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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _______________
COMMISSION FILE NUMBERS - 333-77441, 333-77437, 333-87174, 333-87178,
333-87182 AND 333-87950
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 OFFICERS) (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 August 14, 2002 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.
SAGE LIFE ASSURANCE OF AMERICA, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30,
2002 and 2001 4
Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
Part II. Other Information
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities and Use of Proceeds Not Applicable
Item 3. Defaults upon Senior Securities Not Applicable
Item 4. Submission of Matters to Vote of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 DECEMBER 31,
(UNAUDITED) 2001
------------- -------------
ASSETS
Investments:
Fixed maturity securities available for sale $ 12,752,682 $ 13,652,254
Equity securities available for sale 840,000 1,097,000
Total investments 13,592,682 14,749,254
Cash and cash equivalents 10,338,197 9,383,386
Accrued investment income 231,557 252,983
Receivable from affiliate 1,660,473 1,081,710
Reinsurance receivables 1,468,272 746,661
Deferred acquisition costs 2,735,653 2,569,876
Intangible assets 4,348,765 --
Goodwill 1,427,535 5,776,300
Other assets 790,981 795,057
Separate account assets 110,920,477 78,882,581
------------- -------------
Total assets $ 147,514,592 $ 114,237,808
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred gain from modified coinsurance agreement $ 1,986,641 $ 1,283,790
Unearned revenue 23,912 6,024
Deferred federal income taxes 27,611 60,807
Accrued expenses and other liabilities 2,921,639 2,097,033
Separate account liabilities 110,920,477 78,882,581
------------- -------------
Total liabilities 115,880,280 82,330,235
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 56,337,804 50,937,804
Deficit (27,257,089) (21,648,267)
Accumulated other comprehensive gain 53,597 118,036
------------- -------------
Total stockholder's equity 31,634,312 31,907,573
------------- -------------
Total liabilities and stockholder's equity $ 147,514,592 $ 114,237,808
============= =============
See accompanying notes to consolidated financial statements.
3
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
----------- ----------- ----------- -----------
REVENUES:
Net investment income $ 401,483 $ 652,122 $ 782,184 $ 1,260,184
Realized capital (losses) gains (898,244) 7,143 (910,840) 7,142
Administrative service fees (1,797) 8,944 17,240 21,294
Contract charges and fees 105,368 11,605 264,827 17,247
----------- ----------- ----------- -----------
Total revenues (393,190) 679,814 153,411 1,305,867
BENEFITS AND EXPENSES:
Contract owner benefits 394,836 382,137 701,982 689,229
Acquisition expenses (37,793) -- 460,558 --
Goodwill amortization expense -- 44,099 -- 101,861
General and administrative expenses 2,535,307 2,167,226 4,599,693 3,801,457
----------- ----------- ----------- -----------
Total benefits and expenses 2,892,350 2,593,462 5,762,233 4,592,547
----------- ----------- ----------- -----------
Net Loss $(3,285,540) $(1,913,648) $(5,608,822) $(3,286,680)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $ (5,608,822) $ (3,286,680)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of acquisition costs 460,558 101,861
Goodwill amortization expense --
Amortization of bond discount/premium 150,854 53,747
Realized capital losses 24,403 (7,143)
Changes in:
Accrued investment income 21,426 7,277
Receivable from affiliate 1,080,464 676,279
Unearned revenue 17,888 4,739
Reinsurance receivables (721,611) (559,328)
Acquisition costs deferred (626,335) (412,561)
Deferred gain from modified coinsurance agreement 702,851 332,788
Accrued expenses and other liabilities 824,606 568,865
Other assets 4,076 (11,500)
------------ ------------
Net cash provided by operating activities (3,669,642) (2,531,656)
INVESTING ACTIVITIES
Proceeds from maturities and repayment of fixed maturity securities 883,680 506,710
------------ ------------
Net cash provided by investing activities 883,680 506,710
FINANCING ACTIVITIES
Capital contributions from parent 3,740,773 1,918,728
------------ ------------
Net cash provided by financing activities 3,740,773 1,918,728
------------ ------------
Increase (decrease) in cash and cash equivalents 954,811 (106,218)
Cash and cash equivalents at beginning of period 9,383,386 10,024,167
------------ ------------
Cash and cash equivalents at end of period $ 10,338,197 $ 9,917,949
============ ============
See accompanying notes to consolidated financial statements.
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SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements of Sage Life
Assurance of America, Inc. (the "Company") have been prepared in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly
do not include all of the information and footnote disclosures required by
accounting principles generally accepted in the United States for complete
financial statements and should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Form 10-K
for the year ended December 31, 2001. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
six-month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
2. NEW ACCOUNTING STANDARDS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards Nos. 141, Business Combinations and 142, Goodwill and Other Intangible
Assets. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the new Standards. Other intangible assets
will continue to be amortized over their useful lives.
In adopting the new Standards, the Company reclassified certain intangible
assets, namely state insurance licenses, that were previously reported as a
component of goodwill arising from the original purchase of the predecessor
company, which became Sage Life Assurance Company of America, Inc. Those assets,
totaling $4,349,000, have indefinite lives and, as a result, are not being
amortized. The Company reviewed the fair value of those assets, based on recent
transactions, and determined that no impairment of those assets exists. The
remaining goodwill, totaling $1,428,000, also is not being amortized in
accordance with the Statements and was reviewed for impairment during the first
half of 2002. Using a discounted cash flow approach, the Company determined that
its goodwill was not impaired. The Company reviews its goodwill and intangible
assets annually and records impairment, if any, in current period operations.
3. COMPREHENSIVE LOSS
The components of comprehensive loss, net of deferred federal income taxes, for
the three and six months ended June 30, 2002 and 2001 were as follows:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------- --------------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net loss $(3,285,540) $(1,913,648) $(5,608,822) $(3,286,680)
Change in unrealized investment
gains and losses 236,293 53,828 (64,439) 187,326
----------- ----------- ------------ -----------
Comprehensive loss $(3,049,247) $(1,859,820) $(5,673,261) $(3,099,354)
=========== =========== =========== ===========
Accumulated other comprehensive gain at June 30, 2002 and December 31, 2001,
consist entirely of unrealized gains/(losses), net of related deferred federal
income taxes.
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4. MODIFIED COINSURANCE AGREEMENT
During the first quarter of 2002, the Company's quota share modified coinsurance
agreement ("the Modco Agreement") with Swiss Re Life and Health America, Inc.
("Swiss Re", formerly Life Reassurance Corporation of America) was amended to
include certain variable annuity products introduced by the Company during the
fourth quarter of 2001. The amendment resulted in a reduction of gross written
premium, contract charges and contract owner benefits of approximately
$9,312,000, $8,000 and $5,000, respectively.
Excluding the aforementioned retroactive effects of the amendment, premiums,
contract charges and fees and contract owner benefits ceded to Swiss Re were
$33,295,000, $188,000 and $98,000, respectively for the period ended June 30,
2002, compared with $14,146,000, $39,000 and $45,000 for the period ended June
30, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Business Overview
Sage Insurance Group, Inc. ("SIGI") acquired the Company on December 31, 1996
and, since that date, the Company has been building an infrastructure, obtaining
necessary financial ratings, and developing products, systems and
administration, to support its insurance underwriting and marketing activities.
The Company's ongoing business strategy is to focus on the development,
underwriting, and marketing of variable annuity and variable life insurance
products (the "Contracts"). 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, supporting the Contracts to
which they relate, are not chargeable with liabilities arising out of any other
business the Company may conduct.
The Company's initial marketing focus has been to distribute its products
through banks, financial planning companies and regional broker dealers. The
Company anticipates that, over the long-term, its distribution channels will
expand to include wirehouses.
The Company is a wholly-owned subsidiary of Sage Life Holdings of America, Inc.
("Sage Life Holdings"). SIGI owns 90.1% of the common stock of Sage Life
Holdings. Swiss Re owns the remaining 9.9% of the common stock of Sage Life
Holdings. Before acquiring Sage Life Holding's common stock, Swiss Re invested
$12,500,000 in non-voting, non-redeemable cumulative, preferred stock of Sage
Life Holdings. During 2000, Swiss Re exchanged a portion of the preferred stock
it acquired for the common stock. Swiss Re's ultimate parent is Swiss
Reinsurance Company, Switzerland, one of the world's largest life and health
reinsurance groups.
Results of Operations
Gross premiums written (which, under accounting principles generally accepted in
the United States, are not reported as revenue) for the three and six month
periods ended June 30, 2002 and were approximately $21,553,000 and $42,762,000
compared to $14,214,000 and $20,180,000, respectively, in the prior year.
Premiums, net of reinsurance for the three and six months periods ended June 30,
2002 were $4,670,700 and $52,824 compared to $4,191,000 and $5,987,000,
respectively in the prior year. The small amount of net premium written during
the period ended June 30, 2002, reflects the effect of an amendment to the
Company's Modco agreement with Swiss Re to include certain variable annuity
products introduced during
7
the fourth quarter of 2001. This amendment resulted in an additional $9,312,000
in premium ceded relating to business written during the fourth quarter of 2001.
Contract owners pay us contract charges and fees, while the fund managers pay us
administrative fees. These administrative fees, and most of the charges received
from contract owners, are based on underlying variable and fixed account values.
Therefore, these fees and charges vary with the amount of premiums we have
received and investment performance of the funds. Annual contract charges we
receive 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 period under review. Contract charges and fees increased
significantly as compared with the first half of 2001 as a result of the growth
in business.
Net investment income includes interest earned on separate account assets
allocated to options in the fixed account by contract owners as well as general
account assets. The significant decrease in net investment income reflects a
declining fixed income asset base in the general account along with an overall
decrease in yields on such securities as compared to the same period of the
prior year.
Although gross premiums continue to show significant growth, they are still well
below levels needed to generate significant charges based on variable and fixed
account assets. Accordingly, net investment income continues to represent most
of our revenues. We expect net investment income will continue to represent the
majority of our revenues for the next several years as our sales and related
variable and fixed account assets grow.
The trend of increasing general and administrative expenses reflects our
progress in implementing our business strategy and putting in place the
necessary staff, systems and other elements needed to support our planned
growth. The increase in general and administrative expenses is in large part due
to an increase in the number of employees (including several senior positions),
which were 66 at June 30, 2002 as compared to 55 at June 30, 2001.
We do not currently reflect the benefits of deferred federal income taxes in our
operating results.
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 the
funding of our daily operations. Our cash needs have been met primarily through
capital contributions from Sage Life Holdings and funding of the vast majority
of our acquisition expenses through the Modco arrangement with Swiss Re, as
well as through interest income on the invested assets of the general account.
In accordance with the terms of the Preferred Stock Purchase Agreement (as
amended) with Swiss Re, the Company is required to maintain statutory capital
and surplus of at least $25,000,000. In addition, we have made a commitment to
the Michigan Insurance Department to maintain statutory capital and surplus of
at least $25,000,000. We had previously expected that our cash resources would
be adequate to enable us to maintain this minimum capital and surplus
requirement through the end of the first quarter of 2003. However, events in
the current period including the diminution in the value of the Company's
holdings in WorldCom debt securities, depressed levels of sales and assets
under management resulting from volatility in world equity markets, and less
than anticipated expense savings, have all contributed to higher than expected
net cash outflows. Net operating cash outflows necessary to support our current
underwriting and marketing activities are approximately $700,000 per month.
Our ultimate parent, Sage Group, a publicly traded South African financial
services group, is currently prohibited under South African currency controls
from utilizing funds raised in South Africa for our cash needs other than
through capital issues in foreign currency. Sage Group's current ability to
issue stock outside of South Africa has been hindered by a devaluation of the
South African Rand relative to the United States dollar and a decrease in their
stock price reflective of a general decline of financial services stocks in
South Africa. Sage Group is actively exploring a variety of alternatives for
providing for our current and future cash needs, including issuing new capital
to strategic investors of Sage Life Holdings and/or its affiliates, or a sale of
the Company. Sage Group and its affiliates are currently engaged in discussions
with potential strategic investers, acquirors and other providers of long-term
capital. However, there can be no assurance that Sage Group will be successful
in these efforts, as Sage Group has not yet finalized negotiations with any
party. Our future marketing efforts and results of operations could be adversely
affected if Sage Group is unable to raise, or does not provide, additional
funding for us.
8
For the month ended July 31, 2002, the Company's statutory capital and surplus
was approximately $24,755,000, below the minimum required level mentioned above
but higher than the minimum capital and surplus required under the laws of
Delaware. We have already notified Swiss Re of this situation and shall notify
the insurance departments of the states of Delaware and Michigan. Should this
situation remain uncured for 60 calendar days, the Preferred Stock Purchase
Agreement provides that, subject to obtaining regulatory approval, each share of
preferred stock shall be entitled to a number of votes sufficient to provide
preferred shareholders of 51% of the voting interest in Sage Life Holdings, our
direct parent. Should this occur, there can be no assurance that our current
business strategy will be maintained.
With regard to contract owners, our obligation under their 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, supporting the
contracts to which they relate, are not chargeable with any of our other
liabilities.
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.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe-harbor"
for forward-looking statements. This Quarterly Report on Form 10-Q 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, equity market performance,
inflation and cyclical industry conditions; (ii) governmental and regulatory
policies, as well as the judicial environment; (iii) accessibility to reasonably
priced reinsurance and the ability of the Company and/or its affiliates to
access additional capital; (iv) continued financial support from the Company's
ultimate parent, Sage Group Limited ("Sage Group"), a South African corporation;
and the ability of the company and/or its affiliates to access additional
capital; (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 Quarterly 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk during the six
months ended June 30, 2002. The Company has provided a discussion of its market
risks in Item 7A of Part II of the December 31, 2001 Form 10-K.
9
PART II. OTHER INFORMATION
ITEMS 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
99.1 Certification of Chief Executive Officer
99.2 Certification of Principal Financial Officer
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended June 30,
2002.
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/ Robin I. Marsden
Robin I. Marsden
President and Chief Executive Officer
/s/ Gregory S. Gannon
Gregory S. Gannon
Vice President and Controller
(Chief Accounting Officer)
Date: August 19, 2002
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