The Registrant’s home office is located at 2 World Financial Center, South Tower, 5th Floor, New York, New York. This office space is leased from MLPF&S. In addition, personnel performing services for the Registrant pursuant to its Management Services Agreement operate in MLIG office space. MLIG occupies certain office space in Pennington, New Jersey through Merrill Lynch & Co. An allocable share of the cost of each of these premises is paid by the Registrant through the service agreement with MLIG. Merrill Lynch Insurance Group Services, Inc. (“MLIGS”), an affiliate of MLIG owns office space in Jacksonville, Florida. MLIGS also leases certain office space in Springfield, Massachusetts from Picknelly Family Limited Partnership. During 2001, MLIGS consolidated operations into the Jacksonville, Florida location. MLIGS continues to lease the office space in Springfield, Massachusetts, although there are no personnel at that location.
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 for the Registrant (referred to as "ML of New York" for purposes of Items 7 and 7A).
Modified guaranteed annuity sales increased $14.4 million from $0.8 million to $15.2 million during 2002 as compared to 2001. The increase is primarily due to increasing demand for products with guarantee features, as noted above.
During 2002, ML of New York experienced contract owner withdrawals that exceeded deposits by $44.6 million. The components of contract owner transactions were as follows:
ML of New York maintains a conservative general account investment portfolio. ML of New York has no mortgage or real estate investments. The following schedule identifies ML of New York’s general account invested assets by type:
The continuing decline in overall credit quality among corporate bonds has placed added pressure on ML of New York’s fixed income portfolio. As of December 31, 2002 and 2001, approximately $4.1 million (or 3%) and $4.8 million (or 3%), respectively, of ML of New York’s fixed maturity securities were considered non-investment grade. ML of New York defines non-investment grade as unsecured debt obligations that 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. Current non-investment grade holdings are the result of ratings downgrades on ML of New York’s portfolio as ML of New York does not purchase non-investment grade securities. Also, as of December 31, 2002, approximately $10.9 million (or 7%) of ML of New York’s fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by Standard and Poor’s, compared to $12.8 million (or 9%) of ML of New York’s fixed maturity securities as of December 31, 2001. ML of New York closely monitors such investments.
As of December 31, 2002, ML of New York had 2,154 life insurance and annuity contracts inforce with interest rate guarantees. The estimated average rate of interest credited on behalf of contract owners was 4.57% during 2002. Invested assets supporting liabilities with interest rate guarantees had an estimated effective yield of 5.76% during 2002. The number of life insurance and annuity contracts inforce with interest rate guarantees decreased 1% as compared to 2001.
ML of New York amortizes deferred policy acquisition costs based on the expected future gross profits for each group of contracts. In estimating future gross profits, management makes assumptions regarding such factors as policy charge revenue, investment performance, policy lapse rates, mortality, and expenses for the expected life of each group of contracts. Actual gross profits can vary from management’s estimates resulting in increases or decreases in the rate of amortization. Management periodically updates these estimates and evaluates the recoverability of deferred policy acquisition costs. The impact of revisions to estimates on cumulative amortization is recorded as a charge or credit to current operations (commonly referred to as “DAC unlocking”). During 2002, ML of New York reduced earnings by $1.5 million, via an increase in amortization
The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are amortized over the period in which ML of New York anticipates holding those funds, as noted in the Management Estimates section above. Deferred policy acquisition costs are principally commissions and a portion of certain other expenses relating to policy acquisition, underwriting and issuance that are primarily related to and vary with the production of new business. Insurance expenses and taxes reported in the statements of earnings are net of amounts deferred. In addition, ML of New York incurs expenses associated with the maintenance of inforce contracts.
Policy charge revenue decreased $0.8 million (or 4%) during 2002 as compared to 2001. The decrease in policy charge revenue is primarily attributable to reductions in asset-based fees collected on variable account balances. Variable annuity and variable life asset-based fees decreased $0.4 million (or 4%) and $0.3 million (or 12%), respectively, generally consistent with decreases in average variable account balances for those products. Asset-based fees were favorably impacted by increases in rates charged to unaffiliated fund investment managers for administrative services.
Net realized investment losses increased $0.7 million during 2002 as compared to 2001. The increase in net realized investment losses is due to an increase in credit related losses primarily losses on investments in fixed maturity securities issued by WorldCom Inc.
Policy benefits increased $1.4 million (or 47%) during 2002 as compared to 2001. During 2002, life insurance mortality expense increased $0.8 million as compared to 2001 primarily due to an increase in the number of death claims. In addition, variable annuity mortality expense increased $0.5 million as compared to 2001 primarily due to increased death benefit payments incurred under guaranteed minimum death benefit provisions.
Amortization of deferred policy acquisition costs increased $2.0 million (or 56%) during 2002 as compared to 2001 primarily due to period-to-period differences in DAC unlocking as noted in the Management Estimates section above.
Net earnings derived from interest spread decreased $1.8 million during 2001 as compared to 2000. The decrease in interest spread is primarily a result of ML of New York’s $35.0 million dividend payment to MLIG during the fourth quarter 2000, as well as the reduction in invested assets resulting from the decline in fixed rate contracts inforce.
Policy benefits increased $1.3 million (or 71%) during 2001 as compared to 2000. The increase in policy benefits is primarily due to a $1.7 million increase in variable annuity death benefit payments incurred under guaranteed minimum death benefit provisions. Partially offsetting this increase is decreased mortality for variable life insurance products.
ML of New York’s effective federal income tax rate increased to 45% for 2001 from 32% for 2000. During 2001, ML of New York recorded a $0.8 million (net of tax) adjustment for interest expense. Excluding this interest expense adjustment, ML of New York’s effective federal income tax rate was 34% for 2001.
ML of New York is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2002.