reported
directly to shareholder's equity. The following reconciles the
net unrealized investment loss as of December 31,:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale $(11,473) $ 16,908
Equity securities available for sale 314 (1,192)
Deferred policy acquisition costs 3,177 (818)
Federal income taxes - deferred 1,812 502
---------- ----------
(6,170) 15,400
---------- ----------
Liabilities:
Policyholders' account balances 2,807 (16,327)
---------- ----------
Stockholder's equity:
Net unrealized investment loss $ (3,363) $ (927)
========== ==========
</TABLE>
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accrued to
the maturity date and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of identified cost.
Fixed maturity securities may contain securities which are
considered high yield. The Company defines high yield fixed
maturity securities as unsecured corporate debt obligations
which do not have a rating equivalent to Standard and Poor's
(or similar rating agency) BBB or higher, and are not
guaranteed by an agency of the federal government. Probable
losses are recognized in the period that a decline in value is
determined to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal
balances net of valuation allowances. Such valuation
allowances are based on the decline in value expected by
management to be realized on in-substance foreclosures of
mortgage loans and on mortgage loans which management believes
may not be collectible in full. In establishing valuation
allowances management considers, among other things, the
estimated fair value of the underlying collateral.
The Company recognizes income from mortgage loans on real
estate based on the cash payment interest rate of the loan,
which may be different from the accrual interest rate of the
loan for certain outstanding mortgage loans. The Company will
recognize a realized gain at the date of the satisfaction of
the loan at contractual terms
<PAGE>
for loans where there is a
difference between the cash payment interest rate and the
accrual interest rate. For all loans the Company stops accruing
income when an interest payment default either occurs or is
probable.
The Company has previously made commercial mortgage loans
collateralized by real estate. The return on and the ultimate
recovery of these loans and investments are generally dependent
on the successful operation, sale or refinancing of the real
estate. In many parts of the country, current real estate
markets are characterized by vacancy rates in excess of
historical averages, a lack of ready sources or credit for real
estate financing, reduced or declining real estate values, and
similar factors.
The Company employs a system to monitor the effects of current
and expected market conditions and other factors when assessing
the collectability of mortgage loans. When, in management's
judgment, these assets are impaired, appropriate losses are
recorded. Such estimates necessarily include assumptions,
which may include anticipated improvements in selected market
conditions for real estate, which may or may not occur. The
more significant assumptions management considers involve
estimates of the following: lease, absorption and sales rates;
real estate values and rates of return; operating expenses;
inflation; and sufficiency of any collateral independent of the
real estate. Management believes that the carrying value
approximates the fair value of these investments.
During 1993 the Financial Accounting Standards Board issued
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114") which was amended during 1994 by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". SFAS No. 114, as amended,
requires that for impaired loans, the impairment shall be
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or the
fair value of the collateral. Impairments of mortgage loans on
real estate are established as valuation allowances and
recorded to net realized investment gains or losses. SFAS No.
114, as amended, must be adopted for fiscal years beginning
after December 15, 1994. The Company has decided not to early
adopt this statement. The Company estimates that the impact on
both financial position and earnings from adopting SFAS No.
114, as amended, would be immaterial.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Federal Income Taxes: The Company accounts for Federal income
taxes in compliance with SFAS No. 109 "Accounting for Income
Taxes" ("SFAS No. 109") which requires an asset and liability
method in recording income taxes on all transactions that have
been recognized in the financial statements. SFAS No. 109
provides that deferred taxes be adjusted to reflect tax rates
at which future tax liabilities or assets are expected to be
settled or realized.
Separate Accounts: The Separate Accounts are established in
conformity with New York insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to General Account
claims only to the extent the value of such assets exceeds the
Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing
net deposits and accumulated net investment earnings less fees,
held for the benefit of policyholders, are shown as separate
captions in the balance sheets.
Postretirement Benefits Other Than Pensions: The Company
accounts for postretirement benefits in compliance with SFAS
No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS No. 106"). SFAS No. 106 requires
the accrual of postretirement benefits (such as health care
benefits) during the years an employee provides service.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments which approximates
the estimated fair value of these financial instruments as of
December 31, are:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale (1) $ 286,078 $ 458,916
Equity securities available for sale (1) 4,301 7,195
Mortgage loans on real estate (2) 7,941 17,627
Policy loans on insurance contracts (3) 77,827 73,380
Cash and cash equivalents (4) 20,915 27,464
Separate accounts assets (6) 471,656 410,613
---------- ----------
Total financial instruments recorded as assets $ 868,718 $ 995,195
========== ==========
Liabilities:
Payable to affiliates - net (5) $ 4,242 $ 5,223
---------- ----------
Total financial instruments recorded as liabilities $ 4,242 $ 5,223
========== ==========
</TABLE>
(1) For publicly traded securities, the estimated fair value
is determined using quoted market prices. For securities
without a readily ascertainable market value, the Company
has determined an estimated fair value using a discounted
cash flow approach, including provision for credit risk,
based upon the assumption that such securities will be
held to maturity. Such estimated fair values do not
necessarily represent the values for which these
securities could have been sold at the dates of the
balance sheets. At December 31, 1994 and 1993,
respectively, securities without a readily ascertainable
market value, having an amortized cost of approximately
$81,899 and $125,783, had an estimated fair value of
approximately $82,470 and $131,917, respectively.
(2) The estimated fair value of mortgage loans on real estate
approximates the carrying value. See Note 1 for a
discussion of the Company's valuation process.
(3) The Company estimates the fair market 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.
(4) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(5) The fair value of the Company's payables to affiliates is
estimated at carrying value. These borrowings are payable
on demand and bear a variable interest rate based on
LIBOR.
(6) Assets held in the Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3: INVESTMENTS
The amortized cost (cost for equity securities) and estimated
fair value of investments in fixed maturity securities and
equity securities as of December 31 are:
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 213,488 $ 1,764 $ 9,393 $ 205,859
Mortgage-backed securities 79,911 588 4,184 76,315
U.S. government and agencies 4,152 177 425 3,904
----------- ----------- ----------- -----------
Total fixed maturity securities
available for sale $ 297,551 $ 2,529 $ 14,002 $ 286,078
=========== =========== =========== ===========
Equity securities available for sale:
Common stocks $ 2,281 $ 72 $ 1,165 $ 1,188
Non-redeemable preferred stocks 1,706 1,782 375 3,113
----------- ----------- ----------- -----------
Total equity securities available for sale $ 3,987 $ 1,854 $ 1,540 $ 4,301
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1993
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 284,710 $ 13,726 $ 3,204 $ 295,232
Mortgage-backed securities 149,834 6,209 216 155,827
U.S. government and agencies 3,964 349 24 4,289
Municipals 3,500 68 0 3,568
----------- ----------- ----------- -----------
Total fixed maturity securities
available for sale $ 442,008 $ 20,352 $ 3,444 $ 458,916
=========== =========== =========== ===========
Equity securities available for sale:
Common stocks $ 2,392 $ 106 $ 438 $ 2,060
Non-redeemable preferred stocks 5,995 1,002 1,862 5,135
----------- ----------- ----------- -----------
Total equity securities available for sale $ 8,387 $ 1,108 $ 2,300 $ 7,195
=========== =========== =========== ===========
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by
contractual maturity are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 15,738 $ 15,891
Due after one year through five years 93,527 92,558
Due after five years through ten years 82,820 76,448
Due after ten years 25,555 24,866
----------- -----------
217,640 209,763
Mortgage-backed securities 79,911 76,315
----------- -----------
Total fixed maturity securities available
for sale $ 297,551 $ 286,078
=========== ===========
</TABLE>
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by rating
agency equivalent are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
AAA $ 65,797 $ 62,068
AA 57,337 57,000
A 37,430 34,682
BBB 105,549 101,820
Non-investment grade 31,438 30,508
---------- ----------
$ 297,551 $ 286,078
========== ==========
</TABLE>
Proceeds, gains and losses from the sale or maturity of fixed
maturity securities available for sale and held to maturity for
the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds $ 216,017 $ 446,517 $ 373,526
Realized investment gains 6,793 4,546 7,275
Realized investment losses 8,560 438 3,206
</TABLE>
The Company had investment securities of $982 and $1,118 held
on deposit with insurance regulatory authorities at December
31, 1994 and 1993, respectively.
The Company's investment in mortgage loans on real estate
consists principally of loans collateralized by commercial real
estate. At December 31, 1994, the Company's investment in
commercial real estate mortgage loans as measured by the
outstanding principal balance are for properties located in
California ($7,477 or 78.9%) and Pennsylvania ($2,000 or
21.1%).
<PAGE>
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1994
and 1993 are shown below:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Carrying value $ 3,939 $ 4,626
Valuation allowance 1,536 848
</TABLE>
Net investment income arose from the following sources for the
years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturity securities $ 28,255 $ 45,523 $ 59,036
Equity securities available for sale 0 113 499
Mortgage loans on real estate 975 1,924 2,309
Policy loans 3,680 3,487 3,029
Cash equivalents 659 476 1,034
Other 0 0 1,310
--------- --------- ---------
Gross investment income 33,569 51,523 67,217
Less expenses (890) (862) (1,839)
--------- --------- ---------
Net investment income $ 32,679 $ 50,661 $ 65,378
========= ========= =========
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances, for the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities $ (1,767) $ 4,108 $ 4,069
Equity securities available for sale 237 2,081 (2,710)
Mortgage loans on real estate (688) (58) (1,793)
---------- ---------- ----------
Net realized investment gains (losses) $ (2,218) $ 6,131 $ (434)
========== ========== ==========
</TABLE>
The following is a reconciliation of the change in valuation
allowances which have been established to reflect other than
temporary declines in estimated fair value of the following
classifications of investments for the years ended December 31,:
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to End
of Year Operations of Year
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage loans on real estate
1994 $ 848 $ 688 $ 1,536
1993 790 58 848
1992 0 790 790
</TABLE>
The Company held investments at December 31, 1994 of $4,600
which have been non-income producing for the preceding twelve
months.
<PAGE>
The Company has restructured the terms of certain of its
investments in mortgage loans on real estate during 1993.
During 1994, the Company did not restructure any investments.
The following table provides the amortized cost less valuation
allowances immediately prior to restructuring, gross interest
income that would have been earned had the loans been current
per their original terms ("Expected Income") and gross interest
income recorded during the year ("Actual Income") and equity
interests which are received in the restructuring:
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Mortgage loans on real estate:
Amortized cost less valuation allowance $ 5,475
Expected income 442
Actual Income 411
</TABLE>
NOTE 4: FEDERAL INCOME TAXES
The Company is taxed as a life insurance company according to
the Federal Income Tax Reform Act of 1986, as amended. The
Company's tax return is not consolidated with any other entity.
The following is a reconciliation of the provision for income
taxes based on income before taxes, computed using the Federal
statutory tax rate, with the provision for income taxes for the
years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 2,552 $ 840 $ 125
Increase (decrease) in income taxes resulting from:
Federal tax rate increase 0 (227) 0
Dividend received deduction (670) 0 0
Other (64) (21) 52
---------- ---------- ----------
Federal income tax provision $ 1,818 $ 592 $ 177
========== ========== ==========
</TABLE>
The Federal statutory rate for 1994, 1993 and 1992 was 35%, 35%
and 34%, respectively.
The Company provides for deferred income taxes resulting from
temporary differences which arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 887 $ (1,184) $ (2,094)
Policyholders' account balances 833 (969) 1,700
Investment adjustments 1,117 (100) (1,093)
Other (806) 3 (709)
--------- ---------- ----------
Deferred Federal income tax
provision (benefit) $ 2,031 $ (2,250) $ (2,196)
========= ========== ==========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 9,015 $ 9,848
Net unrealized investment gain (loss) 1,812 500
Investment adjustments 4,026 5,143
---------- ----------
Total deferred tax asset 14,853 15,491
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 5,170 4,283
Other (66) 740
---------- ----------
Total deferred tax liability 5,104 5,023
---------- ----------
Net deferred tax asset $ 9,749 $ 10,468
========== ==========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
NOTE 5: RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain data processing, legal,
actuarial, management, advertising and other services to the
Company. Expenses incurred by MLIG in relation to this service
agreement are reimbursed by the Company on an allocated cost
basis. Charges billed to the Company by MLIG pursuant to the
agreement were $4,025, $5,688 and $5,403 for the years ended
December 31, 1994, 1993 and 1992 respectively. The Company is
allocated interest expense on its accounts payable to MLIG which
approximates the daily Federal funds rate. Total intercompany
interest paid was $50, $69 and $122 for 1994, 1993 and 1992,
respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM") are
parties to a service agreement whereby MLAM has agreed to provide
certain invested asset management to the Company. The Company
pays a fee to MLAM for these services through the MLIG service
agreement. Charges attributable to this agreement and allocable
to the company by MLIG were $203, $265 and $339 for the years
ended December 31, 1994, 1993 and 1992, respectively.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S who are the Company's licensed insurance agents, solicit
applications for contracts to be issued by the Company. MLLA is
paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were approximately $5,329, $4,927, and
$1,469 for 1994, 1993 and 1992, respectively. Substantially all
of these fees were capitalized as deferred policy acquisition
costs and are being amortized in accordance with the policy
discussed in Note 1.
In connection with the acquisition of a block of variable life
insurance business from Monarch Life Insurance Company ("Monarch
Life"), the Company borrowed funds from Merrill Lynch & Co. to
partially finance the transaction. As of December 31, 1994 and
1993, the outstanding balance of these loans was approximately
$4,336 and $5,550, respectively. Approximately $1,214, $1,650
and $4,600 was repaid on these loans during 1994, 1993 and 1992,
respectively. Interest was calculated on these loans at LIBOR
plus 150 basis points. Intercompany interest paid on these loans
during 1994, 1993 and 1992 was approximately $302, $328 and $679,
respectively.
During 1994, 1993 and 1992, the Company assumption reinsured
certain policies previously indemnity reinsured by the Company's
affiliate, Merrill Lynch Life Insurance Company ("MLLIC"), and
directly written by Family Life Insurance Company ("Family
Life"), a former affiliate. These transactions resulted in the
transfer of approximately $11,860 and $2,000 of policy reserves
during 1993 and 1992, respectively. During 1994 certain
<PAGE>
adjustments to the 1993 assumption reinsurance transactions
resulted in a transfer of $9,129 of policy reserves from the
Company to MLLIC.
NOTE 6: STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
At December 31, 1994 and 1993, $42,612 and $30,125, respectively,
of stockholder's equity was available for distribution to MLIG.
Notice of intention to declare a dividend must be filed with the
New York Superintendent of Insurance who may disallow the
payment. No dividends were declared or paid during 1994, 1993 and
1992. Statutory capital and surplus at December 31, 1994 and
1993, was $64,913 and $57,333, respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial statements
by charging policy acquisition costs to expense as incurred,
establishing future policy benefit reserves using different
actuarial assumptions, not providing for deferred income taxes
and valuing securities on a different basis. The Company's
statutory net income for the years ended December 31, 1994, 1993
and 1992 was $3,816, $6,515 and $10,167, respectively.
The National Association of Insurance Commissioners ("NAIC") has
developed and implemented, effective December 31, 1993, the Risk
Based Capital ("RBC") adequacy monitoring system. The RBC
calculates the amount of adjusted capital which a life insurance
company should have based upon that company's risk profile. The
NAIC has established four different levels of regulatory action
with respect to the RBC adequacy monitoring system. Each of these
levels may be triggered if an insurer's total adjusted capital is
less than a corresponding level of RBC. These levels are as
follows:
For companies with capital levels which are below 100% of
the basic RBC level (company action level) calculated for
that company, the company must submit to the domiciliary
insurance commissioner, and implement, an approved plan to
increase adjusted capital to at least 100% of the basic
RBC.
For companies with capital levels which are below 75% of
the basic RBC level calculated for that company, an
examination of the company will be conducted by the
domiciliary insurance department and as a result of the
findings of the examination, corrective orders may be
issued.
For companies with capital levels which are below 50% of
the basic RBC level (authorized control level) calculated
for that company, the domiciliary insurance commissioner
will have the authority to place the company into
conservatorship or liquidation.
For companies with capital levels which are below 35% of
the basic RBC level calculated for that company, the
domiciliary insurance commissioner will be required to
place the company into conservatorship or liquidation.
As of December 31, 1994 and 1993, based on the RBC formula, the
Company's total adjusted capital level was 344% and 245%,
respectively, of the basic RBC level.
NOTE 7: 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
policyholders 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 policyholder obligations (within specified limits).
Based upon the public information available at this time,
management believes the Company has no material financial
obligations to state guaranty associations.
<PAGE>
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 or results of operations of the Company.
* * * * * *
<PAGE> 38
APPENDIX
The tables below are designed to show the impact of the Market Value Adjustment
and withdrawal charge on a single premium of $10,000. Table 1 assumes the
premium is allocated to a subaccount with a 10-year Guarantee Period with a
guaranteed rate of interest of 6.0%. Table 2 assumes the premium is allocated to
a subaccount with a 5-year Guarantee Period with a guaranteed rate of 5.6%. The
Market Value Adjustments are based on interpolated current interest rates
(defined in the Contract as "B") of 4%, 6.0% and 8.0% in the 10 year guarantee
table and 3.6%, 5.6% and 7.6% in the 5 year guarantee table. The net subaccount
values shown in the tables are the maximum amount available as cash withdrawals.
Although the withdrawal charge is in each case a fixed percentage of the amount
withdrawn, the amount of the charge for withdrawals made at the end of each year
varies as a result of the Market Value Adjustment. Values shown in the tables
have been rounded to the nearest dollar, and therefore the figures under the net
subaccount value columns may not precisely equal amounts set forth in the
subaccount value, plus the Market Value Adjustment, less the withdrawal charge
columns.
TABLE 1
<TABLE>
------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
------------------------------------------------------------------------------------------------------
4.00% 6.00% 8.00%
-------------------------------------------------------------------------------------------------------------------------------
END OF MARKET WITH- NET SUB MARKET WITH- NET SUB MARKET WITH- NET SUB
CERT. SUB ACC. VALUE DRAWAL ACCOUNT VALUE DRAWAL ACCOUNT VALUE DRAWAL ACCOUNT
YEAR VALUE ADJUST. CHARGE VALUE ADJUST. CHARGE VALUE ADJUST. CHARGE VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,600 1,914 364 12,150 -0- 309 10,291 (1,601) 262 8,737
2 11,236 1,787 379 12,644 -0- 327 10,909 (1,521) 283 9,432
3 11,910 1,643 395 13,158 -0- 347 11,563 (1,423) 305 10,181
4 12,625 1,479 411 13,693 -0- 368 12,257 (1,304) 330 10,991
5 13,382 1,294 427 14,249 -0- 390 12,992 (1,162) 356 11,864
6 14,185 1,088 445 14,828 -0- 413 13,772 (994) 384 12,807
7 15,036 857 463 15,430 -0- 438 14,598 (797) 415 13,824
8 15,938 600 482 16,057 -0- 464 15,474 (568) 448 14,922
9 16,895 318 338 16,876 -0- 331 16,564 (307) 325 16,263
10 17,908 -0- -0- 17,908 -0- -0- 17,908 -0- -0- 17,908
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 2
<TABLE>
--------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
--------------------------------------------------------------------------------------------------------
3.6% 5.6% 7.6%
-------------------------------------------------------------------------------------------------------------------------------
END OF WITH- NET SUB MARKET WITH- NET SUB MARKET WITH- NET SUB
CERT. SUB ACC. MARKET VALUE DRAWAL ACCOUNT VALUE DRAWAL ACCOUNT VALUE DRAWAL ACCOUNT
YEAR VALUE ADJUST. CHARGE VALUE ADJUST. CHARGE VALUE ADJUST. CHARGE VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,560 815 310 11,065 -0- 288 10,272 (744) 267 9,548
2 11,151 639 321 11,470 -0- 304 10,848 (595) 288 10,269
3 11,776 446 333 11,889 -0- 321 11,455 (422) 309 11,044
4 12,435 233 345 12,324 -0- 339 12,097 (225) 333 11,878
5 13,132 -0- -0- 13,132 -0- -0- 13,132 -0- -0- 13,132
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The formulas used in determining the amounts shown in the above tables are as
follows:
<TABLE>
<S> <C>
Subaccount Value
------------------------------------------------------------------
1 + Current Interest Rate
(1) Net Subaccount Value = Withdrawal Factor + ( ------------------------------- ) n/365
1 + Guaranteed Interest Rate
</TABLE>
A-1
<PAGE> 39
(2) Withdrawal Charge = Net Subaccount Value X Withdrawal Factor
<TABLE>
<S> <C>
1 + Current Interest Rate
(3) Market Value Adjustment = Net [ 1- ( ------------------------------- ) n/365 ]
Subaccount Value X 1 + Guaranteed Interest Rate
</TABLE>
(4) Withdrawal Factor is the Lessor of:
(a) Guaranteed Interest Rate
------------------------
2
or
(b) 10% in Contract Year 1,
9% in Contract Year 2,
8% in Contract Year 3,
7% in Contract Year 4,
6% in Contract Year 5,
5% in Contract Year 6,
4% in Contract Year 7,
3% in Contract Year 8,
2% in Contract Year 9,
1% in Contract Year 10,
0% in Contract Year 11 and later
(5) "n" is the number of days remaining in the Guarantee Period of the
subaccount, but not less than 365.
A-2
