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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBERS - 333-77441 AND 333-77437
SAGE LIFE ASSURANCE OF AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0258372
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
300 ATLANTIC STREET, STAMFORD, CONNECTICUT 06901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 602-6500
(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. [X] Yes [ ] No
As of April 12, 2001 there were 1,000 shares of outstanding common stock, par
value $2,500 per share, of the registrant. All outstanding shares were owned by
Sage Life Holdings of America, Inc.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are not historical facts. Although such
forward-looking statements reflect the current views of the Company and
management with respect to future events and financial performance, there are
known and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those contemplated or indicated by such
forward-looking statements. These include, but are not limited to, risks and
uncertainties inherent in or relating to (i) general economic conditions,
including interest rate movements, inflation and cyclical industry conditions;
(ii) governmental and regulatory policies, as well as the judicial environment;
(iii) accessibility to reasonably priced reinsurance; (iv) continued financial
support from the Company's ultimate parent, Sage Group Limited ("Sage Group"), a
South African corporation; (v) increasing competition in the markets in which
the Company operates; (vi) changes in generally accepted accounting principles;
and (vii) the risks and uncertainties included in the Company's Securities and
Exchange Commission filings. The words "believe", "expect", "anticipate",
"project", and similar expressions identify forward-looking statements, which
speak only as of their dates. Accordingly, there can be no assurance that actual
results will conform to the forward-looking statements in this Annual Report.
Neither the Company nor its management undertakes any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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SAGE LIFE ASSURANCE OF AMERICA, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 7
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10
Item 8. Financial Statements 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 10
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14
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PART I
ITEM 1. BUSINESS
General
Sage Life Assurance of America, Inc. ("Sage Life" or "the Company" or
"We") is a stock life insurance company incorporated in Delaware in
1981 with its principal offices in Stamford, Connecticut. We have
licenses to conduct an insurance business in 49 states and the District
of Columbia. The Company is authorized to write variable annuity
contracts in all jurisdictions, in which it is licensed, and is
authorized to write variable life insurance in all but three states.
Although the Company is not licensed in New York, its wholly-owned
subsidiary, Sage Life Assurance Company of New York ("Sage New York")
has made application to the New York Insurance Department for an
insurance license.
We are a wholly-owned subsidiary of Sage Life Holdings of America, Inc.
("Sage Life Holdings"). Sage Insurance Group Inc. ("SIGI") owns 90.1%
of the common stock of Sage Life Holdings. Life Reassurance Corporation
of America ("Life Re"), an affiliate of Swiss Re Life and Health
America, Inc. ("Swiss Re"), owns the remaining 9.9% of the common stock
of Sage Life Holdings. Before acquiring Sage Life Holdings' common
stock, Life Re invested $12.5 million in non-voting non-redeemable
cumulative preferred stock of Sage Life Holdings. During 2000, Life Re
exchanged a portion of the preferred stock it acquired for the common
stock. Life Re's ultimate parent is Swiss Reinsurance Company,
Switzerland, one of the world's largest life and health reinsurance
groups.
SIGI is a wholly-owned, indirect subsidiary of Sage Group Limited
("Sage Group"), a South African corporation quoted on the Johannesburg
Stock Exchange. Sage Group is a holding company with a thirty-year
history of extensive operating experience in mutual funds, life
assurance and investment management. Sage Group has directly and
indirectly engaged in insurance marketing activities in the United
States since 1977 through its financial interests in Independent
Financial Marketing Group Inc., a financial planning and bank insurance
marketing company. Sage Group sold its interest in Independent
Financial Marketing Group in March 1996 to the Liberty Financial
Companies of Boston. In addition to its U.S. and South African
activities, Sage Group also provides insurance products to non-U.S.
citizens through its indirect subsidiary, Sage Life (Bermuda), Ltd.
Effective December 31, 1996, SIGI purchased all of the outstanding
stock of Sage Life, then named Fidelity Standard Life Insurance Company
("Fidelity Standard"), from Security First Life Insurance Company
("SFLIC"). Prior to the purchase and effective October 31, 1996,
Fidelity Standard entered into a modified coinsurance arrangement to
cede all of its separate account liabilities to its then parent, SFLIC.
Assets equal to the total reserves and related liabilities were
transferred to SFLIC. The remaining general account liabilities were
ceded under a 100% coinsurance arrangement with SFLIC. In connection
with the purchase of Fidelity Standard, the Company entered into a
service agreement with SFLIC to provide all necessary administrative
services for all ceded business. Effective September 30, 1998, all of
the in-force business of the Company was novated to SFLIC.
Segment Information
We operate in one business segment, the variable insurance product
market. Products we currently offer include combination fixed and
variable deferred annuities and combination fixed and variable life
insurance products. We may introduce additional variable products in
the future including combination fixed and variable immediate
annuities.
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Products and Distribution
Our ongoing business strategy is to focus on the development,
underwriting, and marketing of variable annuity and variable life
insurance products (the "Contracts"). Our obligations under these
Contracts are supported by (1) variable accounts -- determined by the
value of investments held in separate accounts, and (2) fixed accounts
-- backed by investments held in separate accounts. The assets in these
separate accounts which equal the reserves and other liabilities
supporting the Contracts to which they relate, are legally segregated
from other obligations or creditors of the Company. (Except in
California, where the fixed account for the variable life insurance
products will be held in our general account.)
Our initial marketing focus has been to distribute our products through
banks and financial planning companies. More recently, we expanded our
distribution channels to include regional broker-dealers. We anticipate
that, over the long-term, our distribution channels will expand to
include wirehouses.
Rating Agencies
The Company's financial ratings are important in its ability to
accumulate and retain assets. The Company is rated "A" (Excellent) by
A.M. Best and "AA-" (Very Strong) by Fitch-Duff & Phelps. Rating
agencies periodically review the ratings they issue for any required
changes. These ratings reflect the opinion of the rating agency as to
the relative financial strength of the Company and its ability to meet
its contractual obligations to its policyholders. Many financial
institutions and broker-dealers focus on these ratings in determining
whether to market an insurer's variable products. If any of the
Company's ratings were downgraded from their current levels, sales of
the Company's products and the Company's relationships with
distributors could be adversely affected.
Competition
We are engaged in a business that is highly competitive due to the
large number of stock and mutual life insurance companies as well as
other entities marketing insurance products comparable to our products.
There are approximately 1,500 stock, mutual and other types of insurers
in the life insurance business in the United States, a substantial
number of which are significantly larger than us. We are unique in that
we are one of the few life insurers confining activities to the
marketing of separate account variable insurance products.
Employees
As of December 31, 2000, we had 43 full-time salaried employees. Many
of these employees also perform duties for affiliated companies.
ITEM 2. PROPERTIES
We maintain our corporate offices in space leased by SIGI. SIGI
currently leases approximately 31,000 square feet of which it intends
to terminate approximately 9,000 square feet thereof. Affiliated
companies also occupy the space with us.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this filing, neither we nor our subsidiary is
involved in any lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's outstanding shares are owned by Sage Life
Holdings. The Company did not pay any dividends to its parent in 2000,
1999 and 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to the
operations of the Company. The selected financial data should be read
in conjunction with the financial statements and the notes thereto and
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations. As the Company is effectively a new company
since January 1997, results prior to that time are not applicable to
the Company and its operations. For this reason, only four years of
data are shown:
2000 1999 1998 1997
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract charges and fees $ 4,725 $ 861 $ -- $ --
Administrative service fees 49,940 37,671 -- --
Net investment income 1,368,550 1,290,196 1,243,522 989,494
------------ ------------ ------------ ------------
Total revenues 1,423,215 1,328,728 1,243,522 989,494
BENEFITS AND EXPENSES:
Development expenses 2,421,265 3,827,887 -- --
Amortization expense 234,468 234,468 548,818 325,406
General and administrative expenses 3,519,931 1,693,299 1,263,678 1,015,874
------------ ------------ ------------ ------------
Total benefits and expenses 6,175,664 5,755,654 1,812,496 1,341,280
------------ ------------ ------------ ------------
Loss before cumulative effect adjustment (4,752,449) (4,426,926) (568,974) (351,786)
Cumulative effect adjustment for change in
accounting for development costs -- (4,269,488) -- --
------------ ------------ ------------ ------------
Net loss $ (4,752,449) $ (8,696,414) $ (568,974) $ (351,786)
============ ============ ============ ============
BALANCE SHEET DATA:
Total Assets $ 54,726,227 $ 31,736,580 $ 36,542,531 $ 36,688,739
============ ============ ============ ============
Total Liabilities $ 22,209,130 $ 233,435 $ 70,474 $ 3,486,311
============ ============ ============ ============
Total Stockholder's Equity $ 32,517,097 $ 31,503,145 $ 36,472,057 $ 33,202,428
============ ============ ============ ============
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the accompanying
financial statements and notes thereto and Item 6, Selected Financial
Data.
Results of Operations
Excluding the cumulative effect of approximately $4.3 million for the
write-off of capitalized development costs on January 1, 1999, we
reported net losses of approximately $4.8 million, $4.4 million and
$0.6 million for 2000, 1999 and 1998, respectively.
Contract charges and fees are received from contract owners, while
administrative fees are received from the various investment fund
managers overseeing contract owner invested funds. Administrative fees
paid by investment fund managers, and the predominant portion of the
charges received from contract owners, are based on underlying asset
values and, as such, vary with premium production and investment
performance. Annual contract charges received from contract owners are
flat fees assessed on each contract's anniversary date; accordingly,
they vary according to the number of contracts in force during the
course of a year. Prior to 2000, we produced a limited amount of
business as we focused most of our efforts on obtaining financial
ratings and developing the infrastructure necessary for the
commencement of underwriting and marketing activities. In 2000,
although gross and net premiums written (which under accounting
principles generally accepted in the United States are not reported as
revenue) of approximately $21.1 million and $7.0 million, respectively,
are significantly higher than the approximate $0.1 million gross and
net premiums written in 1999, they are still well below levels needed
to generate significant asset-based charges. Accordingly, net
investment income continues to represent over 95% of our revenues. We
expect net investment income will continue to represent the majority of
our revenues for the next several years as our premium volume and
related separate account assets grow.
The reduction in development expenses and increase in general and
administrative expenses in 2000 as compared to prior years are a direct
reflection of our continued progress in the implementation of our
strategy and related infrastructure needed to support our planned
growth. The increase in general and administrative expenses is
primarily due to an increase in our employee headcount (including
several senior positions) which was 43 at December 31, 2000 compared to
27 at December 31, 1999 and 14 at December 31, 1998.
Our results do not reflect (through the establishment of a valuation
allowance) the benefits of deferred federal income tax assets that we
believe it is not more likely than not will be realized in the near
future.
Liquidity and Capital Resources
Since the beginning of 1997, our primary cash needs have been for the
development of our insurance products and related infrastructure, and
to fund our daily operations. Our cash needs have been met through
interest income on the invested assets of the general account as well
as through capital contributions from SIGI.
We expect our cash needs will continue to increase as we expand our
underwriting and marketing activities. We anticipate that we will be
unable to meet all of our liquidity requirements without capital
contributions from SIGI. Although not required to do so, we believe
that SIGI will continue to provide capital for our operations to the
extent needed. Our future marketing efforts could be adversely affected
in the event that SIGI and/or its affiliates are unwilling to commit
additional funding.
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Reinsurance
In 2000, we entered into a modified coinsurance agreement (the "Modco
Agreement") with Life Re. Under the Modco Agreement we cede a
significant portion of our variable business to Life Re. This
arrangement provides us with additional capacity for growth of the
variable insurance business.
In addition, we have entered into reinsurance arrangements that
reinsure certain mortality risks associated with the death benefit and
accidental death benefit features of the Contracts, as well as other
contract guarantees. We intend to use only highly rated reinsurance
companies to reinsure these risks.
Reinsurance does not relieve us from our obligations to contract
owners. We remain primarily liable to the contract owners to the extent
that any reinsurer does not meet its obligations under the reinsurance
agreements.
Reserves
The insurance laws and regulations under which we operate obligate us
to carry on our books, as liabilities, actuarially determined reserves
to meet our obligations on outstanding contracts. We base our reserves
involving life contingencies on mortality tables in general use in the
United States. Where applicable, we compute our reserves to equal
amounts which, together with interest on such reserves computed
annually at certain assumed rates, will be sufficient to meet our
contract obligations at their maturities or in the event of the covered
person's death. At December 31, 2000 and 1999 the Company held $21.3
million and $93 thousand of reserves in its Separate Account.
Investments
Our cash and invested assets of $24.7 million and $24.1 million at
December 31, 2000 and 1999, respectively, were comprised entirely of
investment grade securities and money market funds. It is the stated
policy of the Company to refrain from investing in securities having
speculative characteristics.
Dividend Restrictions
We are subject to state regulatory restrictions that limit the maximum
amount of dividends payable. Subject to certain net income carryforward
provisions as described below, we must obtain approval of the Insurance
Commissioner of the State of Delaware in order to pay, in any 12-month
period, "extraordinary" dividends which are defined as those in excess
of the greater of 10% of surplus as regards policyholders as of the
prior year-end and statutory net income less realized capital gains for
such prior year. We may pay dividends only out of earned surplus. In
addition, we must provide notice to the Insurance Commissioner of the
State of Delaware of all dividends and other distributions to Sage Life
Holdings, within five business days after declaration and at least ten
days prior to payment. At December 31, 2000, we could not pay a
dividend to Sage Life Holdings without prior approval from state
regulatory authorities as we currently do not have earned surplus.
State Regulation
We are subject to the laws of the State of Delaware governing insurance
companies and to the regulations of its Department of Insurance (the
"Insurance Department"). The Company annually files a detailed
financial statement in the prescribed form (the "Statement") with the
Insurance Department covering our operations for the preceding year and
our financial condition as of the end of that year. Regulation by the
Insurance Department means that it may examine our books and records to
determine, among other things, whether reported contract liabilities
and reserves are computed in accordance with statutory accounting
practices prescribed or permitted by the Insurance Department. The
Insurance Department, under the auspices of the National Association of
Insurance Commissioners ("NAIC"), periodically
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conducts a full examination of the Company's operations.
In addition, we are subject to regulation under the insurance laws of
all jurisdictions in which we operate. These laws 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 types and amounts of investments permitted. We must file
the Statement with supervisory agencies in each of the jurisdictions in
which we operate, and our operations and accounts are subject to
examination by these agencies at regular intervals.
Our statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Delaware
Insurance Department. Currently, "prescribed" statutory accounting
practices are interspersed throughout state insurance laws and
regulations, the NAIC's Accounting Practices and Procedures Manual and
a variety of NAIC publications. "Permitted" statutory accounting
practices encompass all accounting practices that are not prescribed;
such practices may differ from state to state, may differ from company
to company within a state, and may change in the future.
The NAIC has revised the Accounting Practices and Procedures Manual in
a process referred to as Codification. The revised manual will be
effective January 1, 2001. Delaware has adopted the provisions of the
revised manual. The revised manual has changed, to some extent,
prescribed statutory accounting practices and will result in changes to
the accounting practices that we use to prepare our statutory-basis
financial statements. The cumulative effect of changes in accounting
principles adopted to conform to the revised Accounting Practices and
Procedures Manual will be reported as an adjustment to surplus as of
January 1, 2001. We believe the effect of these changes will not result
in a significant reduction in our statutory-basis capital and surplus.
The NAIC requires insurance companies to report information regarding
minimum Risk Based Capital ("RBC") requirements. These requirements are
intended to allow insurance regulators to identify companies that may
need regulatory attention. The RBC model law requires that insurance
companies apply various factors to asset, premium and reserve items,
all of which have inherent risks. The formula includes components for
asset risk, insurance risk, interest risk and business risk. At
December 31, 2000, our total adjusted capital exceeded RBC
requirements.
Further, many states regulate affiliated groups of insurers like us and
our affiliates, under insurance holding company legislation. Under such
laws, inter-company 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 when other insurance companies 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.
Although the federal government ordinarily does not directly regulate
the business of insurance, federal initiatives often have an impact on
the business in a variety of ways. Our insurance products are subject
to various federal securities laws and regulations. In addition,
current and proposed federal measures that may significantly affect the
insurance business include: 1) regulation of insurance; 2) company
solvency; 3) employee benefit regulation; 4) tax law changes affecting
the taxation of insurance companies; 5) tax treatment of insurance
products and its impact on the relative desirability of various
personal investment vehicles; and 6) privacy protection initiatives.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, we held in our general account $14.7 million of
fixed maturity securities that are sensitive to changes in interest
rates. These securities are held in support of our target surplus. We
have a conservative investment philosophy, with all investments being
investment grade corporate securities, government agency or U.S.
government securities. We perform estimates of the market value of our
fixed maturity portfolio based on increases or decreases in interest
rates. The effects of an increase or decrease of 100 and 200 basis
points ("bps") on our fixed maturity portfolio at December 31, 2000
are:
-200 bps -100 bps Fair value +100 bps +200 bps
-------- -------- ---------- -------- --------
U.S.Government obligations $7,596,313 $7,255,957 $6,934,918 $6,632,074 $6,346,165
Corporate obligations 8,342,810 8,025,810 7,725,851 7,441,890 7,172,730
Total portfolio $15,939,123 $15,281,767 $14,660,769 $14,073,964 $13,518,895
The primary equity market risk to the Company comes from the nature of
the variable annuity and variable life products sold. Various fees and
charges earned by the Company are substantially derived as a percentage
of the market value of the assets under management. In a market
decline, this income would be reduced. This could be further compounded
by customer withdrawals, net of any applicable surrender charges,
partially offset by transfers to the fixed investment option. It also
is not clear what the impact of a prolonged downturn in the equity
markets would have on sales. Customers' perceptions of a downturn in
equity markets coupled with changing interest rates could move them
into financial products other than variable insurance products.
ITEM 8. FINANCIAL STATEMENTS
The Company's audited consolidated financial statements begin on page
F-1. Reference is made to the Index to Financial Statements on page 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the Directors and Executive Officers of the Company:
Position with Sage, Year of
Name, Age Election Other Principal Positions for Past Five Years
--------- -------- ---------------------------------------------
Ronald S. Scowby, 62 Director, January 1997 to Chairman and Trustee, Sage Life Investment Trust, July 1998
present; Chairman, February to present; President, Chief Executive Officer, Sage Life
1998 to present Assurance of America Inc., January 1997 to February 1998;
Director, President, Chief Executive Officer, Sage Management
Services (USA), Inc., June 1996 to December 1999; Owner,
Sheldon Scowby Resources July 1995 to June 1996
Robin I. Marsden, 35 Director, January 1997 to President and Trustee, Sage Life Investment Trust, July 1998
present; President and Chief to present; Director, Sage Distributors, Inc., January 1998
Executive Officer, February to present; Director, January 1997 to present, President and
1998 to present Chief Executive Officer, February 1998 to present, Sage
Insurance Group, Inc.; Chief Investment Officer and Chief
Financial Officer, Sage Life Holdings, Ltd., November 1994 to
January 1998
H. Louis Shill, 70 Director, January 1997 to Chairman, Sage Life Assurance of America, Inc. January 1997
present to February 1998; Chairman, Sage Insurance Group, Inc.,
January 1997 to present; Founder, Chairman, Sage Group
Limited, 1965 to present
Paul C. Meyer, 48 Director, January 1997 to Partner, Clifford Chance Rogers & Wells, 1986 to present
present
Richard D. Starr, 56 Director, January 1997 to Chairman and Chief Executive Officer, Financial Institutions
present Group, Inc., October 1978 to present; Chairman and Director,
ABN Amro Financial Services, Inc.
Dr. Meyer Feldberg, 59 Director, January 2000 to Dean/Professor, Columbia University Graduate School of
present Business, July 1989 to present; Chairman and Director, Sage
Life Assurance Company of New York; Director of Revlon,
Inc., Federated Department Stores, Primedia, and Paine-Webber
Mutual Funds
John A. Benning, 66 Director, April 2000 to Senior Vice President and General Counsel, Liberty Financial
present Companies, 1986 to 2000; Director of ICI Mutual Insurance
Company, T.T. International U.S.A. Feeder Trust, Liberty
Newport World Portfolio
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Mitchell R. Katcher, 47 Director, December 1997 to Vice President, Sage Life Investment Trust, July 1998 to
present; Senior Executive present; Director, Sage Distributors, Inc., January 1998 to
Vice President, Chief present; Treasurer, July 1997 to present, Senior Executive
Actuary May 1997 to present; Vice President, December 1997 to present, Sage Insurance
Chief Financial Officer, May Group, Inc.; Executive Vice President, Golden American Life
1997 to October 2000 Insurance Company, January 1992 to February 1997
Lincoln B. Yersin, 37 Executive Vice President - President, Sage Distributors, September 2000 to present;
Marketing, National Sales Executive Vice President, Sage Insurance Group, Inc. January
Manager, May 1999 to present 2001 to present; President, AmSouth Investment Services,
Inc., June 1993 to May 1999; Senior Vice President, AmSouth
Bancorporation, June 1993 to May 1999
Jeffrey C. Gordon, 39 Senior Vice President and Senior Vice President and Chief Financial Officer, Sage
Chief Financial Officer, Insurance Group Inc., October 2000 to present; Controller,
October 2000 to present Frontier Insurance Group, Inc., January 1999 to September
2000; Senior Manager, Ernst & Young LLP, January 1988 to
December 1998
All entities with "Sage" in their name are affiliates of Sage Life. The
executive officers of Sage Life hold various other offices and directorships
with affiliates not named above. None of these, however, are considered to be
principal positions.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Chief Executive
Officer and certain other Executive Officers of the Company:
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(1) Compensation(2)
- --------------------------- ---- ------ ----- --------------- ---------------
Robin I. Marsden 2000 $354,750 $100,000 $17,850 $119,399
(Chief Executive Officer) 1999 322,500 150,000 16,800 38,018
1998 275,000 - 16,800 -
Ronald S. Scowby (3) 2000 $ - $75,000 $ - $56,538
(Chairman and former President 1999 354,167 200,000 16,800 42,484
and CEO) 1998 333,333 170,000 16,800 -
Mitchell R. Katcher 2000 $293,750 $137,500 $17,850 $17,824
(Senior Executive Vice 1999 268,750 150,000 16,800 30,456
President and Chief Actuary) 1998 250,000 265,000 16,800 -
Lincoln Yersin 2000 $186,250 $150,000 $13,300 $47,191
(Executive Vice President Marketing 1999 116,667 100,000 - 124,692
and National Sales Manager)
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(1) Represents amounts credited to executives under a SIGI sponsored defined
contribution plan
(2) All Other Compensation consists of the following for the executive officers:
Mr. Marsden: 2000, $19,399 - contribution to non-qualified retirement plan,
$100,000 - deferral of partial 1999-2000 fiscal year earned bonus; 1999, $17,062
- - contribution to non-qualified retirement plan, $20,956 - contribution to
annuity contract issued by the Company.
Mr. Scowby: 2000, $56,538 - cash-out of earned leave accrued during status as
executive; 1999, $20,387 - contribution to non-qualified retirement plan,
$22,097 - contribution to annuity contract issued by the Company.
Mr. Katcher: 2000, $12,994 - contribution to non-qualified retirement plan,
$4,830 - contribution to non-qualified plan in lieu of employee benefit; 1999,
$11,419 - contribution to non-qualified retirement plan, $19,037 - contribution
to annuity contract issued by the Company.
Mr. Yersin: 2000, $47,191 - moving expenses; 1999, $65,116 - recruitment bonus,
$59,576 - moving expenses.
(3) Mr. Scowby retired as an executive officer effective December 31, 1999.
Bonus compensation shown for 2000 is in connection with his former executive
status, and was paid in 2000.
Employment Contracts.
Mr. Marsden and the Company are parties to an Employment Agreement effective
April 1, 2000. The agreement provides for Mr. Marsden's title and duties with
the Company, and establishes certain restrictive covenants. It sets forth his
annual remuneration for the year from April 1, 2000, to March 31, 2001, and
provides that such remuneration will be reviewed annually thereafter. Further,
the agreement provides that Mr. Marsden is eligible to participate in the
Company's short-term incentive bonus plan for executive employees, and in a
long-term capital incentive plan to be established by SIGI. The agreement also
provides that if his employment is terminated (except for a "with cause"
termination) (i) he shall continue to be paid 24 months of then-current base
salary with a proportionate bonus under the Company's short-term incentive plan
for the months of service since the last bonus payment; (ii) that his employee
welfare benefits will be continued for 24 months; (iii) that unvested pension
contributions would immediately vest; and (iv) that unvested allocations or
options under the long-term capital incentive plan would be treated in the same
manner as a retirement under the rules of the plan. In addition, if the Company
is no longer controlled by Sage Group and its effective place of business is
relocated by its new owners, Mr. Marsden may, in lieu of relocating and being
reimbursed thereof, elect to terminate his employment and receive the benefits
he would otherwise have received if terminated without cause.
Mr. Katcher and the Company are parties to an Employment Agreement effective
February 1, 1997. The agreement provides for Mr. Katcher's title and duties with
the Company, sets forth his remuneration through March 31, 1999, and provides
that such remuneration will be reviewed annually thereafter. The agreement also
provides that Mr. Katcher is eligible to participate in the Company's short-term
incentive bonus plan for executive employees, and provides that bonuses payable
on certain dates ending April 1, 1999, will not be less than indicated amounts.
The agreement also provides that Mr. Katcher may participate in a long-term
capital incentive plan to be established by SIGI. The agreement also provides
that if his employment is terminated (except for a "with cause" termination) (i)
his monthly compensation and employee welfare benefits shall be continued for a
period of time as determined by a formula; (ii) that unvested contributions Mr.
Katcher and the Company unvested allocations or options under the long-term
capital incentive plan would be accelerated and deemed to immediately vest. In
addition, pursuant to a "change of control" provision, Mr. Katcher may elect to
terminate his employment and receive the benefits he would otherwise have
received if terminated without cause.
Mr. Yersin and the Company are parties to an employment agreement with an
effective date of May 3, 1999. The agreement provides for Mr. Yersin's title and
duties with the Company, and sets forth his base salary and other compensation
based on sales ("override"), with stated minimums on the override for the first
two years. It also provides for compensation to Mr. Yersin in recognition of
long-term incentives he forfeited with his former employer. Half of the value
was advanced in cash and vested pro rata over the next two years. The other half
was credited to Mr. Yersin's participation in a long-term capital incentive plan
to be established by SIGI. In addition, pursuant to a "change of control"
provision, Mr. Yersin may elect to terminate his employment and receive twelve
months of basic salary, benefits and guaranteed minimum bonus or the equivalent
of the prior year's override, and ordinary vesting under any benefit or
incentive plan.
13
14
Directors' Compensation. Messrs. Marsden, Katcher and Shill are also
officers-employees of Sage Life and/or its affiliates and parent companies, and
are not therefore separately compensated for serving on the Board. Compensation
for the other directors is inclusive of their services as directors for any of
our affiliates. Messrs. Meyer, Starr and Benning are paid an annual retainer of
$12,000, and $2,000 per meeting attended. Dr. Feldberg, who is also chairman of
our subsidiary, Sage Life Assurance Company of New York, is paid an annual
retainer of $30,000, and $8,000 per meeting attended. Messrs. Meyer, Starr,
Benning, and Feldberg do not receive retirement benefits. Mr. Scowby is paid
$12,833 per month for services as director and chairman of Sage Life and Sage
Life Investment Trust. In addition, he is paid a stipend to cover the cost of
certain insurance coverages formerly provided to him as an executive; the amount
of the stipend in 2000 was $26,938. He is also provided with certain retirement
benefits and is eligible to participate in a long-term incentive plan to be
established by SIGI.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Paul C. Meyer, a director of the Company, is a partner with the law
firm Clifford Chance Rogers & Wells. Since 1997, the Company has
retained Clifford Chance Rogers & Wells, and its predecessor firm,
Rogers & Wells, to provide legal counseling to the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements Page
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Stockholder's Equity for the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
The following consolidated financial statement schedule of Sage Life Assurance
of America, Inc. is included in Item 14(a):
Schedule IV - Reinsurance F-14
All other schedules for which provision is made in Article 7 of Regulation S-X
are omitted because they are either not applicable or because the information
required therein is included in the Notes to the Consolidated Financial
Statements.
Signatures F-15
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 2000.
(c) Exhibit Index E-1
14
15
Report of Independent Auditors
Board of Directors
Sage Life Assurance of America, Inc.
We have audited the accompanying consolidated balance sheets of Sage Life
Assurance of America, Inc. and subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sage
Life Assurance of America, Inc. and subsidiary at December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ Ernst & Young LLP
New York, NY
March 19, 2001
16
Sage Life Assurance of America, Inc.
Consolidated Balance Sheets
DECEMBER 31
2000 1999
---- ----
ASSETS
Investments:
Fixed maturity securities available for sale $ 14,660,769 $ 16,179,750
Short-term investments 8,963,495 5,972,494
------------ ------------
Total investments 23,624,264 22,152,244
Cash and cash equivalents 1,060,672 1,979,985
Accrued investment income 243,111 226,234
Receivable from affiliates 1,299,114 671,270
Deferred federal income taxes 146,530 376,461
Reinsurance recoverables 290,302 --
Deferred acquisition costs 343,901 --
Goodwill 5,993,678 6,228,146
Capitalized software 400,900 --
Other assets 12,580 9,231
Separate account assets 21,311,175 93,009
------------ ------------
Total assets $ 54,726,227 $ 31,736,580
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred gain from modified coinsurance $ 318,028 $ -
agreement
Accrued expenses and other liabilities 579,927 140,426
Separate account liabilities 21,311,175 93,009
------------ ------------
Total liabilities 22,209,130 233,435
Stockholder's equity:
Common stock, $2,500 par value, 1,000 shares authorized,
issued and outstanding 2,500,000 2,500,000
Additional paid-in capital 44,671,161 39,351,096
Deficit (14,369,623) (9,617,174)
Accumulated other comprehensive loss (284,441) (730,777)
------------ ------------
Total stockholder's equity 32,517,097 31,503,145
------------ ------------
Total liabilities and stockholder's equity $ 54,726,227 $ 31,736,580
============ ============
See accompanying notes to consolidated financial statements.
F-2
17
Sage Life Assurance of America, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
REVENUES
Contract charges and fees $ 4,725 $ 861 $ --
Administrative service fees 49,940 37,671
Net investment income 1,368,550 1,290,196 1,243,522
----------- ----------- -----------
Total revenues 1,423,215 1,328,728 1,243,522
BENEFITS AND EXPENSES
Development expenses 2,421,265 3,827,887 --
Amortization expense 234,468 234,468 548,818
General and administrative expenses 3,519,931 1,693,299 1,263,678
----------- ----------- -----------
Total benefits and expenses 6,175,664 5,755,654 1,812,496
Loss before cumulative effect adjustment (4,752,449) (4,426,926) (568,974)
Cumulative effect adjustment for change in
accounting for development costs -- (4,269,488) --
----------- ----------- -----------
Net loss $(4,752,449) $(8,696,414) $ (568,974)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
18
Sage Life Assurance of America, Inc.
Consolidated Statements of Stockholder's Equity
OTHER
ACCUMULATED
ADDITIONAL COMPREHENSIVE
PAID-IN (LOSS)
COMMON STOCK CAPITAL DEFICIT INCOME TOTAL
------------ ------- ------- ------ -----
Balances at January 1, 1998 $ 2,500,000 $ 31,005,508 $ (351,786) $ 48,706 $ 33,202,428
Net loss -- -- (568,974) -- (568,974)
Change in unrealized gain on
investments, net of federal income taxes -- -- -- (31,616) (31,616)
------------
Comprehensive loss (600,590)
Additional capital contributions -- 3,870,219 -- -- 3,870,219
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 2,500,000 34,875,727 (920,760) 17,090 36,472,057
Net loss -- -- (8,696,414) -- (8,696,414)
Change in unrealized gain on
investments, net of federal income taxes -- -- -- (747,867) (747,867)
------------
Comprehensive loss (9,444,281)
Purchase price adjustment -- (102,518) -- -- (102,518)
Additional capital contributions -- 4,577,887 -- -- 4,577,887
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1999 2,500,000 39,351,096 (9,617,174) (730,777) 31,503,145
Net loss -- -- (4,752,449) -- (4,752,449)
Change in unrealized loss on investments, -- -- -- 446,336 446,336
net of federal income taxes
------------
Comprehensive loss -- -- -- -- (4,306,113)
Additional capital contributions -- 5,320,065 5,320,065
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 $ 2,500,000 $ 44,671,161 $(14,369,623) $ (284,441) $ 32,517,097
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
19
Sage Life Assurance of America, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES
Net loss $ (4,752,449) $ (8,696,414) $ (568,974)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization expense 234,468 234,468 548,818
Amortization of bond discount/premium 114,223 124,842 33,808
Amortization of capitalized software 22,966 -- --
Cumulative effect adjustment for change in accounting for
development costs -- 4,269,488 --
Changes in:
Accrued investment income (16,877) (22,809) (145,386)
Receivable from affiliates (627,844) (671,270) (128,425)
Reinsurance recoverables (290,302) -- --
Deferred acquisition costs (343,901) -- --
Deferred gain from modified coinsurance agreement 318,028 -- --
Accrued expenses and other liabilities 439,501 78,756 (118,772)
Other assets (3,349) (4,231) 6,443
------------ ------------ ------------
Net cash used in operating activities (4,905,536) (4,687,170) (372,488)
INVESTING ACTIVITIES
Purchases of fixed maturity securities (453,975) (4,444,806) (10,295,438)
Proceeds from maturities and repayments of fixed maturity
securities 2,535,000 -- 815,000
Net (purchases) sales of short-term investments (2,991,001) 5,002,909 10,555,486
Software capitalization (423,866) -- --
------------ ------------ ------------
Net cash (used in) provided by investing activities (1,333,842) 558,103 1,075,048
FINANCING ACTIVITIES
Development expenses paid by parent 2,421,265 3,827,887 --
Capital contributions from parent 2,898,800 750,000 600,000
------------ ------------ ------------
Net cash provided by financing activities 5,320,065 4,577,887 600,000
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (919,313) 448,820 1,302,560
Cash and cash equivalents at beginning of year 1,979,985 1,531,165 228,605
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,060,672 $ 1,979,985 $ 1,531,165
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
20
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATION
Sage Life Assurance of America, Inc. (the "Company") is domiciled in Delaware
and is a wholly-owned subsidiary of Sage Life Holdings of America, Inc.
("SLHA"). SLHA is owned 9.9% by Life Reassurance Corporation of America ("Life
Re"), an affiliate of Swiss Re Life and Health America, Inc. ("Swiss Re") and
90.9% owned by Sage Insurance Group, Inc. ("SIGI"), a wholly-owned indirect
subsidiary of Sage Group Limited, a South African company ("Sage Group").
The Company is licensed to write business in all states with the exception of
New York. In 1998 the Company formed Sage Life Assurance Company of New York
("Sage New York") as a wholly-owned subsidiary. Sage New York is in the process
of obtaining its license in the State of New York.
DESCRIPTION OF BUSINESS
The Company develops and markets variable annuity and variable life insurance
products. Sales of these products to the retail public are made by registered
representatives of unaffiliated broker-dealers that have entered into selling
agreements with the principal underwriter for the product, Sage Distributors,
Inc., an affiliate of the Company.
Significant sales activity began in the third quarter of 2000. Gross sales for
2000 were approximately $21.1 million, a significant amount of which were
produced by one broker-dealer, predominantly from residents of the State of
Texas. This broker-dealer has recently been purchased by an unaffiliated company
and is no longer covered under a selling agreement with the Company.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States and reflect the
consolidated accounts of the Company and its wholly-owned subsidiary. All
intercompany balances and transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires that management make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant estimates and
assumptions are related to deferred acquisition costs and involve policy lapses,
investment return and maintenance expenses. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less from the date of purchase to be cash equivalents. Cash and
cash equivalents are carried at cost, which approximates fair value.
INVESTMENTS
The Company has classified all of its fixed maturity investments as
available-for-sale. Those investments are carried at fair value and changes in
unrealized gains and losses are reported as a component of stockholder's equity,
net of applicable deferred federal income taxes. Fair values are determined by
quoted market prices.
Short-term investments are carried at amortized cost, which approximates fair
value.
F-6
21
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ACQUISITION COSTS
The costs of acquiring new business, which vary with and are primarily related
to the production of new business, are being deferred net of reinsurance. These
costs include commissions, costs of contract issuance, and certain selling
expenses. These costs are being amortized generally in proportion to expected
gross profits from surrender charges, policy and asset based fees and mortality
and expense margins. This amortization is adjusted retrospectively and
prospectively when estimates of current and future gross profits to be realized
from a group of products are revised.
REINSURANCE
During 2000, the Company entered into a modified coinsurance agreement (the
"Modco Agreement") with Life Re. Under the Modco Agreement, the Company cedes a
quota share of the premiums related to all of its variable business to Life Re.
The Modco Agreement provides the Company with additional capacity for growth in
supporting the cash strain from the Company's variable business.
In addition, the Company has entered into reinsurance arrangements that reinsure
certain morality risks associated with the death benefit and accidental death
benefit features of the contracts as well as other contract guarantees.
Reinsurance contracts are accounted for in a manner consistent with the
underlying contracts. The deferred gain from the Modco Agreement in the
accompanying balance sheets represents the unamortized commission received by
the Company in excess of the quota share percentage. Such gain is amortized in
relation to the estimated gross profits of the related business. Reinsurance
premiums ceded and reinsurance recoveries on benefits and claims incurred are
deducted from the respective income and expense accounts. Assets and liabilities
related to reinsurance ceded are reported on a gross basis.
Reinsurance does not relieve the Company from its obligations to contract
owners. The Company remains primarily liable to the contract owners to the
extent that any reinsurer does not meet its obligations under the reinsurance
agreements.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for the
benefit of certain contract owners who bear the investment risk. The separate
account assets and liabilities are carried at fair value based on quoted market
prices. Revenues and expenses related to the separate account assets and
liabilities, to the extent of benefits paid or provided to the separate account
contract owners, are excluded from the amounts reported in the accompanying
statements of operations.
At December 31, 2000 the separate account liabilities included approximately
$17.8 million relating to annuity contracts for which the contract owner is
guaranteed a fixed rate of return. Separate account assets of the same amount
held in support of these annuity contracts consist of bonds, short-term
securities, transfers due from the general account and cash and cash
equivalents.
CONTRACT LIABILITIES
The Company has no contract liabilities in its general account at December 31,
2000 and 1999. All contract liabilities are in the separate account and are
comprised of all payments received adjusted for investment experience, contract
owner charges, assessments and withdrawals related to the underlying insurance
contracts.
F-7
22
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUE AND CONTRACT BENEFITS
Revenues for variable annuity contracts consist of charges against contract
owner account values for mortality and expense risks, administration fees,
surrender charges and annual maintenance fees. Revenues for variable life
insurance contracts consist of charges against contract owner account values for
mortality and expense risks, administration fees, cost of insurance fees,
surrender charges and annual maintenance fees. Benefit reserves for variable
annuity and variable life insurance contracts represent the account values of
the contracts and are included in the separate account liabilities.
The Company defers the non-level portions of mortality and expense risk fees and
annual maintenance fees as unearned revenue. Such revenue is recognized
generally in proportion to expected gross profits on the underlying business.
In addition, the Company recognizes as revenue the difference between the amount
of investment income credited on the portion of account values allocated by
contract owners to market value adjusted fixed options under variable life and
annuity contracts and the income earned on the underlying investments.
CAPITALIZED SOFTWARE
Capitalized software includes certain internal and external costs incurred in
connection with the development of the Company's internet site and modifications
to enhance the functionality of the administrative systems used to process the
Company's business. Such costs are being amortized on a straight-line basis over
five years. Accumulated amortization expense at December 31, 2000 was
approximately $23,000.
GOODWILL
On December 31, 1996 the Company was purchased by SIGI from Security First Life
Insurance Company. The amount paid in excess of the acquired assets is recorded
as goodwill and is being amortized on a straight-line basis over thirty years.
The carrying value of goodwill is regularly reviewed for indications of
impairment in value. The Company utilizes sales forecasts to project future
distributable earnings as a basis for an indication of impairment in the
goodwill. These current projections warrant no action to be taken in regards to
any goodwill impairment. Accumulated amortization at December 31, 2000 and 1999
was approximately $938,000 and $704,000, respectively.
DEVELOPMENT EXPENSES
Costs incurred in the development of the Company's products, systems and
distribution channels are classified as development expenses. These
non-recurring expenses are comprised primarily of legal and consulting fees.
Prior to January 1, 1999, development costs were being capitalized and amortized
on a straight-line basis over fifteen years. Pursuant to the adoption of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", the
Company is required to charge to expense all development costs incurred. In
addition, the Company was required to write-off any unamortized capitalized
development costs on January 1, 1999. The one time write-off of the unamortized
capitalized development expenses was $4,269,488.
FEDERAL INCOME TAXES
Federal income taxes are accounted for using the liability method. Using this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
F-8
23
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement amended SFAS No. 133
to defer its effective date on year to fiscal years beginning after June 15,
2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" - an amendment of SFAS
No. 133. This statement makes certain changes in the hedging provisions of SFAS
No. 133 and is effective concurrent with SFAS No. 133 (collectively hereafter
referred to as the "Statement"). The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset by the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Whereas, the Company does not have any derivatives, no
import upon adoption of this Statement has been recorded.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial statement
amounts to conform to the 2000 presentation.
2. INVESTMENTS
Investments in fixed maturity securities at December 31 consist of the
following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
2000
U.S. Government obligations $ 7,075,997 $ 17,991 $ 159,070 $ 6,934,918
Corporate obligations 8,015,742 9,093 298,984 7,725,851
----------- ----------- ----------- -----------
$15,091,739 $ 27,084 $ 458,054 $14,660,769
=========== =========== =========== ===========
1999
U.S. Government obligations $ 9,250,709 $ 21,930 $ 641,593 $ 8,631,046
Corporate obligations 8,036,278 -- 487,574 7,548,704
----------- ----------- ----------- -----------
$17,286,987 $ 21,930 $ 1,129,167 $16,179,750
=========== =========== =========== ===========
The amortized cost and fair value of fixed maturity securities by contractual
maturity at December 31, 2000 are summarized below. Actual maturities will
differ from contractual maturities because certain borrowers have the right to
call or prepay obligations.
F-9
24
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
AMORTIZED FAIR
COST VALUE
---- -----
Due in one year or less $ 499,804 $ 499,491
Due after one year through five years 7,084,672 6,968,789
Due after five years through ten years 7,507,263 7,192,489
----------- -----------
Total $15,091,739 $14,660,769
=========== ===========
Investment income by major category of investment is summarized as follows:
2000 1999 1998
---- ---- ----
Fixed maturity securities $ 1,066,873 $ 907,068 $ 261,781
Short-term investments 750,988 438,951 787,873
Cash and cash equivalents 112,630 22,416 239,700
----------- ----------- -----------
Total investment income 1,930,491 1,368,435 1,289,354
Interest credited on fixed option (474,624) -- --
Investment expenses (87,317) (78,239) (45,832)
----------- ----------- -----------
Net investment income $ 1,368,550 $ 1,290,196 $ 1,243,522
=========== =========== ===========
At December 31, 2000 securities with an amortized cost and fair value of
approximately $6.6 million and $6.4 million, respectively, were held by trustees
in various amounts in accordance with the statutory requirements of certain
states in which the Company is licensed to conduct business.
3. MODIFIED COINSURANCE AGREEMENT
Under the Modco Agreement, the Company cedes a quota share of the premiums
related to all of its variable business to Life Re.
During 2000 the Company ceded approximately $14.1 million in variable annuity
premiums to Life Re. Contract charges and fees for 2000 are net of approximately
$8 thousand ceded to Life Re.
4. FEDERAL INCOME TAXES
The Company files a separate life insurance company Federal income tax return
and will continue to do so through the year 2001. Beginning in 2002, the Company
will be included in the consolidated Federal income tax return of Sage Holdings
(U.S.A.), Inc. and its subsidiaries.
The provision for Federal income taxes varies from the amount which would be
computed using the Federal statutory income tax rate as follows:
2000 1999 1998
---- ---- ----
Pre-tax loss $(4,752,449) $(8,696,414) $ (568,974)
Application of the Federal statutory tax rate - 34% (1,615,833) (2,956,781) (193,451)
Change in valuation allowance 1,614,188 2,907,523 193,451
Other 1,645 49,258 --
----------- ----------- -----------
Total income tax provision $ -- $ -- $ --
=========== =========== ===========
F-10
25
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
The Company's deferred tax assets and liabilities are comprised of the following
at December 31:
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 5,132,087 $ 3,501,308
Unrealized loss on depreciation of investments 146,530 376,461
Reserves 37,732 --
Deferred gain from Modco Agreement 108,130 --
Other 40,255 --
----------- -----------
Total deferred tax assets 5,464,734 3,877,769
Deferred tax liabilities:
Goodwill (304,214) (261,185)
Deferred policy acquisition costs (116,926) --
Other (30,319) (19,617)
----------- -----------
Total deferred tax liabilities (451,459) (280,802)
Valuation allowance for deferred tax assets (4,866,745) (3,220,506)
----------- -----------
Net deferred tax asset $ 146,530 $ 376,461
=========== ===========
Based upon the lack of historical operating earnings and the uncertainty of
operating earnings in the future, management has determined that it is not more
likely than not that the deferred tax assets will be fully recognized.
Accordingly, a valuation allowance has been recorded.
The Company has a separate company net operating loss carryforward of
approximately $15.1 million at December 31, 2000, which expires between 2012 and
2015.
5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS
Statutory-basis net (loss) income and capital and surplus of the Company are as
follows:
2000 1999 1998
---- ---- ----
Net (loss) income $ (1,948,877) $ (389,023) $ 27,002
Capital and surplus 26,505,917 25,973,744 25,609,097
The National Association of Insurance Commissioners ("NAIC") requires insurance
companies to report information regarding minimum Risk Based Capital ("RBC")
requirements. These requirements are intended to allow insurance regulators to
identify companies that may need regulatory attention. The RBC model law
requires that insurance companies apply various factors to asset, premium and
reserve items, all of which have inherent risks. The formula includes components
for asset risk, insurance risk, interest risk and business risk. At December 31,
2000, the Company's total adjusted capital exceeded RBC requirements.
The Company is subject to state regulatory restrictions that limit the maximum
amount of dividends payable. Subject to certain net income carryforward
provisions as described below, the Company must obtain approval of the Insurance
Commissioner of the State of Delaware in order to pay, in any 12-month period,
"extraordinary" dividends which are defined as those in excess of the greater of
10% of surplus as regards policyholders as of the prior year-end and statutory
net income less realized capital gains for such prior year. Dividends may be
paid by the Company only out of earned surplus. In addition, the Company must
provide notice to the Insurance Commissioner of the State of Delaware of all
dividends and other distributions to stockholders within five business days
after declaration and at least ten days prior to payment. At December 31, 2000,
the Company could not pay a dividend to SLHA without prior approval from state
regulatory authorities as the Company currently does not have earned surplus.
F-11
26
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS (CONTINUED)
The Company's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Delaware Insurance
Department. Currently, "prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
Accounting Practices and Procedures Manual and a variety of NAIC publications.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future.
The NAIC has revised the Accounting Practices and Procedures Manual in a process
referred to as Codification. The revised manual will be effective January 1,
2001. Delaware has adopted the provisions of the revised manual. The revised
manual has changed, to some extent, prescribed statutory accounting practices
and will result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements. The cumulative effect of
changes in accounting principles adopted to conform to the revised Accounting
Practices and Procedures Manual will be reported as and adjustment to surplus as
of January 1, 2001. Management believes the effect of these changes will not
result in a significant reduction in the Company's statutory-basis capital and
surplus.
6. RELATED PARTY TRANSACTIONS
The Company has a cost sharing agreement with SIGI whereby the entities share
personnel costs, office rent and equipment costs. These costs are allocated
between the companies based upon the estimated time worked, square footage of
space utilized and upon estimated usage of equipment, respectively. General and
administrative expenses in the accompanying financial statements reflect
reductions of approximately $2.1 million, $0.9 million, and $0.2 million in
2000, 1999 and 1998, respectively, for amounts allocated to SIGI under this
agreement. At December 31, 2000 and 1999 amounts due from SIGI under this
agreement were approximately $989 thousand and $594 thousand, respectively.
The Company receives administrative fees for investments held under management
by Sage Advisors, Inc. ("Sage Advisors"), an affiliated company. Sage Advisors
is the investment advisor for the Sage Life Investment Trust (the "Trust"). The
Trust is comprised of five investment funds that are available to variable
contract owners of the Company. Income received from Sage Advisors was
approximately $50 thousand and $38 thousand in 2000 and 1999, respectively. The
Trust was formed in 1999 so no amount was received in 1998. At December 31, 2000
and 1999, approximately $4 thousand and $38 thousand respectively, was due from
Sage Advisors.
7. COMMITMENTS
The Company has made a commitment to the Michigan Department of Insurance to
maintain statutory-basis capital and surplus at an amount not less than $25
million in order to remain a licensed insurer in that state. Subsequent to that
commitment, SLHA entered into a preferred stock agreement with Life Re whereby
the Company is also required to maintain statutory-basis capital and surplus of
not less than $25 million.
8. EMPLOYEE BENEFITS
After completion of one year of service with the Company, all employees
participate in a defined contribution pension plan (the "Plan") sponsored by
SIGI. Under the Plan, benefits are based on a percentage of base annual salary
and are vested 100% after three years of service with the Company. All
contributions to the plan are directly expensed at the time of contribution and
amounted to approximately $77,500, $69,600 and $78,300 in 2000, 1999 and 1998,
respectively.
F-12
27
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (continued)
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes information with respect to the operations of the
Company on a quarterly basis:
(in thousands) THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000
Net investment income $ 359 $ 259 $ 421 $ 330
Total revenues 374 270 431 348
Total benefits and expenses 1,888 1,029 2,221 1,038
Net loss (1,514) (759) (1,790) (690)
1999
Net investment income $ 317 $ 315 $ 319 $ 339
Total revenues 317 330 332 350
Total benefits and expenses 1,083 1,413 1,468 1,791
Net loss (5,036) (1,083) (1,136) (1,441)
Third quarter of 2000 amounts in the above summary reflect a reclassification of
interest credited on the fixed option from benefits to revenues to conform with
the presentation in the accompanying financial statements. The large net loss in
the first quarter 1999 is due to the write-off of unamortized capitalized
development costs pursuant to the adoption of SOP 98-5.
F-13
28
SAGE LIFE ASSURANCE OF AMERICA, INC.
SCHEDULE IV
REINSURANCE
Ceded to Assumed Percentage of
Gross Other From Other Amount Assumed
Amount Companies Companies Net Amount to Net
------ --------- --------- ---------- ------
FOR THE YEAR ENDED DECEMBER 31, 2000
Life insurance in force $266,424 $125,774 $ -- $140,650 0%
======== ======== ======= ======== ========
PREMIUMS AND OTHER CONSIDERATIONS
Life insurance and annuities $ 13,050 $ 8,325 $ -- $ 4,725 0%
Accident and health insurance -- -- -- -- 0%
-------- -------- ------- -------- --------
TOTAL PREMIUMS AND OTHER CONSIDERATIONS $ 13,050 $ 8,325 $ -- $ 4,725 0%
======== ======== ======= ======== ========
F-14
29
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.
Sage Life Assurance of America, Inc.
/s/ Jeffrey C. Gordon
Jeffrey C. Gordon
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ James F. Renz
James F. Renz
Vice President - Accounting and Finance
(Chief Accounting Officer)
Date: April 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ RONALD S. SCOWBY April 12, 2001
--------------------
Ronald S. Scowby
Chairman of the Board
/s/ ROBIN I. MARSDEN April 12, 2001
--------------------
Robin I. Marsden
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ H. LOUIS SHILL April 12, 2001
------------------
H. Louis Shill
Director
/s/ PAUL C. MEYER April 12, 2001
-----------------
Paul C. Meyer
Director
/s/ RICHARD D. STARR April 12, 2001
--------------------
Richard D. Starr
Director
F-15
30
/s/ DR. MEYER FELDBERG April 12, 2001
----------------------
Dr. Meyer Feldberg
Director
/s/ JOHN A. BENNING April 12, 2001
-------------------
John A. Benning
Director
/s/ MITCHELL R. KATCHER April 12, 2001
-----------------------
Mitchell R. Katcher
Senior Executive Vice President, Chief
Actuary and Director
F-16
31
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were previously
filed as exhibits to registration statements filed by Sage Life under the
Securities Act of 1933, as amended, and are hereby incorporated by reference to
such statements.
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of Sage Life, as amended to date
(Exhibit 6 to the Registration Statement on Form N-4 (File
No.333-43329) dated December 24, 1997).
3.2 By-Laws of Sage Life, as amended to date (Exhibit 6 to the
Registration Statement on Form N-4 (File No.333-43329) dated
December 24, 1997.
10.1 Services Agreement with Financial Administrative Services,
Inc. (Exhibit 8 to Pre-Effective Amendment No.2 to the
Registration Statement on Form N-4 (File No.333-43329) dated
January 28, 1999.
10.2* Reinsurance Agreement (Modified Coinsurance Treaty) with Life
Reassurance Corporation of America. Confidential treatment has
been requested for portions of this document.
10.3*+ Employment Agreement with Robin I. Marsden.
10.4*+ Employment Agreement with Mitchell R. Katcher.
10.5*+ Employment Agreement with Lincoln B. Yersin.
10.6*+ Sage Insurance Group, Inc. Non-qualified Compensation Plan.
10.7*+ Sage Insurance Group Rabbi Trust Agreement
21* Subsidiaries of Sage Life Assurance of America, Inc.
- -------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
E-1