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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 SEPTEMBER 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION)
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 November 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 SEPTEMBER 30, 2002
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2002 and 3
December 31, 2001
Consolidated Statements of Operations for the Three and Nine Month Periods Ended 4
September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 5
2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
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 Not Applicable
Signatures 13
Certification of Principal Executive Officer 14
Certification of Principal Financial Officer 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED) (Note 1)
------------- -------------
ASSETS
Investments:
Fixed maturity securities available for sale $ 13,078,324 $ 13,652,254
Equity securities available for sale 684,000 1,097,000
------------- -------------
Total investments 13,762,324 14,749,254
Cash and cash equivalents 13,587,318 9,383,386
Accrued investment income 245,617 252,983
Receivable from affiliate -- 1,081,710
Reinsurance receivables -- 746,661
Deferred acquisition costs 3,011,692 2,569,876
Intangible assets 4,348,765 --
Goodwill 1,427,535 5,776,300
Other assets 899,523 795,057
Separate account assets 119,282,635 78,882,581
------------- -------------
Total assets $ 156,565,409 $ 114,237,808
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred gain from modified coinsurance agreement $ 2,225,799 $ 1,283,790
Payable to affiliate 1,252,693 --
Reinsurance payables 912,939 --
Unearned revenue 26,091 6,024
Deferred federal income taxes 166,983 60,807
Accrued expenses and other liabilities 2,250,947 2,097,033
Separate account liabilities 119,282,635 78,882,581
------------- -------------
Total liabilities 126,118,087 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 (28,714,626) (21,648,267)
Accumulated other comprehensive gain 324,144 118,036
------------- -------------
Total stockholder's equity 30,447,322 31,907,573
------------- -------------
Total liabilities and stockholder's equity $ 156,565,409 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES:
Net investment income $ 372,462 $ 501,883 $ 1,154,646 $ 1,762,069
Realized capital (losses) gains 262 -- (910,578) 7,143
Administrative service fees 14,497 9,891 31,737 31,184
Contract charges and fees 196,438 24,249 461,265 41,497
----------- ----------- ----------- -----------
Total revenues 583,659 536,023 737,070 1,841,893
BENEFITS AND EXPENSES:
Contract owner benefits 363,964 213,768 1,065,945 902,997
Acquisition expenses 60,191 -- 520,749 --
Goodwill amortization expense -- 57,751 -- 159,612
General and administrative
expenses 1,617,041 2,185,944 6,216,735 5,987,405
----------- ----------- ----------- -----------
Total benefits and expenses 2,041,196 2,457,463 7,803,429 7,050,014
----------- ----------- ----------- -----------
Net loss $(1,457,537) $(1,921,440) $(7,066,359) $(5,208,121)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,066,359) $(5,208,121)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Amortization of acquisition costs 520,749 --
Goodwill amortization expense -- 159,612
Amortization of bond discount/premium 85,487 135,923
Realized capital losses/(gains) 24,402 (7,143)
Changes in:
Accrued investment income 7,366 (75,285)
Receivable from affiliate 2,334,403 728,931
Unearned revenue 20,067 11,955
Reinsurance receivables 1,659,600 (1,380,774)
Acquisition costs deferred (962,565) (1,234,253)
Deferred gain from modified coinsurance agreement 942,009 776,798
Accrued expenses and other liabilities 459,338 588,769
Other assets (227,439) (362,596)
------------ -----------
Net cash provided by operating activities (2,202,992) (5,866,184)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayment of fixed maturity securities 883,680 506,710
Proceeds from sale of other invested assets 123,194 --
Short-term investments, net -- 1,471,267
------------ -----------
Net cash provided by investing activities 1,006,874 1,977,977
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent 5,400,000 3,517,019
------------ -----------
Net cash provided by financing activities 5,400,000 3,517,019
------------ -----------
Increase (decrease) in cash and cash equivalents 4,203,932 (371,188)
Cash and cash equivalents at beginning of period 9,383,386 9,949,167
------------ -----------
Cash and cash equivalents at end of period $ 13,587,318 $ 9,577,979
============ ===========
See accompanying notes to consolidated financial statements.
5
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. ("Sage Life" or 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. These unaudited financial statements 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, these statements include all normal
recurring adjustments considered necessary for a fair presentation of the
results. Operating results for the nine-month period ended September 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
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("FAS 141"), Business Combinations and
No. 142 ("FAS 142"), Goodwill and Other Intangible Assets. FAS 141 is effective
for all business combinations initiated after June 30, 2001 and FAS 142 is
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to impairment tests conducted at least
annually in accordance with the new standard. Intangible assets that do not have
indefinite lives continue to be amortized over their estimated useful lives.
The Company adopted FAS 142 on January 1, 2002. In adopting the new standard,
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 of America, Inc. Those assets, totaling $4,349,000, have indefinite
lives and, as a result, are not amortized. As of December 31, 2001, 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 standard
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 nine months ended September 30, 2002 and 2001 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net loss $(1,457,537) $(1,921,440) $(7,066,359) $(5,208,121)
Change in unrealized investment
gains 270,547 198,256 206,925 385,582
----------- ----------- ----------- -----------
Comprehensive loss $(1,186,990) $(1,723,184) $(6,859,434) $(4,822,539)
=========== =========== =========== ===========
6
Accumulated other comprehensive gain at September 30, 2002 and December 31,
2001, consisted entirely of unrealized gains/(losses), net of related deferred
federal income taxes.
4. REINSURANCE
At the date of issue, the Company's variable insurance products (the
"Contracts") result in a net cash outflow in that 100% of Contract owner
premiums received by the Company are invested in separate accounts supporting
the Contracts, leaving a cash strain caused by the payment of commissions and
other policy acquisition expenses. In 2000, the Company entered into a
multi-year quota share modified coinsurance agreement ("the Modco Agreement")
with Swiss Re Life and Health America, Inc. ("Swiss Re", formerly Life
Reassurance Corporation of America) under which the Company, cedes a significant
portion of its variable insurance business to Swiss Re. Depending on the
product, the Company cedes to Swiss Re between 65% to 81% of Contract revenues
and related expenses in return for an expense allowance from Swiss Re that
substantially covers commission and other Contract acquisition costs. This Modco
Agreement provides the Company with additional capacity for growth by
substantially funding our cash flow strain from new business.
During the first quarter of 2002, the Company's Modco Agreement was amended to
include certain variable annuity products introduced by the Company during the
fourth quarter of 2001. The amendment resulted in reductions of written premium,
Contract charges and Contract owner benefits of $9,312,250, $8,000, and $5,000,
respectively, relating to the prior year.
Excluding the aforementioned retroactive effects of the amendment, premiums,
Contract charges and fees and Contract owner benefits ceded to Swiss Re were
$52,407,000, $485,000 and $225,000, respectively, for the period ended September
30, 2002, compared with $32,454,000, $73,000 and $158,000 for the period ended
September 30, 2001.
In addition, the Company has entered into reinsurance arrangements that reinsure
certain mortality risks associated with the guaranteed minimum death benefit and
accidental death benefit features of the Contracts, as well as other Contract
guarantees. The Company uses only highly rated reinsurance companies to reinsure
these risks.
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.
5. SEGMENT REPORTING
The Company operates in one business segment, the variable insurance product
market. Products currently offered by the Company include combination fixed and
variable deferred annuities and combination fixed and variable life insurance
products. The Company may introduce additional variable products in the future,
including combination fixed and variable immediate annuities.
6. SIGNIFICANT ACCOUNTING POLICIES
Deferred acquisition costs ("DAC"), deferred gains arising from the Modco
agreement, and unearned revenue are amortized over the life of the Contracts in
relation to estimated gross profits ("EGPs"). Both the deferred amounts and the
EGPs are net of reinsurance. EGPs are based on assumptions about future contract
experience including persistency, growth rate of elected investment options, and
the level of expense required to maintain the Contracts. At each balance sheet
date, EGPs are replaced with actual gross profits. Future EGPs are also recast
taking into account the volume and mix of the Contracts actually in force and
warranted changes in assumptions about future experience. Finally, amortization
is derived based on the combination of actual gross profits to date and the
recast EGPs. As at September 30, 2002 the Company have replaced EGPs with
actual gross profits and EGPs have been recast taking into consideration the
volume and mix of Contracts in force. Assumptions about future experience have
not been revised.
For fuller information on the Company's significant accounting policies, see
Notes to Consolidated Financial Statements in the Company's audited consolidated
financial statements on Form 10-K for the year ended December 31, 2001.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS - CAUTIONARY LANGUAGE
The pages that follow review the results of operations of Sage Life and its
consolidated financial condition including liquidity and capital resources.
Where appropriate, factors that may affect future financial performance are
identified and discussed. Certain statements made in this report are
"forward-looking statements" within the meaning of the Securities Litigation
Reform Act of 1995 that provides a "safe-harbor" for forward-looking statements.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and include words like "believe", "expect", "anticipate",
"project", "will", "shall" and other words or phrases with similar meaning which
speak only as of their dates.
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) the ability of the Company to
obtain access to capital for the funding of its future cash needs, whether
through the successful conclusion by Sage Group of a transaction with a joint
venture partner, a sale of the Company or otherwise; (ii) the approval by the
Delaware Insurance Department of the requested amendment to the Underwriting
Agreement providing for the Company to pay its own marketing and distribution
expenses; (iii) the Company's future financial ratings; (iv) general economic
conditions, including interest rate movements, equity market performance,
inflation and cyclical industry conditions; (v) governmental and regulatory
policies, as well as the judicial environment; (vi) accessibility to reasonably
priced reinsurance, (vii) increasing competition in the markets in which the
Company operates; (viii) changes in generally accepted accounting principles;
and (ix) the risks and uncertainties included in the Company's Securities and
Exchange Commission filings.
The risks included here are not exhaustive. The Company operates in a rapidly
changing and competitive environment. New risk factors emerge from time to time
and it is not possible for management to predict all such risk factors. Further,
it is not possible to assess the impact of all risk factors on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ from those contained in any forward-looking statements.
Accordingly, there can be no assurance that actual results will conform to the
forward-looking statements in the Quarterly Report. In addition, 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.
BUSINESS OVERVIEW
Sage Life is a stock life insurance company with its principal offices in
Stamford, Connecticut. The Company has 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 two of those states.
Although the Company is not licensed in New York State, its wholly owned
subsidiary, Sage Life Assurance Company of New York, has applied to the New York
Insurance Department for an insurance license.
Effective December 31, 1996, the Company was acquired from Security First Life
Insurance Company ("SFLIC") by Sage Insurance Group Inc. ("SIGI"), a
wholly-owned subsidiary of Sage Group Ltd. ("Sage Group"), a South African
corporation. As part of the purchase agreement with SFLIC, all of the insurance
business of the Company, which was then known as Fidelity Standard Life
Insurance Company, was transferred to SFLIC. As a result, Sage Life (as renamed)
was established as a new company, with no insurance business on its books. The
Company's business plan is to develop new variable insurance products and sell
them through independent distributors. In order to do so, it was important that
the Company secure strong financial ratings from the insurance rating agencies,
which necessitated a search for a financially strong strategic partner for the
Company.
Effective December 31, 1998, Sage Group entered into such a relationship with
Swiss Re. Swiss Re's ultimate parent is Swiss Reinsurance Company, Switzerland,
one of the world's largest life and health reinsurance groups. Pursuant to the
terms of a Preferred Stock Purchase Agreement, Swiss Re invested $12,500,000 in
non-voting, non-redeemable cumulative preferred stock of Sage Life Holdings of
America, Inc. ("Sage Life Holdings"), a new company formed for the purpose of
this investment. Sage Life Holdings became the Company's immediate parent and a
subsidiary of SIGI. During 2000, Swiss Re exchanged a portion of the preferred
stock it had acquired for shares of a separate class of common stock of Sage
Life Holdings, which provides Swiss Re with 9.9% of the voting rights. As a
result, SIGI holds 90.1% of the voting rights of Sage Life Holdings.
PRODUCTS AND DISTRIBUTION
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"). The Company's obligations under these Contracts are
supported by variable and fixed accounts backed by investments held in separate
accounts. The assets maintained in these separate accounts are not chargeable
with liabilities arising out of any other business the Company conducts. To
date, the Company has focused its attention on its variable annuity products,
and has not actively promoted its variable life insurance products. Accordingly,
the Company has issued a very limited number of variable life insurance
Contracts.
The Company's initial marketing focus has been to secure distribution agreements
with banks, financial planning companies and regional broker-dealers, and to
commence distribution of its products through these channels. Management
anticipates that, over the long-term, the Company's distribution channels will
expand to include wirehouses.
In order to support the Company's distribution plans, SIGI established Sage
Distributors Inc., ("Sage Distributors") to act as the principal securities
underwriter of the Company's Contracts. The Company entered into a distribution
agreement with Sage Distributors (the "Underwriting Agreement") whereby Sage
Distributors is permitted to enter into selling agreements with unaffiliated
broker-dealers whose registered representatives sell the Company's products to
the public. The Underwriting Agreement provides that Sage Distributors receive
no compensation for providing underwriting services to the Company and that Sage
Distributors is responsible for all of its costs in marketing the Company's
products, except for any commissions payable to registered representatives of
Sage Distributors. The Company and Sage Distributors are now proposing to amend
the Underwriting Agreement. This
8
amendment is discussed in more detail in the "Marketing and Distribution
Expenses" subsection of the "Liquidity and Capital Resources" section that
follows.
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 nine month
periods ended September 30, 2002, were approximately $24,643,000 and $67,405,000
compared to $25,905,000 and $46,084,000, respectively, for the same periods in
the prior year. Premiums, net of reinsurance, for the three and nine months
periods ended September 30, 2002 were $5,429,000 and $5,482,000 compared to
$7,555,000 and $13,541,000, respectively, for the same periods in the prior
year. The level of net premium written during the period ended September 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 the
fourth quarter of 2001. This retroactive amendment resulted in an additional
$9,312,000 in premium ceded in the current year relating to business written
during the fourth quarter of 2001.
Prior to June 30, 2000, the Company sold a limited number of Contracts as it
focused most of its efforts on obtaining strong ratings from rating agencies and
developing the staff, systems and other elements necessary to begin underwriting
and marketing activities. Gross premiums continue to show significant growth
when compared to the levels of the prior year; however, 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 the Company's revenues. Net investment income includes interest earned on the
Company's general account assets and assets in the fixed sub-accounts of the
separate account. The decrease in net investment income is primarily
attributable to the fall in assets in the general account and the fixed
sub-accounts as well as a decline in yields on short-term investments.
Contract owners pay Sage Life contract charges and fees, while the fund managers
pay administrative fees. These administrative fees, and most of the charges
received from Contract owners, are based on underlying variable and fixed
account values. Accordingly, these fees and charges vary with the value of
assets under management that is largely determined by the premiums the Company
has received and the investment performance of the funds. Annual contract
charges the Company receives from Contract owners are flat fees assessed on each
Contract's anniversary date. Consequently, the aggregate amount of these fees
received by the Company varies according to the number of Contracts in force
during the course of the year.
The trend of increasing general and administrative expenses for the nine-month
period ended September 30, 2002 compared with the same period for the prior year
reflects the Company's progress in implementing its business strategy and
putting in place the necessary staff, systems and other elements needed to
support planned growth. The reduction in general and administrative expenses in
the current quarter reflects the implementation of certain internal initiatives
to contain expenses.
The benefits of deferred federal income taxes are not currently reflected in
operating results.
LIQUIDITY AND CAPITAL RESOURCES
FUNDING OF CASH NEEDS. Since the beginning of 1997, the Company's primary cash
needs have been for the development of its insurance products and related
infrastructure and funding of its business acquisition expenses and other daily
operations. To date, the Company's cash needs have been met primarily through
capital contributions from Sage Group and Sage Life Holdings, the funding of
commission and acquisition expenses through the Modco Agreement, and through
interest income on the invested assets of the general and fixed sub-accounts.
It had become clear to management during 2001 that the Company's cash needs
could not be fully met solely by the methods mentioned above. Accordingly,
compliance with capital commitments discussed below required that additional
sources of capital be obtained. As of September 2001, Sage Group began actively
exploring a variety of alternatives for the Company's current and future cash
needs. Sage Group had been, and is currently, prohibited under South African
currency controls from utilizing funds raised in South Africa for the Company's
cash needs, other than with funds raised through capital issues denominated in
currencies other than the South African rand.
9
Furthermore, Sage Group's current ability to issue stock outside of South Africa
has been hindered by a severe devaluation of the South African rand relative to
the United States dollar and a decrease in its stock price reflective of a
general decline of financial services stocks in South Africa and elsewhere.
Consequently, Sage Group has not issued new securities in the international
markets to provide for the Company's cash needs.
Following certain recent developments (more fully discussed in the "Capital
Commitments" sub-section below), Sage Group accelerated its capital-raising
efforts in August 2002 by appointing Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") to explore transactions involving a number of
alternative strategic approaches, including future financing of the Company's
cash needs through a strategic partnership or the outright sale of Sage Group's
interests in the Company. To date, Merrill Lynch has, with management's
assistance, identified potential interested parties, solicited interest and
commenced meetings of such interested parties with management.
Sage Group has not yet finalized negotiations with any strategic investor and
there can be no assurance that they will be successful in these capital-raising
efforts. Although the Company's future marketing efforts and results of
operations could be adversely affected if Sage Group and/or its affiliates are
unable to raise additional funding, management believes the Company's ability to
meet its obligations to Contract owners should not be affected. Moreover,
management believes the Company has adequate capital resources to meet its
Contract servicing obligations.
CAPITAL COMMITMENTS. In 1997, pursuant to a commitment to the Michigan Insurance
Department in connection with the Company's application to renew its insurance
license in that state, the statutory capital and surplus of the Company was
increased to $25 million by a capital contribution from Sage Group. In 1998,
Sage Life Holdings further committed to maintaining this $25 million level of
capital and surplus pursuant to the terms of the Preferred Stock Purchase
Agreement with Swiss Re.
Initial projections management had developed indicated that the Company would
require additional capital during the first quarter of 2003 to enable it to
maintain its $25 million commitments to Michigan and Swiss Re. However, events
in the six months ended June 30, 2002 - including the diminution in the value of
the Company's holdings in two formerly highly-rated debt securities, lower than
projected levels of asset based fees due to depressed equity markets, lower than
projected sales levels, and a slower reduction in expenses than anticipated -
have all contributed to higher than expected net cash outflows and a reduction
in capital levels. As a result, as reported in the Company's Form 10-Q for the
quarter ended June 30, 2002, the Company's statutory capital and surplus
declined to approximately $24,755,000 in July 2002. Net cash flows necessary to
support the Company's current operations, underwriting and marketing activities
(including the costs of distribution more fully described in "Marketing and
Distribution Expenses" below) are approximately $800,000 per month.
Under the terms of the original Preferred Stock Purchase Agreement, if the
Company's statutory-basis capital and surplus fell below $25 million and
remained uncured for 60 days then, subject to obtaining regulatory approval,
each share of Swiss Re preferred stock would be entitled to a number of votes
sufficient to provide preferred shareholders 51% of the voting interest in Sage
Life Holdings, the Company's direct parent. In response to the developments
noted above, Sage Group conferred with Swiss Re and on September 30, 2002
reached an agreement to amend certain terms of the Preferred Stock Purchase
Agreement. The required minimum level for the Company's statutory capital and
surplus was reduced from $25 to $20 million, subject to the elimination of any
cure rights with respect to the new minimum capital level. In the agreement,
Swiss Re stated that "we agree with your assessment that Sage Life appears to be
very well capitalized on a statutory basis." As of September 30, 2002, the
Company's statutory-basis capital and surplus was $24,047,000.
In addition, Swiss Re also agreed to defer the December 31, 2002 dividends
payable (by Sage Life Holdings) with respect to its preferred shares until the
earlier of June 30, 2003 or the closing of any material financing or sale of any
material component of the Company's business. Further, Swiss Re and Sage Group
agreed that Swiss Re would remain actively involved in Sage Group's capital
raising activities and be consulted on material decisions affecting the
Company's business.
Officials in the Company Regulation Bureau of the Delaware Insurance Department,
the Company's primary state regulator, were made aware of these developments and
of the Company's capital-raising efforts. Management also contacted officials in
the Company Regulation Bureau of the Michigan Insurance Department to inform
them that our statutory capital and surplus had fallen below $25 million, as
committed to them, and of our capital-raising
10
initiatives. The Michigan Insurance Department has not restricted the Company's
license, and management has agreed to keep them informed of the Company's
capital-raising activities.
MARKETING AND DISTRIBUTION EXPENSES. As discussed under "Products and
Distribution" above, a large part of the Company's marketing and distribution
expenses to date have been borne by Sage Distributors under the Underwriting
Agreement and funded by SIGI under an Expense Reimbursement Agreement.
Currently, these marketing and distribution expenses are approximately $550,000
per month. Sage Group currently is not in a position to fund the Company's
marketing and distribution costs allocated to Sage Distributors under the
Underwriting Agreement. Accordingly, management has determined that the terms of
the agreement should be amended in order that Sage Life becomes responsible for
payment of the marketing and distribution expenses for its products. As the
Underwriting Agreement is an agreement with an affiliate, the Company has
submitted the proposed amendment to the Delaware Insurance Department.
Management's current projections indicate that if the amendment becomes
effective October 1, 2002, as requested, then the Company's statutory capital
and surplus would fall below $20 million during the first quarter of 2003. If
the Delaware Department of Insurance does not approve the proposed amendment to
the Underwriting Agreement and the capital raising efforts are unsuccessful,
Sage Group will have to limit the underwriting and marketing activities of the
Company. As discussed above, Sage Group is actively seeking additional capital
that would enable it to fund the Company's future cash needs and pursue its
longer-term marketing and underwriting plans.
CONTRACT OBLIGATIONS AND CUSTOMER SERVICE. With regard to Contract owners, the
Company's 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. Further, guarantees under the
Contracts that are supported by assets in the Company's general account are 100%
reinsured. Accordingly, management believes that, notwithstanding the Company's
current capital situation and the possible scenarios in the event it shall not
be able to raise additional capital, the Company will remain able to meet cash
claims by Contract owners in the event of surrenders, partial withdrawals or
other benefits. Management believes that these Contract obligations will be met
regardless of whether the Company is sold, whether an investor acquires a
sufficient amount of the Company's equity to have control of the Company, or
whether Swiss Re assumes control of the Company. During any such change in
control, it is possible that customer service could be adversely affected due to
the transitions; however, management believes the Company will nevertheless be
adequately capitalized to maintain its historical level of customer service.
RATING AGENCIES. The Company's financial ratings are important in its ability to
accumulate and retain assets. 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 Contract owners. Many
financial institutions and broker-dealers focus on these ratings in determining
whether to market an insurer's variable products.
On August 20, 2002, Fitch Ratings lowered its rating of the Company from "AA-"
(Very Strong) to "A" (Strong). On October 2, 2002, A.M. Best Company lowered its
rating of the Company from "A" (Excellent) to "A-" (Excellent) and the current
rating remains under review with "developing implications." These ratings have
the following meanings:
- "A" (Strong) per Fitch Ratings: "Insurers are viewed as possessing
strong capacity to meet policyholder and contract obligations. Risk
factors are moderate, and the impact of any adverse business and
economic factors is expected to be small."
- "A-"(Excellent) per A.M. Best Company: "Assigned to companies which
have, on balance, excellent balance sheet strength, operating
performance and business profile when compared to the standards
established by the A.M. Best Company. These companies, in [A.M. Best
Company's] opinion, have a strong ability to meet their ongoing
obligations to policyholders."
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The rating declines noted above are related to matters disclosed in the
"Liquidity and Capital Resources" section above, including uncertainty about the
future ownership of the Company and, in the case of Fitch Ratings, a further
factor was an industry-wide rating review of U.S. life insurance companies. To
date, the Company has not experienced any significant negative effects (e.g.,
levels of sales have remained stable, distributors have not terminated selling
agreements or removed us from their "preferred" lists) following these rating
declines. There can be no assurances that the rating agencies will not further
lower the Company's ratings. If any of the Company's ratings were lowered from
their current levels, sales of the Company's products and its relationships with
distributors could be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk during the nine
months ended September 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Principal
Executive Officer and Principal Financial Officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures [as
defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act")] as of a date within 90 days before the filing date
of this quarterly report. Based on that evaluation, the Principal Executive
Officer and the Principal Financial Officer have concluded that the Company's
disclosure controls and procedures are effective, providing them with material
information relating to the Company as required to be disclosed in the reports
the Company files or submits under the Exchange Act on a timely basis.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls.
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PART II. OTHER INFORMATION
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/ Terry Eleftheriou
Terry Eleftheriou
Chief Financial Officer
Date: November 14, 2002
13
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Robin I. Marsden, President and Chief Executive Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sage Life Assurance of
America Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Robin I. Marsden
Name: Robin I. Marsden
Title: Chief Executive Officer
Date: November 14, 2002
14
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Terry Eleftheriou, Chief Financial Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sage Life Assurance of
America Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Terry Eleftheriou
Name: Terry Eleftheriou
Title: Chief Financial Officer
Date: November 14, 2002
15