<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 33-34562; 33-60288; 333-48983
ML LIFE INSURANCE COMPANY OF NEW YORK
(Exact name of Registrant as specified in its charter)
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<S> <C>
NEW YORK 16-1020455
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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100 CHURCH STREET
NEW YORK, NEW YORK 10080-6511
(Address of Principal Executive Offices)
(800) 333-6524
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 220,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I Financial Information
Item 1. Financial Statements.
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
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<CAPTION>
ASSETS September 30, December 31,
- ------ 1998 1997
-------------- --------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $204,163; 1997 - $250,695) $ 209,562 $ 255,958
Equity securities, at estimated fair value
(cost: 1998 - $13,551; 1997 - $5,830) 12,594 5,029
Policy loans on insurance contracts 87,249 88,163
-------------- --------------
Total Investments 309,405 349,150
CASH AND CASH EQUIVALENTS 10,449 10,063
ACCRUED INVESTMENT INCOME 6,605 5,416
DEFERRED POLICY ACQUISITION COSTS 31,111 30,406
REINSURANCE RECEIVABLES 402 429
RECEIVABLES FROM SECURITIES SOLD 7,907 -
OTHER ASSETS 4,191 3,405
SEPARATE ACCOUNTS ASSETS 783,660 739,712
-------------- --------------
TOTAL ASSETS $ 1,153,730 $ 1,138,581
============== ==============
</TABLE>
See notes to financial statements. (continued)
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Continued) (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY September 30, December 31,
- ------------------------------------ 1998 1997
-------------- --------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 273,234 $ 307,333
Claims and claims settlement expenses 5,792 2,007
-------------- --------------
Total policy liabilities and accruals 279,026 309,340
OTHER POLICYHOLDER FUNDS 1,611 1,941
FEDERAL INCOME TAXES - DEFERRED 2,181 1,905
FEDERAL INCOME TAXES - CURRENT 328 2,255
AFFILIATED PAYABLES - NET 2,212 3,492
OTHER LIABILITIES 1,876 2,155
SEPARATE ACCOUNTS LIABILITIES 783,660 739,712
-------------- --------------
Total Liabilities 1,070,894 1,060,800
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 220,000 shares
authorized, issued and outstanding 2,200 2,200
Additional paid-in capital 66,259 66,259
Retained earnings 14,660 9,692
Accumulated other comprehensive loss (283) (370)
-------------- --------------
Total Stockholder's Equity 82,836 77,781
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,153,730 $ 1,138,581
============== ==============
</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 EARNINGS
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 16,430 $ 19,157
Net realized investment gains (losses) (283) 2,119
Policy charge revenue 11,521 9,485
------------- -------------
Total Revenues 27,668 30,761
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 10,424 10,690
Market value adjustment expense 480 181
Policy benefits (net of reinsurance recoveries: 1998 - $751;
1997 - $241) 1,169 285
Reinsurance premium ceded 1,262 1,168
Amortization of deferred policy acquisition costs 3,180 3,205
Insurance expenses and taxes 3,967 3,468
------------- -------------
Total Benefits and Expenses 20,482 18,997
------------- -------------
Earnings Before Federal Income Tax Provision 7,186 11,764
FEDERAL INCOME TAX PROVISION:
Current 1,990 2,182
Deferred 228 1,779
------------- -------------
Total Federal Income Tax Provision 2,218 3,961
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NET EARNINGS $ 4,968 $ 7,803
============= =============
</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 EARNINGS
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 5,293 $ 6,343
Net realized investment gains (losses) (221) 15
Policy charge revenue 3,932 3,350
------------ ------------
Total Revenues 9,004 9,708
------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 3,525 2,838
Market value adjustment expense 285 89
Policy benefits (net of reinsurance recoveries: 1998 - $376;
1997 - $167) 476 94
Reinsurance premium ceded 448 402
Amortization of deferred policy acquisition costs 1,024 1,033
Insurance expenses and taxes 1,595 964
------------ ------------
Total Benefits and Expenses 7,353 5,420
------------ ------------
Earnings Before Federal Income Tax Provision 1,651 4,288
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 328 1,531
Deferred 475 (34)
------------ ------------
Total Federal Income Tax Provision 803 1,497
------------ ------------
NET EARNINGS $ 848 $ 2,791
============ ============
</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 COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1997
------------ ------------
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NET EARNINGS $ 4,968 $ 7,803
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized losses on investment securities:
Net unrealized holding gains arising during the period 102 246
Reclassification adjustment for gains included in net earnings (122) (1,947)
------------ ------------
Net unrealized losses on investment securities (20) (1,701)
Adjustments for:
Policyholder liabilities 154 187
Income tax (expense) benefit related to items of
other comprehensive income (47) 529
------------ ------------
Other comprehensive income (loss), net of tax 87 (985)
------------ ------------
COMPREHENSIVE INCOME $ 5,055 $ 6,818
============ ============
</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 COMPREHENSIVE INCOME
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997
------------ ------------
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NET EARNINGS $ 848 $ 2,791
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains on investment securities:
Net unrealized holding gains arising during the period 1,115 1,219
Reclassification adjustment for gains included in net earnings (226) (32)
------------ ------------
Net unrealized gains on investment securities 889 1,187
Adjustments for:
Policyholder liabilities (126) (1,142)
Income tax expense related to items of
other comprehensive income (267) (17)
------------ ------------
Other comprehensive income, net of tax 496 28
------------ ------------
COMPREHENSIVE INCOME $ 1,344 $ 2,819
============ ============
</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
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings income (loss) equity
----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 2,200 $ 72,040 $ 9,219 $ 1,095 $ 84,554
Dividend to Parent (5,781) (9,219) (15,000)
Net earnings 9,692 9,692
Other comprehensive loss, net of tax (1,465) (1,465)
----------- ----------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 2,200 66,259 9,692 (370) 77,781
Net earnings 4,968 4,968
Other comprehensive income, net of tax 87 87
----------- ----------- ------------ ------------- -------------
BALANCE, SEPTEMBER 30, 1998 $ 2,200 $ 66,259 $ 14,660 $ (283) $ 82,836
=========== =========== ============ ============= =============
</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
(Dollars in Thousands) (Unaudited)
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<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1997
------------ ------------
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Cash Flows From Operating Activities:
Net earnings $ 4,968 $ 7,803
Adjustments to reconcile net earnings to net cash and
cash equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 3,180 3,205
Capitalization of policy acquisition costs (3,885) (3,651)
Amortization (accretion) of investments (262) (100)
Net realized investment (gains) losses 283 (2,119)
Interest credited to policyholders' account balances 10,424 10,690
Provision for deferred Federal income tax 228 1,779
Changes in operating assets and liabilities:
Accrued investment income (1,189) (1,551)
Claims and claims settlement expenses 3,785 (580)
Federal income taxes - current (1,927) (568)
Other policyholder funds (330) 879
Affiliated payables - net (1,280) (1,109)
Policy loans on insurance contracts 914 (3,752)
Other - net (1,038) 2,995
------------ ------------
Net cash and cash equivalents provided by operating activities 13,871 13,921
------------ ------------
Cash Flows From Investing Activities:
Sales of available-for-sale securities 66,613 58,991
Maturities of available-for-sale securities 44,348 37,625
Purchases of available-for-sale securities (80,077) (78,882)
Mortgage loans principal payments received - 2,057
------------ ------------
Net cash and cash equivalents provided by investing activities 30,884 19,791
------------ ------------
</TABLE>
See notes to financial statements. (continued)
<PAGE>
ML LIFE INSURANCE COMPANY OF NEW YORK
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Continued) (Dollars in Thousands) (Unaudited)
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<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1997
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Cash Flows From Financing Activities:
Policyholders' account balances:
Deposits $ 75,141 $ 75,813
Withdrawals (including transfers to / from separate accounts) (119,510) (89,625)
------------ ------------
Net cash and cash equivalents used by financing activities (44,369) (13,812)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 386 19,900
CASH AND CASH EQUIVALENTS:
Beginning of year 10,063 7,828
------------ ------------
End of period $ 10,449 $ 27,728
============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 3,916 $ 2,749
Intercompany interest 119 322
</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 (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
ML Life Insurance Company of New York (the "Company") is a
wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.
("MLIG"). The Company is an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company
sells life insurance and annuity products, including variable
life insurance and variable annuities.
The unaudited condensed financial statements included herein
have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. The preparation of financial statements in conformity
with generally accepted accounting principles and prevailing
industry practice requires management to make estimates that
affect the reported amounts and disclosure of contingencies in
the financial statements. Actual results could differ from
those estimates. Results for the three months and nine months
ended September 30, 1998 and 1997 are not necessarily indicative
of annual results. These unaudited financial statements should
be read in conjunction with the financial statements and the
notes thereto included in the Company's 1997 Annual Report on
Form 10-K ("1997 Report").
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of New York and the
National Association of Insurance Commissioners. Statutory
capital and surplus at September 30, 1998 and December 31, 1997,
was $55.8 million and $51.1 million, respectively. For the nine
month periods ended September 30, 1998 and 1997, statutory net
income was $4.1 million and $8.6 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as available-for-sale and are recorded at fair value.
The Company is required to adjust deferred policy acquisition
costs and certain policyholder liabilities associated with
investments classified as available-for-sale. These adjustments
are recorded in accumulated other comprehensive income (loss),
which is a component of stockholder's equity, and assume that
the unrealized gain or loss on available-for-sale securities was
realized. These investments primarily support in-force,
universal life-type contracts. The following reconciles net
unrealized investment loss recorded in accumulated other
comprehensive loss at September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
------------- -------------
(In Thousands)
Assets:
Fixed maturity securities $ 5,399 $ 5,263
Equity securities (957) (801)
------------- -------------
4,442 4,462
------------- -------------
Liabilities:
Policyholders' account balances 4,878 5,032
Federal income taxes - deferred (153) (200)
------------- -------------
4,725 4,832
------------- -------------
Stockholder's equity:
Accumulated other comprehensive loss $ (283) $ (370)
============= =============
NOTE 4. ACCOUNTING PRONOUNCEMENTS
During 1997, the Company early adopted SFAS No. 130, "Reporting
Comprehensive Income". This pronouncement establishes standards
for reporting comprehensive income and its components within the
financial statements. Comprehensive income is defined as all
non-owner changes in equity during a period and is reported in
the Statements of Comprehensive Income included herein for the
three month and nine month periods ended September 30, 1998 and
1997.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This pronouncement
requires a Company to present disaggregated information based on
the internal segments used in managing its business. This
pronouncement is effective for annual periods beginning after
December 31, 1997, and for interim periods beginning in the
following year. Adoption will not impact the Company's
financial position or results of operations, but it will may
affect the presentation of the Company's disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities". This
pronouncement will be effective for annual periods beginning
after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial
position or results of operations.
NOTE 5. RECLASSIFICATIONS:
To facilitate comparison with the current year, certain amounts
in the prior year have been reclassified.
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of
Operations addresses changes in revenues and expenses for the
three month and nine month periods ended September 30, 1998 and
1997. This discussion should be read in conjunction with the
accompanying unaudited financial statements and notes thereto,
in addition to the 1997 Financial Statements and Notes to
Financial Statements and the Management's Narrative Analysis of
the Results of Operations included in the 1997 Report.
Business Overview
The Company's 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 fees charged to
variable life insurance and variable annuity contract owners.
The costs associated with acquiring contract owner deposits are
deferred and amortized over the period in which the Company
anticipates holding those funds. In addition, the Company incurs
expenses associated with the maintenance of in-force contracts.
During the third quarter 1998, the global economic crisis
intensified as the financial problems in Asia spread to the
emerging market economies of Eastern Europe and Latin America.
Domestically, investor concerns regarding that impact of expanding
global economic instability resulted in the emergence of
two important economic factors during the quarter. First, the
continued flight to quality to the U.S Treasury market widened
credit spreads to historically unprecedented levels, relative to
the current yield on U.S. Treasury securities. During the third
quarter, the interest rate on the 30 year U.S Treasury Bond
dropped 66 basis points to yield 4.97%. During the same time
period, rates on medium term Treasury securities, defined as 1
to 10 year terms, decreased on average 112 basis points. In the
corporate bond market, the combined effects of record levels of
debt issuance, investor concern regarding corporate earnings and
the disappearance of liquidity in certain markets increased that
market's overall credit risk. The second factor was the sharp
decline in the equity markets. During the third quarter, the
Standard & Poor's 500 Composite Stock Price Index decreased
10.3% eliminating most of the gains of the first six months of 1998.
Life insurance and annuity deposits increased $0.4 million (or
1%) to $32.6 million and $6.7 million (or 8%) to $88.0 million
in the third quarter and nine month periods ended September 30,
1998, respectively, as compared to the same periods in 1997.
Excluding internal tax-free exchanges the current three month
and nine month periods both decreased $0.7 million. Including
internal tax-free exchanges, variable annuity sales represent
approximately 90% of the Company's total sales at September 30,
1998. Variable annuity deposits increased $0.7 million (or 3%)
to $28.9 million and increased $10.5 million (or 15%) to $79.2
million in the third quarter and nine month periods ended
September 30, 1998, respectively, as compared to the same
periods in 1997. Management attributes the increase in variable
annuity sales to changes in the Company's distribution
structure. Previously, specialists supporting the sales force
were responsible for both life and annuity products. Beginning
in 1997 and into 1998, the Company created two specialist
positions within each district where it was geographically
feasible. One specializes in estate planning life insurance
products while the other specializes in annuity and single
premium life products. This increase in the number of product
specialists has resulted in a greater and more focused coverage
of the Company's sales force. Additionally, the Company is
beginning to realize the benefits from its sales force training
programs implemented over the past two years. Future variable
product sales, however, could be negatively impacted due to
continued volatility in the equity markets.
On June 5, 1998, the Company introduced five new investment
options for its variable annuity product designed to complement
the investment objectives of the twenty-one pre-existing fund
options. Three of the new investment options are managed by
Merrill Lynch Asset Management, L.P., an affiliated investment
advisor, one is managed by Hotchkis & Wiley, an affiliated
investment advisor, and one is managed by an unaffiliated
investment advisor. Also, during 1998, the Company closed two
pre-existing funds to new allocations.
Policy and contract surrenders increased $5.3 million (or 52%)
to $15.5 million and $23.7 million (or 72%) to $56.7 million for
the three month and nine month periods ended September 30, 1998,
respectively, compared to the equivalent periods in 1997. During
the current nine month period, variable annuity surrenders
increased $5.0 million to $12.1 million primarily due to the growth
of that block of business. During the same period, modified
guaranteed annuity surrenders increased $13.5 million to $25.3
million due to the generally lower interest rate environment
during the first nine months of 1998 as compared to the same
period in 1997. During periods of lower interest rates,
modified guaranteed annuity contractholders are more inclined to
surrender their contracts for two reasons. First,
contractholders can lock-in gains resulting from the market
value adjustment, which is applied to withdrawals made prior to
the expiration of the stated guarantee period. The market value
adjustment has an inverse relationship to changes in interest
rates. Second, interest crediting rates offered upon renewal
are generally lower than the rates that had been credited prior
to the renewal date.
During the first nine months of 1998, separate account assets
increased $43.9 million (or 5.9%) to $784 million as strong
investment performance during the first half of 1998 reversed
during the volatile third quarter. The following table compares
the movement in separate account assets during the first three
quarters of 1998:
Year-
1st 2nd 3rd to-
(In Millions) Qtr Qtr Qtr date
------------- ----- ----- ------- -------
Variable product investment performance $61.6 $15.8 ($81.6) ($ 4.2)
Variable product net cash inflow 12.8 15.1 20.2 48.1
------ ------ ------- -------
Total increase (decrease) in separate
account assets $74.4 $30.9 ($61.4) $43.9
Percentage increase (decrease) 10.1% 3.8% ( 7.3%) 5.9%
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of September 30,
1998, the Company's assets included $172 million of cash, short-
term investments and investment grade publicly traded fixed
maturity securities that could be liquidated if funds were
required.
As of September 30, 1998 approximately $16.8 million (or 8.0%)
of the Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured corporate debt obligations which do not have a rating
equivalent to Standard and Poor's BBB- or higher (or similar
rating agency). Non-investment grade securities are speculative
and are subject to significantly greater risks related to the
creditworthiness of the issuers and the liquidity of the market
for such securities. The Company carefully selects, and closely
monitors, such investments.
The Company has exposure to selected emerging markets that
include those securities issued by sovereigns or corporations of
Asia (excluding Japan), Eastern Europe, Latin America and
Mexico. At September 30, 1998, the Company held $6.7 million in
emerging market securities with an approximate unrealized loss
of $0.6 million.
Year 2000 Compliance
As the millenium approaches, the Company has undertaken initiatives
to address the Year 2000 problem (the "Y2K problem") in conjunction
with the Merrill Lynch & Co. Year 2000 Compliance Initiative. The
Y2K problem is the result of a widespread programming technique
that causes computer systems to identify a date based on the
last two numbers of a year, with the assumption that the first
two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the Y2K problem
may cause information technology systems (e.g., computer databases)
and non-information technology systems (e.g., elevators) to
produce incorrect data or cease operating completely.
The Company believes that it has identified and evaluated its
internal Y2K problem and is devoting sufficient resources to
renovating technology systems that are not already Year 2000
compliant. The Company expects the renovation phase (as
discussed below) of its Year 2000 efforts to be substantially
completed by December 31, 1998, thereby allowing it to focus on
additional testing efforts and integration of the Year 2000
programs during 1999. In order to focus attention on the Y2K
problem, management has deferred certain other technology
projects; however this deferral is not expected to have a material
adverse effect on the Company's business, results of operations,
or financial condition.
The failure of the Company's technology systems relating to a
Y2K problem would likely have a material adverse effect on the
company's business, results of operations, or financial condition.
This effect could include disruption of normal business transactions,
such as the processing of contractholder transactions, the
valuation of contractholder liabilities and the recording and
valuation of assets. The Y2K problem could also increase the Company's
exposure to risk and its need for liquidity.
In 1995, Merrill Lynch & Co. established the Year 2000 Compliance
Initiative, which is an enterprisewide effort to address the risks
associated with the Y2K problem, both internal and external. The
Year 2000 Compliance Initiative's efforts to address the risks
associated with the Y2K problem have been organized into six segments
or phases: planning, pre-renovation, renovation, production testing,
certification, and integration testing.
The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and
determining the level of expert knowledge available within Merrill
Lynch & Co. regarding particular systems or application. The
pre-renovation phase involved developing a detailed enterprisewide
inventory of applications and systems, identifying the scope of
necessary renovations to each application or system, and establishing
a conversion schedule. During the renovation phase, source codes are
actually converted, date fields are expanded or windowed (windowing
is used on an exception basis only), test data is prepared, and each
system or application is tested using a variety of Year 2000 scenarios.
The production testing phase validates that a renovated system is
funtionally the same as the existing production version, that renovation
has not introduced defects, and that expanded or windowed date fields
continue to handle current dates properly. The certification phase
validates that a system can run successfully in a Year 2000 environment.
Finally, the integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal
and external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All
plans for both mission-critical and non-mission-critical systems are
tracked and monitored. The work associated with the Year 2000 Compliance
Initiative has been accomplished by Merrill Lynch & Co. employees, with
the assistance of consultants where necessary.
As part of the production testing and certification phases, the Company
has performed and will continue to perform, both internal and external
Year 2000 testing intended to address the risks from the Y2K problem.
The Company is in the process of developing its contingency plans, with
the particular choice of contingency action dependent on the severity
of the problem being addressed, the availability of alternative products
and the level of importance of the business activity supported by the
problematic system. As part of the Year 2000 Compliance Initiative,
Merrill Lynch & Co. has undertaken a business readiness/risk management
effort in which each line of business will identify scenarios in order
to develop plans to reduce risks associated with a Y2K problem.
The Company continues to survey and communicate with parties with whom
it has important relationships that may be associated with information
technology Y2K problems, as well as parties that may be associated
with non-information technology Y2K problems. Management is unable,
at this point, to ascertain whether all such third parties will
successfully address the Y2K problem. The Company will continue to
monitor third parties' Year 2000 readiness to determine whether
additional or alternative measures are necessary. Such measures may
include the selection of alternate third parties or other efforts
designed to mitigate some of the effects of a third party's noncompliance.
However, there can be no assurance that all Y2K problems will be
identified and remediated on a timely basis or that all remediation
efforts will be successfull. The failure of third parties to resolve
their own processing issues in a timely manner could have a material
adverse effect on the Company's business, results of operations, or
financial condition.
The primary costs associated with the Year 2000 Compliance Initiative
are incurred by Merrill Lynch & Co. and are not directly allocated
to the various business units. These costs include planning and
oversight of the Year 2000 Compliance Initiative, as well as certain
Information Systems personnel costs involved in implementation and
testing. All other costs incurred by the Company, primarily non-
Information Systems personnel costs, system upgrades and replacement
of desk-top software, have not been material to the Company's financial
condition or results of operations and are not anticipated to be
material in future periods.
Results of Operations
For the nine month periods ended September 30, 1998 and 1997,
the Company reported net earnings of $5.0 million and $7.8
million, respectively. For the three month periods ended
September 30, 1998 and 1997, the Company reported net earnings
of $0.8 million and $2.8 million, respectively.
Interest spread on fixed rate contracts decreased $1.7 million
and $2.5 million for the three month and nine month periods
ended September 30, 1998, respectively, compared to the same
periods in 1997. During the third quarter 1997, the Company
determined that certain policyholder reserves exceeded amounts
required resulting in reductions to those policyholders' account
balances. Excluding these reductions, interest spread decreased
$0.7 million and $1.5 million for the three month and nine month
periods ended September 30, 1998, respectively, compared to the
same periods in 1997. The reduction in interest spread is
primarily a result of the Company's $15 million dividend payment
to its stockholder during the fourth quarter 1997 and the
declining number of fixed rate contracts in-force.
Net realized investment gains (losses) decreased $0.2 million
and $2.4 million for the three month and nine month periods
ended September 30, 1998, respectively, compared to the
equivalent periods in 1997. During the third quarter 1998, the
Company incurred $0.3 million in credit-related losses from the
sale of emerging market securities. During the first quarter
1997, the Company realized a $2.0 million credit related gain on
the disposition of a single preferred stock investment.
Policy charge revenue increased $0.6 million (or 17%) and $2.0
million (or 21%) during the third quarter and nine month periods
ended September 30, 1998, respectively, compared to the same
periods in 1997. The increase in policy charge revenue is
primarily attributable to the increase in policyholders'
variable account balances. Average variable account balances
increased $97 million (or 14%) and $146 million (or 22%) during
the current three month and nine month periods, respectively, as
compared to the same periods in 1997.
The market value adjustment expense is attributable to the
Company's modified guaranteed annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts that are surrendered before
the expiration of their interest rate guarantee period. The
market value adjustment expense increased $0.2 million (or 220%)
and $0.3 million (or 165%) during the current three month and
nine month periods consistent with an increase in surrender
activity resulting from the lower interest rate environment in
1998.
Policy benefits increased $0.4 million (or 406%) and $0.9
million (or 310%) during the three and nine month periods ended
September 30, 1998 respectively, compared to the equivalent
periods in 1997. The increase in policy benefits is due to
increased mortality in variable life products.
Insurance expenses and taxes increased $0.6 million (or 65%) and
$0.5 million (or 14%) during the third quarter and nine month
periods ended September 30, 1998, respectively, compared to the
same periods in 1997. During the third quarter 1998, the
Company incurred expenses of $0.3 million due to the writedown
of various leasehold improvements and other expenses associated
with the closure of its New York service center, as well as, $0.1
million in certain employee compensation related allocations from
Merrill Lynch & Co. Additionally, insurance department fees
increased $0.1 million during the third quarter 1998 as compared
to the third quarter 1997, primarily due to the timing of invoices
received from the insurance department.
I-1
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
I-2
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML LIFE INSURANCE COMPANY OF NEW YORK
/s/ JOSEPH E. CROWNE, JR.
-----------------------------------------
Joseph E. Crowne, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 12, 1998
I-3
<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 209,562
<EQUITIES> 12,594
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 309,405
<CASH> 10,449
<RECOVER-REINSURE> 402
<DEFERRED-ACQUISITION> 31,111
<TOTAL-ASSETS> 1,153,730
<POLICY-LOSSES> 5,792
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 1,611
<POLICY-HOLDER-FUNDS> 273,234
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,200
<OTHER-SE> 80,636
<TOTAL-LIABILITY-AND-EQUITY> 1,153,730
0
<INVESTMENT-INCOME> 16,430
<INVESTMENT-GAINS> (283)
<OTHER-INCOME> 11,521
<BENEFITS> 1,169
<UNDERWRITING-AMORTIZATION> 3,180
<UNDERWRITING-OTHER> 3,967
<INCOME-PRETAX> 7,186
<INCOME-TAX> 2,218
<INCOME-CONTINUING> 4,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,968
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
