Back to GetFilings.com
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBERS--333-77441, 333-77437, 333-78583,
333-87172, 333-87174, 333-87178, 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)
969 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06902
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 321-8999
(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 15, 2003 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements made in this Annual Report on Form 10-K 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 Annual Report 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 and
certain of its affiliates to obtain access to capital for the funding of its
future cash needs; (ii) the Company's future financial ratings; (iii) general
economic conditions, including interest rate movements, equity market
performance, inflation and cyclical industry conditions; (iv) governmental and
regulatory policies, as well as the judicial environment; (v) accessibility to
reasonably priced reinsurance; (vi) increasing competition in the markets in
which the Company operates; (vii) changes in generally accepted accounting
principles; and (viii) 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 effect 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 Annual 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.
2
Sage Life Assurance of America, Inc.
Annual Report on Form 10-K
Year Ended December 31, 2002
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 16
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 23
Item 13. Certain Relationships and Related Transactions 23
Item 14. Controls and Procedures 23
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
3
PART I
ITEM 1. BUSINESS
History and 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. As
will be discussed in more detail in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in December of 2002
the Boards of Directors of the Company and its intermediate and ultimate parents
approved plans to suspend the Company's marketing and underwriting activities
and to cease all new sales of variable annuity and variable life insurance
products effective January 1, 2003. This action was taken due to the inability
of the Company and its parents to raise the capital necessary to meet the
ongoing needs of the Company. The Company is currently proceeding towards
establishing the facilities necessary to administer an orderly "run-off" of the
in-force business. This development will be alluded to throughout this report,
and may sometimes be referred to as a "general business retrenchment." One of
the consequences of the general business retrenchment relating to the Company's
insurance licenses is that in March 2003, the Company was notified by the
Insurance Department of the State of North Carolina that its license would be
restricted in that state for any new product sales.
The Company is not licensed in New York. However, its wholly owned subsidiary,
Sage Life Assurance Company of New York ("Sage New York") had applied to the New
York Insurance Department for an insurance license. On February 10, 2003, as a
result of the Company's general business retrenchment, the Company and Sage New
York withdrew that application and began the process of dissolving Sage New
York. Sage New York had not been capitalized.
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. Swiss Re Life and Health America Inc. ("Swiss Re",
formerly Life Reassurance Corporation of America), owns the remaining 9.9% of
the common stock of Sage Life Holdings. Before acquiring Sage Life Holdings'
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 such preferred stock for common stock of Sage Life
Holdings. Swiss Re's ultimate parent is Swiss Reinsurance Company, Switzerland,
one of the world's largest life and health reinsurance groups. Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and Item 8 "Financial Statements and Supplementary Data" set forth
additional information regarding the current state of affairs with respect to
Swiss Re's investment in Sage Life Holdings.
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-six 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.
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
4
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
The Company operates in one business segment, the variable insurance product
market. Products we offered before the general business retrenchment included
combination fixed and variable deferred annuities and combination fixed and
variable life insurance products. Refer to Item 8, "Financial Statements and
Supplementary Data," for revenues from external customers and a measure of
operating results and total assets for the last three years.
Products and Distribution
Before the general business retrenchment, the Company's business strategy had
been 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 (i) variable accounts--determined by the
value of investments held in separate accounts, and (ii) 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 we may conduct.
Our initial marketing focus was to distribute our products through banks and
financial planning companies and regional broker-dealers, and then, over the
long-term, we intended to expand our distribution channels to include
wirehouses. As mentioned above, the Company is no longer marketing or
distributing its products.
Since it began marketing its products, Sage Distributors Inc. ("Sage
Distributors") has acted as the principal securities underwriter of the
Contracts issued by the Company and of shares of its separate accounts.
Effective July 24, 2000, the Company entered into a new distribution agreement
with Sage Distributors (the "Underwriting Agreement") whereby Sage Distributors
was permitted to enter into selling agreements with unaffiliated broker-dealers
whose registered representatives sold Sage Life products to the public. The
Underwriting Agreement provides that Sage Distributors receives no compensation
for providing underwriting services to Sage Life and that the Sage Distributors
is responsible for all of its costs in marketing Sage Life products, except for
any commissions payable to registered representatives of Sage Distributors.
Since Sage Distributors has inadequate revenues with which to fund these
marketing and distribution costs, SIGI has historically undertaken to fund these
expenses under the terms of an Expense Reimbursement Agreement between SIGI and
Sage Distributors. The Company, Sage Distributors and SIGI agreed to amend the
Underwriting Agreement and Expense Reimbursement Agreement so that Sage Life
would bear, subject to certain limitations, the full costs of Sage Distributors
marketing, distribution and overhead costs effective October 1, 2002. This
amendment lapsed on December 31, 2002.
The Company has begun the process of forming a subsidiary broker-dealer that
would replace Sage Distributors as the principal securities underwriter of the
Contracts and of shares of the Company's separate accounts. The Company has
undertaken this step due to concerns that Sage Distributors might be unable to
satisfy the net capital requirements of a limited purpose broker-dealer as
prescribed by United States Securities and Exchange Commission ("SEC") and NASD
Rules due to litigation that Sage Distributors is currently involved in. (See
Item 3., "Legal Proceedings" for more details.) If a new broker-dealer is
established as a subsidiary of the Company, the Company will be obligated to
capitalize it at a level that satisfies the net capital requirements.
5
The Company's products currently include as investment options four series funds
of Sage Life Investment Trust (the "Trust"), a registered management investment
company sponsored by the Company. The Trust is managed by Sage Advisors, Inc.
("Sage Advisors"), an SEC-registered investment adviser and a subsidiary of
SIGI. In connection with the general business retrenchment, SIGI has determined
that it is unable to fund the continuing operating losses that Sage Advisors
incurs in connection with its management agreement with the Trust. Accordingly,
Sage Life has applied to the SEC for an Order of Substitution allowing it to
substitute shares of other registered management investment companies for the
shares of the Trust in its products. If the order is granted, the Company will
effect the substitution of shares thereby removing all assets of the Trust. This
in turn will permit the termination of Sage Advisors' agreement with the Trust
and end the operating losses. The Company's application to the SEC is currently
pending and therefore the Company has not yet obtained a firm date on which it
can effect the substitution of shares.
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.
The Company is rated "B++" (Very Good) by A.M. Best Co., and the current rating
remains under review with "negative implications." The Company is rated "A-"
(Strong) by Fitch Ratings. These ratings have the following meanings:
- "B++" (Very Good) per A.M. Best Company: "Assigned to
companies which have, in [A.M. Best Company's] opinion, a good
ability to meet their ongoing obligations to policyholders."
- "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."
Each of the foregoing agencies downgraded the Company's ratings since the date
of the Company's last Annual Report on Form 10-K. These rating declines are
related to matters disclosed in the "Liquidity and Capital Resources" section of
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operation," 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. There can be no assurances that the
rating agencies will not lower the Company's ratings further.
Competition
Before the general business retrenchment, we were 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 1,600 stock, mutual and other types of
insurers in the life insurance business in the United States, of which
approximately 230 write variable products business. A substantial number of
these entities are significantly larger than us. We are one of the few life
insurers confining our activities to separate account variable insurance
products.
6
Employees
At December 31, 2002, we had 70 salaried employees. Many of these employees also
perform duties for affiliated companies. The salary obligations for these
employees are shared amongst us and these companies according to the terms of a
Cost Sharing Agreement that has been filed with, and approved by, the Delaware
Insurance Department. After scheduled staff retrenchments discussed in more
detail in Item 7, we had 26 salaried employees as of April 9, 2003. The Company
plans to keep its remaining staff to effect the phased implementation of general
business retrenchment activities over the course of 2003. This includes further
planned retrenchments to reduce staff down to a group required to efficiently
manage the administration of the Company's in-force business during run-off.
ITEM 2. PROPERTIES
We had previously maintained our corporate offices in space leased by SIGI. On
March 10, 2003, SIGI executed a lease termination agreement with its landlord to
terminate its current lease and cancel all future rental obligations with effect
from April 15, 2003. The Company is relocating to alternative offices effective
April 15, 2003, under a monthly renewable operating agreement. The Company's
principal offices are now located at 969 High Ridge Road, Stamford, CT 06902.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiary are
involved in any lawsuits. However, a former external wholesaler of Sage
Distributors, an affiliated company, has challenged his termination in an
arbitration claim brought before the NASD. The claim alleges that Sage
Distributors breached a provision of his contract providing for an additional 18
months' of guaranteed compensation, and that it defamed him by stating in a Form
U-5 that he was terminated for "lack of production." The wholesaler sought, and
received, an ex parte prejudgment remedy in the amount of $1 million from a
Connecticut state court; the prejudgment remedy attaches the assets of Sage
Distributors (and amounts owed to Sage Distributors by the Company and SIGI) to
be maintained until the NASD arbitration panel issues its award. The $1 million
includes $500,000 for defamation, $234,776 for contract damages, and $265,224
for punitive damages and attorneys' fees.
Sage Distributors exercised its right to challenge the prejudgment remedy. After
a two-day evidentiary hearing, the parties submitted briefs on February 7, 2003.
To date, no decision has been issued. Sage Distributors has filed an appearance
and an answer in the NASD action. For the purpose of the court action (with
respect to the prejudgment remedy), Sage Distributors conceded that the court
could issue a prejudgment remedy for $22,917, the amount of the wholesaler's
monthly guarantee for one month, which Sage Distributors argues is all he would
be owed even if he established he was terminated without cause. Neither we nor
NASD Dispute Resolution nor the Connecticut court have made any determination as
to whether the Company would be liable for any judgment against Sage
Distributors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
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 2002, 2001 and 2000.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to our operations. The
selected financial data should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 8 "Financial Statements and Supplementary Data." All amounts presented in
the following table were derived from our financial statements for the periods
indicated and certain amounts have been reclassified to conform to the 2002
presentation.
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues:
Net investment income $ 1,534,629 $ 2,108,497 $ 1,888,172 $ 1,290,196 $ 1,243,522
Realized capital gains (1,232,740) 14,088 - - -
Administrative service fees 50,663 39,260 49,940 37,671 -
Contract charges and fees 650,853 108,986 3,979 861 -
-----------------------------------------------------------------------
Total revenues 1,003,405 2,270,831 1,942,091 1,328,728 1,243,522
Benefits and expenses:
Contract owner benefits 1,284,163 1,078,918 490,964 - -
Acquisition expenses 647,466 (50,182) - - -
Goodwill amortization expense 1,427,535 217,378 234,468 234,468 548,818
General & administrative
expenses 13,614,804 8,303,361 5,969,108 5,521,186 1,263,678
-----------------------------------------------------------------------
Total benefits and expenses 16,973,968 9,549,475 6,694,540 5,755,654 1,812,496
-----------------------------------------------------------------------
Loss before cumulative effect
adjustment (15,970,563) (7,278,644) (4,752,449) (4,426,926) (568,974)
Cumulative effect adjustment for
change in accounting for
development costs - - - (4,269,488) -
-----------------------------------------------------------------------
Net loss $(15,970,563) $ (7,278,644) $ (4,752,449) $(8,696,414) $ (568,974)
=======================================================================
Written premiums (1):
Gross $ 86,752,785 $ 68,900,272 $ 21,109,921 $ 79,942 $ -
Reinsurance
- Current Year (2) (67,863,858) (39,969,620) (14,106,155) (4,200) -
- Retroactive (3) (9,312,250) - - - -
-----------------------------------------------------------------------
Net $ 9,576,677 $ 28,930,652 $ 7,003,766 $ 75,742 $ -
=======================================================================
BALANCE SHEET DATA
Total assets $166,005,673 $114,237,585 $ 54,726,227 $31,736,580 $36,542,531
=======================================================================
Total liabilities $144,115,088 $ 82,330,012 $ 22,209,130 $ 233,435 $ 70,474
=======================================================================
Total stockholder's equity $ 21,890,585 $ 31,907,573 $ 32,517,097 $31,503,145 $36,472,057
=======================================================================
(1) Under accounting principles generally accepted in the United States,
premiums from the types of products sold by the Company are not reported as
revenue.
(2) In 2000, the Company entered into a multi-year modified coinsurance
agreement whereby a significant portion of the Company's variable insurance
business is ceded to Swiss Re on a quota share basis. This arrangement is
more fully described in the "Reinsurance" subsection below. In addition, the
Company has entered into reinsurance arrangements that reinsure certain
mortality risks associated with the guaranteed minimum death benefit feature
of the Contracts, as well as other Contract guarantees.
(3) During the first quarter of 2002, the Company's reinsurance agreement
with Swiss Re was amended to include certain variable annuity products
introduced by the Company during the fourth quarter of 2001. This
retroactive amendment resulted in a reduction of written premium, contract
charges and contract owner benefits relating to such previously issued
contracts of approximately $9,312,250, $8,000 and $5,000, respectively, for
the quarter ended March 31, 2002.
8
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
Contract owners pay us contract charges and fees, while the managers of the
funds available as investment options in our Contracts (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. Consequently, the aggregate amount of these fees
received by the Company also varies according to the number of Contracts in
force during the course of the year.
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. Although gross premiums continued to show significant
growth through December 31, 2002 when compared to the levels of the prior year,
they remained well below levels needed to generate significant charges based on
variable and fixed account assets. Accordingly, net investment income has
continued to represent a significant portion 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.
The Company's net income for the year ended December 31, 2002 was adversely
impacted by realized losses on certain fixed maturity investments and impairment
losses on seed capital investments of approximately $1.2 million. In addition,
the Company incurred a charge of $1.4 million representing the impairment of
goodwill as a result of the decision to discontinue business activities.
The trend of increasing general and administration expenses over the five-year
period ended December 31, 2002 reflects the Company's implementation of its
business strategy and the establishment of an operational infrastructure to
support the growth estimates in the Company's business plan. In light of capital
considerations discussed below, the Company initiated cost curtailment
initiatives in April 2002 to minimize operating expenses. However, general and
administrative expenses for the year ended 2002 include, among other things,
certain costs of discontinuing business operations, including as discussed
below, non-recurring staff termination and other exit related costs of
approximately $4.0 million. Additionally, marketing and distribution costs of
approximately $1.6 million were incurred during the fourth quarter of 2002 as a
result of the amendment to the Underwriting Agreement with Sage Distributors
that is discussed in more detail in Item 1, "Products and Distribution."
On December 17, 2002, the Board of Directors approved plans to suspend all
sales, marketing and distribution activities, the closure of the Trust, and the
termination of all staff not required to administer the run-off of Sage Life's
in-force Contracts. Effective January 1, 2003, the Company suspended all
marketing and underwriting activities and ceased all new sales. As a result, the
Company's entire internal and external wholesaling and marketing staff were
terminated in mid-January 2003. The Company plans to retain its remaining staff
to effect the phased implementation of business discontinuance activities over
the course of 2003. This includes further planned retrenchments to reduce staff
down to a number appropriate for the
9
efficient administration of the run-off of the in-force business. General and
administrative expenses for the year ended December 31, 2002 include
non-recurring charges of approximately $4.0 million for involuntary termination
benefits and other exit related costs.
We do not currently reflect the benefits of deferred federal income taxes in our
results.
Liquidity and Capital Resources
Funding of Cash Needs: Since the beginning of 1997, and until the general
business retrenchment, the Company's primary cash needs have been for the
funding of the distribution of its insurance products and the establishment and
maintenance of related infrastructure. This included, among other things,
creating and licensing innovative products, developing and maintaining a
marketing and distribution franchise to sell the insurance products through
retail broker-dealers, and establishing technological and operational platforms
necessary to support the development and growth of the business. These cash
needs were met primarily through capital contributions from Sage Group, the
funding of commission and acquisition expenses through a modified coinsurance
arrangement with Swiss Re, issuance of preferred and common stock in Sage Life
Holdings to Swiss Re, and through interest income on the invested assets of the
Company's general account.
During the second quarter of 2001, management determined that the cash needs of
the Company and the maintenance of its capital commitments to Swiss Re and the
Michigan Insurance Department discussed in more detail in the next section could
not be met solely by the methods mentioned above. Sage Group has been, and is
currently, prohibited under South African currency control regulations 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. Furthermore, Sage Group's 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 cash needs of the Company.
During the fourth quarter of 2001, Sage Group announced a search for a strategic
partner to fund its US interests in the face of continued currency and equity
market weakness and appointed a regional investment bank to assist with the
process. This capital raising effort was accompanied by expense containment
programs that were initiated during the first quarter of 2002 to conserve
working capital within Sage Life. Sage Group accelerated its capital-raising
efforts in August 2002 by appointing Merrill Lynch to explore transactions
involving a number of alternative strategic approaches, including financing of
cash needs through a strategic partnership or the outright sale of Sage Group's
interests.
Although a number of interested parties were identified, Sage Group was unable
to secure the necessary capital to sustain the Company's new business activities
due, in part, to prolonged weak global capital markets and the negative
sentiment that has severely impacted the life insurance sector. Accordingly, as
described above in Results of Operations, on December 17, 2002, the Boards of
Directors of Sage Group, SIGI and Sage Life approved the general business
retrenchment plans. Thereafter, on January 1, 2003, the Company suspended all
marketing and underwriting activities and ceased all new sales of the insurance
products.
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 a Preferred Stock Purchase
Agreement ("Preferred Stock Agreement") with Swiss Re.
10
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. Based on these
projections, Sage Group began the capital raising exercise discussed in more
detail in the prior section. 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 - all contributed to higher
than expected net cash outflows and a faster than projected reduction in capital
levels. As a result, the Company's statutory capital and surplus fell below $25
million during the third quarter of 2002.
Under the terms of the original Preferred Stock Agreement with Swiss Re, 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 a majority 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
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 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.
The Company's statutory capital and surplus at December 31, 2002, stood at
approximately $8.6 million, after making provision of approximately $12.7
million for certain non-recurring charges arising from the Company's decision to
discontinue new business activities. These non-recurring reserves have been
established in accordance with statutory accounting principles prescribed by the
state of Delaware. They comprise $7.7 million for asset adequacy analysis
liabilities related primarily to anticipated future run-off expenses projected
to be incurred by the Company over the next twenty years and $5.0 million for
involuntary termination benefits and other exit-related costs. By letter dated
March 18, 2003, the Delaware Insurance Department approved the additional
statutory reserves for future run-off expenses. Under accounting principles
generally accepted in the United States, the Company's total stockholder equity
at December 31, 2002 was approximately $21.9 million.
Given this decline in the Company's statutory-basis capital and surplus, then
subject to obtaining requisite regulatory approvals, Swiss Re now has the right
to exercise its option under the terms of the Preferred Stock Agreement to
assume voting control of Sage Life Holdings. Swiss Re has not yet exercised, and
has yet to indicate whether it would exercise, such an option. However, Swiss Re
is working with the Company to develop and implement plans for the efficient and
effective administration of existing Contract owner service obligations during
run-off.
Officials in the Company Regulation Bureau of the Delaware Insurance Department,
the Company's primary state regulator, have been made aware of these
developments. 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 initiatives. The Michigan Insurance Department has not
restricted the Company's license. Management continues to keep both the
Insurance Departments of Delaware and Michigan apprised of the Company's
financial condition.
11
Management maintains its belief that the Company has adequate capital resources
to meet its Contract benefit and servicing obligations to existing Contract
holders. Additionally, Contract holder investments are fully funded and held in
a separate account and protected from the general creditors of the Company. The
death benefit and other guaranteed rider features in the Company's products have
been reinsured with highly-rated reinsurers.
Reinsurance
At the date of issue, the Company's variable insurance 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 under which the Company ceded a
significant portion of its variable insurance business to Swiss Re. Depending on
the product, the Company has ceded to Swiss Re between 65% to 81% of Contract
revenues and related expenses in return for an expense allowance from Swiss Re
that substantially covered commission and other Contract acquisition costs. The
Modco Agreement provided the Company with additional capacity by funding our
cash flow strain from new business.
During 2002 and 2001, the Company ceded premiums including amounts relating to
guaranteed benefits of $77,170,000 and $39,970,000, respectively. Contract
charges and fees for 2002 and 2001 are net of $883,000 and $230,000,
respectively, ceded to Swiss Re. Contract owner benefits are net of $6,000 and
$123,000 ceded to Swiss Re in 2002 and 2001, respectively.
During the first quarter of 2002, the 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 $67,564,000, $875,000 and $1,000,
respectively, for the year ended December 31, 2002, compared with $39,816,000,
$230,000 and $123,000 for the year ended December 31, 2001.
In addition, the Company has entered into reinsurance arrangements that reinsure
certain risks associated with the guaranteed minimum death benefit feature 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.
Reserves
The insurance laws and regulations under which we operate obligate us to record,
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 that, together with interest on such
reserves computed annually at certain assumed rates, are estimated to be
sufficient to meet our Contract obligations at their maturities or in the event
of the covered person's death. As discussed above, the Company has established a
reserve for asset adequacy analysis liabilities related primarily to anticipated
future run-off expenses over the next twenty years.
12
Critical Accounting Policies
We amortize deferred acquisition costs ("DAC"), deferred gain on modified
coinsurance, and unearned revenue over the life of our 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.
For 2002, we have replaced EGPs with actual gross profits and EGPs have been
recast taking into consideration the volume and mix of Contracts in force.
The Company revised its assumptions about future lapse experience at December
31, 2002 to reflect the anticipated Contract holder behavior resulting from the
Company's decision to discontinue new business activities. This revision in
future assumptions had an immaterial effect on DAC as at December 31, 2002.
Investments
Our cash and invested assets are comprised entirely of investment grade
securities, money market funds and equity securities representing seed money in
two funds in Sage Life Investment Trust.
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 Contract owners 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, 2002, 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. Additionally, we have paid no dividends
since the commencement of our operations.
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"). Annually, we file 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 conducts a full examination of the Company's operations.
13
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. Prior to January 1, 2001, "prescribed" statutory accounting
practices were 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.
Effective January 1, 2001, the NAIC has revised the Accounting Practices and
Procedures Manual in a process referred to as Codification. Delaware has adopted
the provisions of the revised manual. The revised manual has changed, to some
extent, prescribed statutory accounting practices used to prepare
statutory-basis financial statements. However, the effect of these changes did
not result in a reduction in our statutory-basis capital and surplus upon
adoption at January 1, 2001.
On an annual basis, 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, 2002, 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,
intercompany transfers of assets, agreements and arrangements, as well as
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: (i)
regulation of insurance; (ii) company solvency; (iii) employee benefit
regulation; (iv) tax law changes affecting the taxation of insurance companies;
(v) tax treatment of insurance products and its impact on the relative
desirability of various personal investment vehicles; and (vi) privacy
protection initiatives.
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
At December 31, 2002, we held in our general account $13,135,718 of fixed
maturity securities that are sensitive to changes in interest rates. Pursuant to
the Company's investment policy, all fixed maturity investments are held in
investment grade corporate securities, government agency or U.S. government
securities. We determine the sensitivity of the fair 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 the fair value of
our fixed maturity general account portfolio at December 31, 2002 are:
- -----------------------------------------------------------------------------------------------------------
-200 bps -100 bps Fair value +100 bps +200 bps
- -----------------------------------------------------------------------------------------------------------
General Account $13,950,977 $13,538,972 $13,135,718 $12,769,553 $12,405,398
- -----------------------------------------------------------------------------------------------------------
In addition, the Company's deferred annuity and life insurance products offer a
fixed option which also subjects the Company to interest rate risk. These fixed
options provide interest rate guarantees to Contract holders for periods
extending up to 10 years. At December 31, 2002, there was $21,749,426 of fixed
maturity securities held in the separate account in support of fixed accounts.
Pursuant to the Company's investment policy, all fixed maturity investments
consist of investment grade corporate, mortgage-backed and asset-backed
securities. The effects of an increase or decrease of 100 and 200 bps on the
fair value of the fixed maturity separate account portfolio at December 31, 2002
are:
- ----------------------------------------------------------------------------------------------------------
-200 bps -100 bps Fair value +100 bps +200 bps
- ----------------------------------------------------------------------------------------------------------
Mortgage-backed $ 2,973,126 $ 2,875,646 $ 2,754,014 $ 2,596,042 $ 2,415,433
- ----------------------------------------------------------------------------------------------------------
Other securities 19,883,422 19,420,626 18,995,412 18,594,093 18,209,136
- ----------------------------------------------------------------------------------------------------------
Total Fixed Account $22,856,548 $22,296,272 $ 21,749,426 $ 21,190,135 $ 20,624,569
- ----------------------------------------------------------------------------------------------------------
In accordance with the terms of our products, Contract owner withdrawals or
transfers to variable investment options before the end of the guarantee period
subject the Contract owner to a market value adjustment ("MVA"). In the event of
a rising interest rate environment, which makes the fixed maturity securities
underlying the guarantees less valuable, the MVA could be negative. Conversely,
in a declining interest rate environment, which increases the fair value of
fixed maturity securities underlying the guarantees, the MVA could be positive.
The increase or decrease in the value of the fixed option resulting from the MVA
should substantially offset the increase or decrease in the market value of the
securities underlying the guarantees. The Company maintains asset/liability
matching procedures designed to achieve this offset. However, the Company still
takes on the default risk for the underlying securities, the interest rate risk
of reinvestment of interest payments and the risk of failing to maintain the
asset/liability matching program with respect to duration and convexity risks.
Equity Market Risk
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 sustained equity market decline, this
income would be reduced because the value of assets under management would be
reduced. The impact would be compounded if the market decline led to an increase
in surrenders or withdrawals. In addition, a prolonged equity market decline
would result in adjustments to the carrying value of deferred acquisition costs
and deferred gain on modified coinsurance. The estimated impacts, net of
reinsurance, from each of these
15
sources to annual profit next year of an immediate uniform 10% and 20% increase
or decrease in variable funds are:
- -----------------------------------------------------------------------------------------------
-10% -20% +10% +20%
- -----------------------------------------------------------------------------------------------
Contract Charges (282,763) (565,527) 282,763 565,527
- -----------------------------------------------------------------------------------------------
Mutual Fund Revenue (68,391) (136,783) 68,391 136,783
- -----------------------------------------------------------------------------------------------
Seed Capital (75,900) (151,800) 75,900 151,800
- -----------------------------------------------------------------------------------------------
Impact to DAC, bonus credits, sales
inducements and Deferred Gain 169,717 339,435 (169,717) (339,435)
- -----------------------------------------------------------------------------------------------
Total Impact to Profits (257,337) (514,674) 257,337 514,674
- -----------------------------------------------------------------------------------------------
Deferred acquisition costs, bonus credits and sales inducements and deferred
gains on modified coinsurance are determined using a long-term expectation of
variable Contract holder fund performance. The impact of a revision in our
expectation of future performance by 100 bps or 200 bps has very little effect
as the following table illustrates:
- --------------------------------------------------------------------------------------------------------
-200 -100 Current +100 +200
- --------------------------------------------------------------------------------------------------------
DAC, bonus credits, sales
inducements and Deferred Gain $1,546,030 $1,553,560 1,561,004 1,568,163 1,576,015
- --------------------------------------------------------------------------------------------------------
Another equity market exposure for the Company relates to the ancillary benefits
available to Contract owners in the form of guaranteed minimum death benefit,
guaranteed minimum account balance benefit, and guaranteed minimum income
benefit features. The Company's risks from these ancillary benefit features
increases as variable Contract holder investments decline. Conversely, the
Company's exposure to earnings enhancement benefits increases as variable
contract holder investments increase. The Company has entered into reinsurance
arrangements that reinsure the risks associated with the guaranteed minimum
death benefit feature of the Contracts, as well as other Contract guarantees.
These reinsurance arrangements are subject to certain caps and limitations. Even
under a range of substantially adverse mortality scenarios, the Company believes
that its net exposure to these risks is immaterial at December 31, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements begin on page F-1.
Reference is made to the Index to Financial Statements on page 27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
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,
NAME, AGE YEAR OF ELECTION OTHER PRINCIPAL POSITIONS FOR PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------------------------
Robin I. Marsden, 37 Director, January 1997 President and Trustee, Sage Life Investment Trust, July
to present; President and 1998 to present; Director, Sage Distributors, Inc., January
Chief Executive Officer, 1998 to August 2001 and February 2002 to present; President
February 1998 to present Sage Distributors, Inc., February 2002 to present; Director,
January 1997 to present, President and Chief Executive
Officer, February 1998 to present, Sage Insurance Group,
Inc.; Director, President and CEO, Sage Advisors, Inc.,
1998 to present; Director and Chief Executive Officer, Sage
Life (Bermuda), Ltd., June 2000 to present. Sage Life
Limited, Director, December 1994 to present; Sage Life
Holdings Limited, Director, December 1994 to May 2001; Sage
Unit Trusts Limited, Director, December 1994 to present;
Sage Group Limited, Director, May 2001 to present.
H. Louis Shill, 72 Director, January 1997 Chairman, Sage Life Assurance of America, Inc. January 1997
to present; Chairman to February 1998; Chairman, Sage Insurance Group, Inc.,
December 2001 to present January 1997 to present; Founder, Chairman, Sage Group
Limited, 1965 to present.
Paul C. Meyer, 50 Director, January 1997 Partner, Clifford Chance US LLP, 1986 to present (formerly,
to present* Rogers & Wells, and Clifford Chance Rogers & Wells).
Richard D. Starr, 58 Director, January 1997 Chairman and Chief Executive Officer, Financial Institutions
to present* Group, Inc., October 1978 to present; Vice Chairman and
Director, ABN Amro Financial
Services, Inc., 1997 - 2002.
Dr. Meyer Feldberg, 61 Director, January 2000 Dean/Professor, Columbia University Graduate School of
to present* Business, July 1989 to present; Director of Revlon, Inc.,
Federated Department Stores, Primedia, Sappi Ltd., Select
Medical, and UBS Funds.
John A. Benning, 68 Director, April 2000 to Senior Vice President and General Counsel, Liberty Financial
present* Companies, 1986 to December 1999; Director of ICI Mutual
Insurance Company and T.T. International U.S.A. Feeder
Trust; Trustee, Liberty All-Star Equity Fund and Liberty
All-Star Growth Fund (both closed-end funds listed on
NYSE), October 2002 to present.
17
POSITION WITH SAGE, YEAR
NAME, AGE OF ELECTION OTHER PRINCIPAL POSITIONS FOR PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------------------------
Donald C. Waite, III, 61 Director, May 2002 to Director, Executive in Residence Program, Columbia
present* University Graduate School of Business, February 2002 to
present; McKinsey and Company, Director and Senior Partner,
1966 to February 2002; Presstek, Inc., Director; The
Guardian Life Insurance Company of America, Director.
Mitchell R. Katcher, 49 Director, December 1997 Vice President, Sage Life Investment Trust, July 1998 to
to present; Senior present; Director, Sage Distributors, Inc., January 1998 to
Executive Vice President August 2001; Treasurer, July 1997 to December 2001;
and Chief Actuary May Director and Senior Executive Vice President, December 1997
1997 to present; Chief to present, Sage Insurance Group, Inc.; Director, Executive
Operating Officer, Vice President and Chief Actuary, Sage Life (Bermuda),
January 2003 to present Ltd., May 2000 to present; Sage Life Assurance of America,
Inc., Chief Financial Officer, May 1997 to October 2000.
Nancy F. Brunetti, 40 Executive Vice President, Executive Vice President and Chief Administrative Officer,
Operations Sage Insurance Group Inc., January 2001 to present;
Consultant, NFB Consulting, January 2000 to December 2000;
Executive Vice President and Chief Operating Officer,
January 1998 to December 1999 and Senior Vice President
January 1996 to December 1997, American Skandia Life
Assurance Corporation; Sage Life Assurance of America,
Inc., Executive Vice President and Chief Administrative
Officer, January 2001 to December 2002.
Terry Eleftheriou, 43 Executive Vice President Executive Vice President & Chief Financial Officer, Sage
& Chief Financial Insurance Group, Inc., August 2002 to present; Senior Vice
Officer, August 2002 to President - Finance, American General Corporation, June
present 2000 to September 2001; Ernst & Young, Insurance Industry
Services, January 1985 to May 2000.
All entities listed above with "Sage" in their name are affiliates of Sage Life.
All entities listed above not having "Sage" in their names are not 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.
In connection with the general business retrenchment of the Company, Messrs.
Meyer, Starr, Feldberg, Benning, and Waite (the "outside directors") are
resigning as directors of the Company as of April 16, 2003. The outside
directors are not executives of the Company or of any of its affiliates. The
Company is not required by federal securities or state insurance law to have
independent or outside directors on its Board. Nevertheless, the change in the
Board composition will be reported to the Delaware Insurance Department and
other state insurance departments as required by their regulations. The
consensus of the Board, including the outside directors, was that the
resignation of the outside directors was in the best interest of the Company
given the Company's run-off status and the resulting material cost savings to
the Company.
18
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 2002 $ 430,000 $ 240,000 $ 21,000 $ 25,600
(President & CEO) 2001 390,750 108,800 17,850 132,179
2000 354,750 100,000 17,850 119,399
Mitchell R. Katcher 2002 $ 345,625 $ 162500 $ 21,000 $ 19,458
(Sr. EVP, COO & Chief
Actuary) 2001 318,750 150,000 17,850 20,535
2000 293,750 137,500 17,850 17,824
Nancy F. Brunetti 2002 $ 295,250 $ 140,500 $ 21,000 $ 16,001
(EVP, Operations) 2001 279,500 34,375 - 31,000
Terry Eleftheriou 2002 $ 291,017(3) $ 0 $ 0 $ 0
(EVP & Chief Financial
Officer)
Lincoln B. Yersin (4) 2002 $ 33,833 $ 25,000 $ 3,552 $ 0
(Former EVP Marketing) 2001 199,750 150,000 17,850 3,124
2000 186,250 150,000 13,300 47,191
Jeffrey Gordon (5) 2002 $ 107,250 $ 83,000 $ 9,319* $ 0
(Former Sr.V.P. CFO) 2001 205,250 40,000 4,528* 100,229
* These amounts were forfeited due to non-vesting upon employment termination.
(1) Represents amounts credited to executives under a SIGI sponsored
money-purchase, defined contribution plan.
(2) All Other Compensation consists of the following for the executive officers:
Mr. Marsden: 2002, $24,150 - contribution to non-qualified retirement plan,
$1,450 - tax return preparation services; 2001, $23,179 -- contribution to
non-qualified retirement plan, $109,000 deferral of partial 2000-2001 fiscal
year earned bonus; 2000, $19,399 -- contribution to non-qualified retirement
plan, $100,000 - deferral of partial 1999-2000 fiscal year earned bonus.
Mr. Katcher: 2002 - $15,291 contribution to non-qualified retirement plan,
$4,167 contribution to non-qualified retirement plan in lieu of employee
benefit; 2001, $20,535 -- contribution to non-qualified retirement plan;
2000, $12,994 -- contribution to non-qualified retirement plan, $4,830 --
contribution to non-qualified plan in lieu of employee benefit.
Mr. Yersin: 2002, $27,721 - pay-out of paid-time-off benefit; 2001, $3,124
-- contribution to non-qualified retirement plan; 2000, $47,191 -- moving
expenses.
19
Mr. Gordon: 2002, $2,264 contribution to non-qualified plan, $38,769 -
moving expenses, $17,290 pay-out of paid-time-off benefit; 2001, $43,750 --
recruitment bonus, $5,736 -- contribution to non-qualified retirement plan;
$62,880 -- moving expenses.
Ms. Brunetti: 2002, $10,001 - contribution to non-qualified retirement plan,
$6,000 commuter allowance; 2001, $25,000 -- recruitment bonus, $6,000 --
commuter allowance.
(3) Mr. Eleftheriou's salary is comprised of $75,807 reported on Form W-2 as
employee compensation, and $215,210 reported on Form 1099 pursuant to his
consulting contract with the Company.
(4) Mr. Yersin's employment with the Company terminated February 27, 2002.
(5) Mr. Gordon's employment with the Company terminated June 28, 2002.
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. This provision was
amended by letter dated November 11, 2002, to include "material reduction in
compensation" as a triggering event.
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 allocations
or options under the long-term capital incentive plan and unvested employer
contributions attributable to Mr. Katcher under any pension plan would be
accelerated and deemed to immediately vest; and (iii) by letter dated September
15, 2002, amending the employment agreement, guaranteeing a proportionate bonus
up to the point of termination based on his most recent annual performance
bonus. In addition, pursuant to a "change of control" provision, if during the
twelve months following such change of control there is a material reduction in
Mr. Katcher's responsibilities, or a material reduction in his compensation, or
a required job relocation or assignment beyond specified areas, then Mr. Katcher
may elect to terminate his employment and receive the benefits he would
otherwise have received if terminated without cause. In addition, by letter
dated September 15, 2002, Mr. Katcher is guaranteed a "capital raising success
and
20
retention bonus" of not less than $14,687.50 per month for 12 months following
the successful closing of a capital raising effort.
Ms. Brunetti and SIGI are parties to an agreement dated December 21, 2000. The
agreement provides for Ms. Brunetti's title and duties with SIGI and the
Company, sets forth her initial annual remuneration and other incidental
allowances, and provides that such remuneration will be reviewed on an annual
basis. The agreement also provides that Ms. Brunetti is eligible to participate
in the Company's short-term incentive bonus plan for employees, and that for the
period through March 31, 2002, such bonus will be guaranteed at 50% of base
gross salary. The agreement also provides that she is eligible to participate in
a long-term capital incentive plan to be established by SIGI, and an Executive
Non-Qualified Deferred Compensation Plan ("Rabbi Trust"). The agreement provides
for indemnification of personal liability arising in the ordinary course of
business. The December 21, 2000 agreement was updated by letter dated June 10,
2002, wherein Ms. Brunetti's annual compensation was reset and a change of
control provision was added. Pursuant to the change of control provision, if
within the twelve months following the change of control Ms. Brunetti's
employment is terminated, or if there is a material reduction in her
responsibilities without her consent causing her to terminate her employment,
she is guaranteed 12 monthly payments of her then monthly salary and a
proportionate bonus up to the date of termination based on her most recent
bonus. By letter dated December 17, 2002, the Company guaranteed severance pay
and various insurance protection benefits for a period of 12 months.
Mr. Eleftheriou was appointed Chief Financial Officer by a consulting agreement
dated June 20, 2002. The Board subsequently ratified this appointment in August
of 2002. Thereafter, Mr. Eleftheriou and the Company entered into an Employment
Agreement dated November 1, 2002, effective until April 30, 2003, unless
extended by the parties pursuant to terms prescribed in the agreement. Among
other things, the agreement provides for Mr. Eleftheriou's title and duties with
the Company (and SIGI); guarantees his access to committees and persons
necessary for him to fulfill his professional obligations and duties under the
agreement; sets forth his remuneration and provides for certain customary
benefits; and provides for the covering or reimbursement of certain expenses in
consideration of Mr. Eleftheriou's residence in Houston. The agreement provides
for the extension of salary and benefits for a period of 26 weeks if the Company
terminates Mr. Eleftheriou's employment while the agreement is in force or
declines to extend employment pursuant to the prescribed terms. If the Company
makes an offer to extend employment, the terms of which are at least as
favorable as those prescribed in the agreement (and which also include
relocation from Houston), and Mr. Eleftheriou declines to accept the offer, then
the agreement terminates with no extension of salary. Mr. Eleftheriou may
terminate the agreement and his employment and be entitled to 26 weeks of
continued salary and benefits for reasons stipulated in the agreement, including
substantial changes in his position, failure of the Company to comply with the
terms of the Agreement, failure of the Company to implement policies, programs
or systems he deems necessary, material reduction in his salary and change of
control provisions.
Mr. Yersin resigned February 27, 2002. Prior to his resignation, Mr. Yersin and
the Company were parties to an employment agreement with an effective date of
May 3, 1999. The agreement provided for Mr. Yersin's title and duties with the
Company, and set forth his base salary and other compensation based on sales
("override"), with stated minimums on the override for the first two years. It
also provided 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.
Mr. Gordon resigned June 28, 2002. Prior to his resignation, Mr. Gordon and SIGI
were parties to an agreement dated September 11, 2000. The agreement provided
for Mr. Gordon's title and duties with SIGI and the Company, set forth his
initial annual remuneration, and provided that such remuneration will be
reviewed on an annual basis. The agreement also provided that Mr. Gordon was
eligible to participate in the
21
Company's short-term incentive bonus plan for employees. The agreement also
provided that he be eligible to participate in a long-term capital incentive
plan to be established by SIGI. In addition, the agreement provided that for the
first year of employment, SIGI will make a special fully vested monthly
contribution of 4% of base salary to an Executive Non-Qualified Deferred
Compensation Plan ("Rabbi Trust"). The agreement provided for bridge financing
payable over three years should stock loan obligations to Mr. Gordon's former
employer materialize. Under this provision, during 2002, the Company provided
Mr. Gordon with a $15,000 non-interest bearing loan payable December 31, 2002.
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, Benning and Waite 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,
Waite and Feldberg do not receive retirement benefits. Mr. Benning, as chairman
of the audit committee, receives an annual retainer of $3,000, and $500 per
meeting attended.
22
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 US L.L.P. Since 1997, the Company has retained Clifford Chance
US L.L.P., and its predecessor firms, Clifford Chance Rogers & Wells, and Rogers
& Wells, to provide legal counseling to the Company.
ITEM 14. 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 Annual 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.
23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a) 1. Consolidated Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and F-3
2000
Consolidated Statements of Stockholder's Equity for the years ended December 31, 2002, F-4
2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and F-5
2000
Notes to Consolidated Financial Statements F-6
(b) Reports on Form 8-K
Reports on Form 8-K filed on December 9 and 18, 2002 were the only filings by the
Registrant during the quarter ended December 31, 2002.
(c) Exhibit Index E-1
24
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, 2002 and 2001, 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, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1, during 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ Ernst & Young LLP
Hartford, CT
March 21, 2003
F-1
Sage Life Assurance of America, Inc.
Consolidated Balance Sheets
DECEMBER 31
2002 2001
--------------------------------------
ASSETS
Investments:
Fixed maturity securities available for sale (amortized cost: $ 13,135,718 $ 13,652,254
2002- $12,476,000; 2001 - $13,486,000)
Equity securities, at fair value (cost: 2002 - $759,000; 2001 - 759,000 1,097,000
$1,082,000)
--------------------------------------
Total investments 13,894,718 14,749,254
Cash and cash equivalents 9,281,625 9,383,386
Accrued investment income 202,979 252,983
Receivable from affiliates - 1,081,710
Reinsurance receivables - 746,661
Deferred acquisition costs 3,063,793 2,569,876
Intangible assets 4,348,765 5,776,300
Other assets 929,220 794,834
Separate account assets 134,284,573 78,882,581
--------------------------------------
Total assets $ 166,005,673 $ 114,237,585
======================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred gain from modified coinsurance $ 2,301,897 $ 1,283,790
Payable to affiliate 429,954 -
Reinsurance payables 851,368 -
Unearned revenue 23,951 6,024
Deferred federal income taxes 346,007 60,807
Accrued expenses and other liabilities 5,877,338 2,096,810
Separate account liabilities 134,284,573 78,882,581
--------------------------------------
Total liabilities 144,115,088 82,330,012
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 56,337,754 50,937,804
Deficit (37,618,830) (21,648,267)
Accumulated other comprehensive gain 671,661 118,036
--------------------------------------
Total stockholder's equity 21,890,585 31,907,573
--------------------------------------
Total liabilities and stockholder's equity $ 166,005,673 $ 114,237,585
======================================
See accompanying notes to consolidated financial statements.
F-2
Sage Life Assurance of America, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
2002 2001 2000
---------------------------------------------------
REVENUES
Net investment income $ 1,534,629 $ 2,108,497 $ 1,888,172
Realized capital (losses) gains (1,232,740) 14,088 -
Administrative service fees 50,663 39,260 49,940
Contract charges and fees 650,853 108,986 3,979
---------------------------------------------------
Total revenues 1,003,405 2,270,831 1,942,091
BENEFITS AND EXPENSES
Contract owner benefits 1,284,163 1,078,918 490,964
Acquisition expenses 647,466 (50,182) -
Goodwill impairment 1,427,535 - -
General and administrative expenses 13,614,804 8,520,739 6,203,576
---------------------------------------------------
Total benefits and expenses 16,973,968 9,549,475 6,694,540
---------------------------------------------------
Net loss $ (15,970,563) $ (7,278,644) $ (4,752,449)
===================================================
See accompanying notes to consolidated financial statements.
F-3
Sage Life Assurance of America, Inc.
Consolidated Statements of Stockholder's Equity
ACCUMULATED
OTHER
ADDITIONAL PAID- COMPREHENSIVE
COMMON STOCK IN CAPITAL DEFICIT INCOME (LOSS) TOTAL
---------------------------------------------------------------------------------------
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,
net of federal income taxes - - - 446,336 446,336
------------
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
Net loss (7,278,644) - (7,278,644)
Change in unrealized loss on investments,
net of federal income taxes - - - 402,477 402,477
------------
Comprehensive loss - - - - (6,876,167)
Additional capital contributions - 6,266,643 - - 6,266,643
---------------------------------------------------------------------------------------
Balances at December 31, 2001 2,500,000 50,937,804 (21,648,267) 118,036 31,907,573
Net loss (15,970,563) (15,970,563)
Change in unrealized loss on investments,
net of federal income taxes 553,625 553,625
------------
Comprehensive loss 15,416,938)
Additional capital contributions 5,399,950 5,399,950
---------------------------------------------------------------------------------------
Balances at December 31, 2002 $ 2,500,000 $ 56,337,754 $(37,618,830) $ 671,661 $ 21,890,585
=======================================================================================
See accompanying notes to consolidated financial statements.
F-4
Sage Life Assurance of America, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (15,970,563) $ (7,278,644) $ (4,752,449)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of acquisition costs 647,466 - -
Goodwill impairment 1,427,535 - -
Amortization of bond discount/premium 114,504 109,529 114,223
Realized capital losses (gains) 1,232,740 (14,088) -
Amounts transferred to separate account
for realized losses (885,338) - -
Changes in:
Accrued investment income 50,004 (29,843) (16,877)
Receivable (payable) from affiliates 1,511,663 618,304 (1,028,744)
Unearned revenue 17,927 5,123 901
Reinsurance receivables (payables) 1,598,029 (456,359) (290,302)
Deferred acquisition costs (1,141,382) (2,242,156) (327,720)
Deferred gain from modified coinsurance 1,018,107 965,762 318,028
Agreement
Accrued expenses and other liabilities 4,128,378 1,525,082 438,600
Other assets (257,655) (462,919) 139,938
------------------------------------------------
Net cash used in operating activities (6,508,585) (7,260,209) (5,404,402)
INVESTING ACTIVITIES
Purchases of fixed maturity securities - - (453,975)
Proceeds from sales, maturities and repayments
of fixed maturity securities 883,680 1,509,785 2,535,000
Proceeds from sale of other invested assets 123,194 - -
------------------------------------------------
Net cash provided by investing 1,006,874 1,509,785 2,081,025
Activities
FINANCING ACTIVITIES
Capital contributions from parent 5,399,950 5,184,643 5,320,065
------------------------------------------------
Net cash provided by financing activities 5,399,950 5,184,643 5,320,065
------------------------------------------------
(Decrease) increase in cash and cash equivalents (101,761) (565,781) 1,996,688
Cash and cash equivalents at beginning of year 9,383,386 9,949,167 7,952,479
------------------------------------------------
Cash and cash equivalents at end of year $ 9,281,625 $ 9,383,386 $ 9,949,167
================================================
See accompanying notes to consolidated financial statements.
F-5
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Sage Life Assurance of America, Inc. (the "Company" or "Sage Life") is a
Delaware domiciled stock life insurance company with its principal offices in
Stamford, Connecticut. The Company is a wholly owned subsidiary of Sage Life
Holdings of America, Inc. ("SLHA") which is owned 9.9% by Swiss Re Life and
Health America, Inc. ("Swiss Re") and 90.1% owned by Sage Insurance Group, Inc.
("SIGI"), a wholly owned indirect subsidiary of Sage Group Limited, a South
African financial institution.
Before the general business retrenchment described below in "Restructuring
Costs" the Company was engaged in the manufacture, marketing and distribution of
variable annuity and variable life insurance contracts (the "Insurance
Products") and shares of a registered investment company. The Company is
licensed to write business in 49 states and the District of Columbia. 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. Gross premiums for 2002, 2001, and 2000
were approximately $86,753,000, $68,900,000, and $21,110,000, respectively.
Sage Life's affiliated companies include: Sage Life Assurance Company of New
York ("Sage New York"), a subsidiary of Sage Life that had been seeking to
obtain a license in the State of New York; Sage Advisors, Inc. an affiliated
investment manager for the registered investment company ("Sage Life Investment
Trust" or the "Trust") sponsored by Sage Life whose shares (the "Shares") are
available as investment options in the Insurance Products; Sage Distributors,
Inc. ("Sage Distributors") a registered broker-dealer that acts as the principal
underwriter of the Insurance Products and the Shares; Sage Re (Bermuda) Ltd., an
insurance company licensed in Bermuda; and Finplan Holdings, Inc.
As stated in Note 6 - Common and Preferred Stock of Parent, the Company's
statutory capital and surplus at December 31, 2002 fell below the minimum $20
million level required by the Preferred Stock Purchase Agreement between SLHA
and Swiss Re. Consequently, subject to obtaining requisite regulatory approvals,
Swiss Re now has the right to exercise its option under the terms of the
Preferred Stock Purchase Agreement to assume voting control of SLHA. Swiss Re
has not yet exercised, and has yet to indicate whether it would exercise, such
an option.
RESTRUCTURING COSTS
On December 17, 2002, the Board of Directors approved plans to discontinue
business activities including the suspension of all sales, marketing and
distribution activities, the closure of the Trust, and the termination of all
staff not required to administer the run-off of Sage Life's in-force contracts.
Effective January 1, 2003, the Company suspended all marketing and underwriting
activities and ceased all new sales. As a result, the Company's entire internal
and external wholesaling and marketing staff were terminated in mid-January
2003. The Company plans to keep its remaining staff to effect the phased
implementation of business discontinuance activities over the course of 2003.
This includes further planned retrenchments to reduce staff down to a minimum
group to administer the in-force business during run-off.
F-6
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRUCTURING COSTS (CONTINUED)
In accordance with the provisions of Emerging Issues Task Force 94-3, Liability
Recognition for Certain Employee Termination and Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring), the
Company has established provisions of $5,404,000 at December 31, 2002 for
involuntary termination benefits, contract termination and other exit costs
(principally the write off of goodwill) resulting from its decision to cease new
business activities.
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 relate to the amortization of deferred acquisition costs and
deferred gain from the modified coinsurance agreement. These assumptions involve
surrenders, investment return, growth in allocations to variable funds options
by contract owners, and maintenance expenses. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
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.
Equity securities, consisting of seed money investments, are carried at fair
value based on the net asset values of the fund shares and the related
unrealized capital gains (losses) are reported as a component of stockholder's
equity, net of applicable deferred federal income taxes.
F-7
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
The Company reviews its investment portfolio quarterly for indicators of other
than temporary impairment of securities. Based on the facts and circumstances,
when the Company determines that a decline in fair value below cost is other
than temporary, the Company records the difference as a realized loss in the
statement of operations. Realized gains on the disposal of investments are
determined by the specific identification method. In 2002 and 2001, the
reclassification adjustments for realized capital losses previously included in
accumulated other comprehensive income were approximately $5,000 and $38,000,
respectively.
FAIR VALUES
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Cash, Cash Equivalents, and Short-term Investments: The carrying
amounts reported in the accompanying balance sheets for these financial
instruments approximate their fair values.
Investment Securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. The fair values for
equity securities are based on quoted market prices, where available;
for equity securities that are not actively traded, estimated fair
values are based on values of issues of comparable yield and quality.
See Note 2.
Investment Contracts: The carrying amounts of the Company's liabilities
under variable life and annuity contracts approximates fair value.
DEFERRED ACQUISITION COSTS AND SALES INDUCEMENTS
The costs of acquiring new business, which vary with and are primarily related
to the production of new business, are deferred net of reinsurance. These costs
include commissions, costs of contract issuance, and certain selling expenses.
These deferred costs are being amortized in proportion to expected gross profits
from interest, expense, mortality and surrender 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. During 2002,
2001, and 2000, the Company capitalized $1,141,000, $2,192,000, and $328,000,
net of reinsurance ceded. During 2002 and 2001, the Company recorded, net of
reinsurance ceded, amortization and interest accretion of $892,000 and $245,000,
and $45,000 and $95,000 respectively. The Company began amortizing deferred
acquisition costs in 2001.
The Company also offers sales inducements that enhance the investment yield on
the amount allocated to the fixed option by contract owners. Such inducements
are deferred and amortized in a manner similar to deferred acquisition costs. At
December 31, 2002 and 2001 deferred sales inducements were $823,000 and
$604,000, respectively, and are included in other assets in the accompanying
balance sheets.
F-8
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
Reinsurance contracts are accounted for in a manner consistent with the
underlying contracts. 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.
Deferred acquisition costs in the accompanying balance sheets are net of amounts
ceded under a modified coinsurance agreement with Swiss Re. The deferred gain
from this agreement shown in the accompanying consolidated balance sheets
represents the commission and expense allowance received by the Company in
excess of the quota share percentage. Contract liabilities and associated assets
are reported on a gross basis.
Reinsurance premiums ceded for the guarantees in the contracts and the
corresponding reinsurance recoveries on benefits and claims incurred are
included in contract owner benefits.
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. The change in fair value of fixed maturity and marketable equity
securities are recognized in other comprehensive income as if those securities
were in the general account. 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.
Separate account assets consist of mutual funds, bonds, short-term investments,
transfers due from the general account and cash and cash equivalents. The
Company provides return guarantees determined periodically by management that
vary based on the length of the guarantee period ranging from one to ten years
subject to a minimum guaranteed return of 3%, or the rate on an analogous
Treasury Note less 225 basis points, of the average investment balance to
contract owners selecting any of the fixed options. Withdrawals from fixed
options prior to the end of the guarantee period are subject to a market value
adjustment based on interest rate levels at the time of the withdrawal. At
December 31, 2002 and 2001, the separate account liabilities included
approximately $21,597,000 and $28,521,000, respectively, relating to contracts
for which the contract owner is guaranteed a fixed rate of return.
For contract owners that do not select the fixed option, there are no minimum
guarantees and the investment risk associated with market value changes are
borne entirely by the contract owner.
F-9
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONTRACT LIABILITIES
The Company has no contract liabilities in its general account at December 31,
2002 and 2001. 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 contracts.
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.
Contract owner benefits include first year bonus credits and the amount of
guaranteed investment income credited to the fixed account. 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.
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 was recorded
as goodwill and was being amortized on a straight-line basis over thirty years.
The carrying value of goodwill is regularly reviewed for indications of
impairment in value.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). With
the adoption of SFAS No. 142, goodwill is no longer subject to periodic
amortization over its estimated useful life, but rather will be subject to at
least an annual assessment for impairment by applying a fair-value based test.
Acquired intangible assets must be recognized and amortized over their useful
lives. Acquired intangible assets with indefinite lives are not subject to
periodic amortization under the new rules but would be subject to periodic
assessment for impairment. At adoption, the Company performed an impairment test
for its carrying value of goodwill. Utilizing sales forecasts to project future
distributable earnings, the Company computed an embedded value that supported
the carrying value of goodwill. However, concurrent with the Company's decision
to place itself in run-off, the Company concluded that its goodwill was
impaired. Therefore, the Company wrote off the goodwill balance of $1,428,000 in
current year operations.
F-10
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
The remaining balance included in goodwill and identified intangibles represents
state insurance licenses acquired in the acquisition of Fidelity Standard Life
Insurance Company. Those identified intangibles are not subject to amortization
under SFAS No. 142 because of their indefinite lives. The Company reviews those
identified intangibles at least annually for impairment based on fair value of
the insurance licenses.
If SFAS No. 142 were in effect beginning January 1, 2000, the financial
statement impact would have been approximately $217,000 and $234,000 for the
years ended December 31, 2001 and 2000, respectively.
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.
SEGMENT INFORMATION
The Company's operations are classified into one reportable segment:
manufacture, marketing and distribution of variable annuity and variable life
insurance contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, ("SFAS No. 146") which requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than the current practice of recognizing those costs at the date
of a commitment to exit or disposal plan. The provisions of SFAS No. 146 are to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Adoption of SFAS No. 146 is not expected to have a material impact on
the Company's financial condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial statement
amounts to conform to the 2002 presentation.
F-11
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
2. INVESTMENTS
Investments in fixed maturity securities at December 31 consist of the following
(in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------
2002
U.S. Government obligations $ 6,499 $ 486 $ - $ 6,985
Corporate obligations 5,977 251 77 6,151
-------------------------------------------------------
$ 12,476 $ 737 $ 77 $ 13,136
=======================================================
2001
U.S. Government obligations $ 6,988 $ 90 $ 5 $ 7,073
Corporate obligations 6,498 144 63 6,579
-------------------------------------------------------
$ 13,486 $ 234 $ 68 $ 13,652
=======================================================
The amortized cost and fair value of fixed maturity securities by contractual
maturity at December 31, 2002 are summarized below (in thousands). Actual
maturities will differ from contractual maturities because certain borrowers
have the right to call or prepay obligations.
AMORTIZED FAIR
COST VALUE
--------------------------
Due in one year or less $ 2,008 $ 2,040
Due after one year through five years 7,896 8,467
Due after five years through ten years 2,572 2,629
--------------------------
Total $ 12,476 $ 13,136
==========================
Investments in equity securities at December 31 consist of the following (in
thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------
2002
Nasdaq 100 Index Fund $ 273 $ - $ - $ 273
Eagle All-Cap Fund 486 - - 486
-----------------------------------------------------
$ 759 $ - $ - $ 759
=====================================================
2001
Nasdaq 100 Index Fund $ 428 $ 11 $ - $ 439
Eagle All-Cap Fund 654 4 - 658
-----------------------------------------------------
$ 1,082 $ 15 $ - $ 1,097
=====================================================
F-12
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
2. INVESTMENTS (CONTINUED)
During 2002 and 2001, the Company recognized impairment losses in the above
funds of $323,000 and $918,000, respectively. Such losses are included in
realized capital losses in the accompanying statements of operations. In
addition, during 2002, the Company recorded realized capital losses of $863,000
on a WorldCom bond which was held in the separate account to support insurance
contracts in guaranteed fixed options.
Proceeds from the sale of fixed maturity securities were $884,000 and 1,510,000
during 2002 and 2001, resulting in gross realized gains (losses) of $(24,000)
and $14,000, respectively.
During 2001, the Company's parent contributed equity securities with a fair
value of $1,082,000 to the Company. Such equity securities represent seed money
in two funds sponsored by Sage Life Investment Trust.
At December 31, 2002 and 2001, unrealized capital gains of $235,000 and $7,000,
respectively, net of tax, on fixed maturity securities held in the separate
account was reflected in accumulated other comprehensive gains.
Investment income by major category of investment is summarized as follows (in
thousands):
2002 2001 2000
-------------------------------------------
Fixed maturity securities $ 1,483 $ 1,875 $ 1,398
Cash and cash equivalents 157 370 572
-------------------------------------------
Total investment income 1,640 2,245 1,970
Investment expenses (105) (136) (82)
-------------------------------------------
Net investment income $ 1,535 $ 2,109 $ 1,888
===========================================
At December 31, 2002 securities with an amortized cost and fair value of
approximately $6,398,000 and $6,878,000, 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. REINSURANCE
At the date of issue, the Company's variable insurance products 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 modified coinsurance agreement (the
"Modco Agreement") under which Sage Life has ceded a significant portion of the
variable insurance business to Swiss Re. Depending on the product, the Company
ceded 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 provided
the Company with additional capacity for growth by substantially funding the
cash flow strain from new business.
F-13
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
3. REINSURANCE (CONTINUED)
During 2002, 2001, and 2000 the Company ceded premiums of $76,876,000,
$39,816,000, and $14,106,000, respectively. Contract charges and fees for 2002,
2001, and 2000 are net of $883,000, $230,000, and $8,000, respectively, ceded to
Swiss Re. Contract owner benefits are net of $6,000, $123,000, and $30,000 ceded
to Swiss Re in 2002, 2001, and 2000, respectively.
During the first quarter of 2002, the 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 $9,312,000, $8,000, and $5,000,
respectively, relating to the prior year.
In addition, the Company has 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. The
premium ceded under these arrangements in 2002 and 2001 was $294,000 and
$154,000, respectively. The Company uses only highly rated reinsurance companies
to reinsure these risks.
4. FEDERAL INCOME TAXES
Prior to 2002, the Company had filed a separate life insurance company federal
income tax return. Beginning in 2002, the Company may elect to join in a
life/non-life consolidated tax return of Sage Holdings (U.S.A.), Inc. and its
subsidiaries.
The Company files a separate life insurance company federal income tax return
and intends to do so through the year 2002.
The provision for income taxes varies from the amount that would be computed
using the federal statutory income tax rate as follows:
2002 2001 2000
---- ---- ----
Pre-tax loss $(15,970,563) $(7,278,644) $(4,752,449)
Application of the federal statutory
tax rate - 34% (5,429,991) (2,474,739) (1,615,833)
Change in valuation allowance 5,428,929 2,551,734 1,614,188
Other 1,062 (76,995) 1,645
--------------------------------------------
Total income tax provision - - -
============================================
F-14
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:
2002 2001
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 10,571,506 $ 7,682,789
Capital loss carryforwards 419,132 -
Reserves (2,234,396) 282,527
Deferred gain from Modco Agreement 782,645 436,489
Accrued expenses 3,997,952 -
Unearned revenue 161,231 82,944
Other 155,030 37,718
------------------------------------
Total deferred tax assets 13,853,100 8,522,467
Deferred tax liabilities:
Goodwill (41,790) (378,729)
Deferred policy acquisition costs (413,295) (712,167)
Unrealized gain on appreciation of investments (346,007) (60,807)
Other (272,717) (13,093)
------------------------------------
Total deferred tax liabilities (1,073,809) (1,164,796)
Valuation allowance for deferred tax assets (13,125,298) (7,418,478)
------------------------------------
Net deferred tax liability $ (346,007) $ (60,807)
====================================
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.
At December 31, 2002, the Company has separate company net operating loss
carryforwards of approximately $31,100,000, expiring between 2012 and 2017.
5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS
The Company is a Delaware-domiciled life insurance company subject to the laws
of Delaware governing insurance companies and to the regulations of its
Insurance Department (the "Department"). Delaware's insurance laws require,
among other things, that insurers maintain specified minimum levels of paid-in
capital and surplus, and that their investments be of specified types and may
not exceed specified amounts. The Department has broad authority to examine an
insurer's books and records to ensure compliance with those and other insurance
laws of the State, and may determine whether reported contract liabilities and
reserves are computed in accordance with statutory accounting practices
prescribed or permitted by the Department. In addition, the Company is subject
to the regulation under insurance laws of all jurisdictions in which it operates
(49 states and the District of Columbia).
F-15
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS (CONTINUED)
Changes in control of insurance companies are subject to Delaware's Insurance
Holding Company System Registration law and regulation. All transfers of control
must be submitted in advance to the Department for its approval and
determination as to, among other things: the proposed transferee's competence,
experience and integrity; whether the transfer is likely to be hazardous or
prejudicial to the insurance buying public; and whether the plans or proposals
which the proposed transferee has to liquidate the insurer or sell its assets,
or make other material changes may be unfair or unreasonable to policyholders.
The Delaware Insurance Commissioner has broad administrative powers allowing him
or her to: (1) impose monetary penalties on insurers for violations of any
provisions of the insurance laws; (2) to suspend or revoke an insurer's
certificate of authority; (3) to obtain injunctions or receivership with respect
to violations of the Insurance Holding Company System Registration law; and (4)
to apply to the court for orders appointing him as a receiver for the purposes
of rehabilitating or liquidating insolvent or financially unsound insurers.
The insurance laws also set forth the order of priority of claims against a
rehabilitating or liquidating insurer.
The Company's insurance business has been entirely restricted to variable
annuities and variable life insurance contracts. Pursuant to Delaware's
insurance laws, the Company has established separate investment accounts to
support these variable Insurance Products as well as for other purposes
permitted by law. Assets equal to the reserves and other Insurance Products'
liabilities with respect to the separate accounts are not chargeable with
liabilities arising out of any other business or account of the Company.
The Company's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Delaware Insurance
Department as codified in the NAIC's Accounting Practices and Procedures Manual.
Statutory-basis net loss and capital and surplus of the Company were as follows
(in thousands):
2002 2001 2000
----------------------------------------------------
Net loss $ (22,336) $ (7,662) $ (1,949)
Capital and surplus 8,562 25,368 26,506
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,
2002, the Company's total adjusted capital exceeded RBC requirements.
F-16
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS (CONTINUED)
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 contract owners as of the prior year-end and statutory
net income less realized capital gains for such prior year. The Company may pay
dividends 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 SLHA, within five business days after declaration and
at least ten days prior to payment. At December 31, 2002, 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. Additionally, the Company
has paid no dividends since the commencement of its operations.
6. COMMON AND PREFERRED STOCK OF PARENT
On December 31, 1998, pursuant to a Preferred Stock Purchase Agreement (the
"Preferred Stock Agreement"), SLHA issued 125,000 shares of non-voting,
nonconvertible, Series A Cumulative Preferred Stock with a par value of $0.10
and a stated value of $100 to Swiss Re for a purchase price of $12,500,000.
Under the Agreement, Swiss Re is entitled to a cumulative 7.53% dividend for
each year through December 31, 2003, increasing by 0.50% per annum thereafter,
payable annually in arrears on December 31 of each year, commencing on December
31, 1999, in cash, or, at the option of SLHA for the first two years, in
additional shares of Series A Cumulative Preferred Stock. In the event of
liquidation, Swiss Re is entitled to full face value plus any unpaid accrued
dividends prior to any payment to common stockholders or other junior
securities. The Preferred Stock Agreement also contains certain financial and
non-financial covenants, including restrictions related to the types of
investments the Company may hold, the incurrence of indebtedness, mergers and
acquisitions, and the maintenance of minimum capital and surplus.
On December 31, 1999, SLHA exercised its option to issue additional shares of
Series A Cumulative Preferred Stock as payment for the dividend due to Swiss Re.
The value of the shares issued in replacement of the dividend payment was
$941,250.
Effective October 1, 2000, SLHA entered into an Exchange Agreement with Swiss Re
under which Swiss Re exchanged 20,965.13 shares of the preferred stock for
109.88 shares of SLHA's Class A Common Stock, representing a 9.9% interest in
SLHA. In connection with the exchange, the Company also entered into a
Stockholders' Agreement with Swiss Re which, among other things, provides Swiss
Re with the right to designate one member of SLHA's board of directors as well
as providing a "put option" exercisable in the event that SIGI, through a
transfer of its ownership, would own less than 50% of SLHA. Under the put
option, upon notice to Swiss Re of a proposed sale of SLHA shares that would
reduce SIGI's ownership to less than 50%, Swiss Re could require SIGI to
purchase all, but not less than all, of the preferred and common stock then
owned by Swiss Re for an amount equal to $2,096,513 plus, for each share of
preferred stock, $100 plus, all accrued but unpaid dividends.
F-17
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
6. COMMON AND PREFERRED STOCK OF PARENT (CONTINUED)
During 2000, the Preferred Stock Agreement was amended (the "Amended
Agreement"), retroactive to April 1, 1999, to change the dividend rate
applicable to preferred shares that were not received as a dividend paid in kind
to 9.0474% for the period from April 1, 1999 through December 31, 2005. For
preferred shares owned which were received as a result of dividends paid in
kind, the dividend rate was changed to 7.53% through December 31, 2005. For the
period from January 1, 2006 through December 31, 2006, the dividend rate on all
outstanding preferred stock was changed to 9.3924% and thereafter increased by
0.58483% per annum.
SLHA may redeem all or a portion of the outstanding preferred shares for the
stated value plus all accrued and unpaid dividends on the redeemed shares,
provided that: (a) the stated value of the preferred shares outstanding after
any partial redemption must be equal to at least $5 million and (b) at the same
time, the Company purchase an equal percentage of the common shares held by
Swiss Re at a cost of $100 per share. Further, Swiss Re may not transfer or
otherwise dispose of any of the preferred or common shares prior to January 1,
2006, after which time any such transfer or disposition is subject to certain
first refusal rights of the Company.
On September 30, 2002, Swiss Re and Sage Group reached an agreement to amend
certain terms of the Preferred Stock Agreement. Under the terms of the original
Preferred Stock Agreement, if the statutory-basis capital and surplus of Sage
Life 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 a
requisite majority of the voting interest in SLHA. Under the terms of the
Amended Agreement, the required minimum level for Sage Life's statutory-basis
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
addition, Swiss Re also agreed to defer the December 31, 2002 dividends payable
by SLHA 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
Sage Life's business.
At December 31, 2002, Sage Life's statutory capital and surplus was
approximately $8,562,000 million, after making provision of approximately
$12,661,000 million for certain charges in connection with future run-off
expenses, involuntary termination benefits, contract termination and other exit
costs. Consequently, subject to obtaining requisite regulatory approvals, Swiss
Re now has the right to exercise its option under the terms of the Preferred
Stock Agreement to assume voting control of SLHA. Swiss Re has not yet
exercised, and has yet to indicate whether it would exercise, such an option.
7. 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. At December
31, 2002 and 2001 amounts due (to) from SIGI under this agreement were
approximately $(430,000) and $1,082,000, respectively.
F-18
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company receives administrative service fees for investments held under
management by Sage Advisors, an affiliated company. Sage Advisors is the
investment advisor for Sage Life Investment Trust. At December 31, 2002, the
Trust is comprised of four investment funds that are available to variable
contract owners of the Company. Administrative service fees earned on
investments held under management by Sage Advisors were approximately $40,000,
$37,000, and $50,000 in 2002, 2001, and 2000, respectively. At December 31, 2002
and 2001, approximately $26,000 and $7,000, respectively, were due from Sage
Advisors.
The Company has 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. During
the first three quarters of 2002 and throughout 2001, the Company paid
wholesaling allowances of approximately $404,000 and $413,000, respectively, to
Sage Distributors, respectively.
The Company, Sage Distributors and SIGI agreed to amend the Underwriting
Agreement and Cost Sharing Agreement so that the Company would bear, subject to
certain limitations, the full costs of Sage Distributors marketing, distribution
and overhead costs effective October 1, 2002. This amendment lapsed on December
31, 2002.
During 2002, 2001 and 2000, the Company paid $200,000, $226,000 and $60,000,
respectively, to a law firm of which a director of the Company is a partner.
Services provided by this law firm were primarily in the areas of regulatory
compliance and general corporate matters.
8. 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. During the third
quarter of 2002, the Company's surplus fell below that level. The Company
contacted officials in the Company Regulation Bureau of the Michigan Insurance
Department to inform them of this situation. The Michigan Insurance Department
has not restricted the Company's license. The Company continues to keep the
Insurance Department of Michigan appraised of the Company's capital raising /
sale activities.
9. 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 $109,000, $86,000 and $78,000 in 2002, 2001 and 2000,
respectively. The Plan was terminated with effect from January 1, 2003 with all
assets vesting immediately to the benefit of participating employees who will
receive a distribution of their fully vested accounts.
F-19
Sage Life Assurance of America, Inc.
Notes to Consolidated Financial Statements (Continued)
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes information with respect to the operations of the
Company on a quarterly basis:
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------------
(in thousands)
2002
Net investment income $ 381 $ 401 $ 372 $ 381
Total revenues 547 (392) 584 265
Total benefits and expenses 2,870 2,893 2,041 9,170
Net loss (2,323) (3,286) (1,458) (8,904)
2001
Net investment income $ 608 $ 652 $ 502 $ 346
Total revenues 626 680 536 429
Total benefits and expenses 1,999 2,593 2,458 2,499
Net loss (1,373) (1,914) (1,921) (2,071)
Certain quarterly amounts presented in the table above have been reclassified to
conform to the financial statement presentation included in the accompanying
statements of operations.
F-20
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.
/s/ Terry Eleftheriou
Terry Eleftheriou
Executive Vice President
& Chief Financial Officer
(Principal Financial Officer)
/s/ Gregory S. Gannon
Gregory S. Gannon
Vice President and Controller
(Chief Accounting Officer)
Date: April 15, 2003
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/ ROBIN I. MARSDEN April 15, 2003
--------------------
Robin I. Marsden
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ H. LOUIS SHILL April 15, 2003
------------------
H. Louis Shill
Chairman and Director
/s/ PAUL C. MEYER April 15, 2003
-----------------
Paul C. Meyer
Director
/s/ RICHARD D. STARR April 15, 2003
--------------------
Richard D. Starr
Director
/s/ DR. MEYER FELDBERG April 15, 2003
----------------------
Dr. Meyer Feldberg
Director
/s/ DONALD C. WAITE, III April 15, 2003
------------------------
Donald C. Waite, III
Director
/s/ JOHN A. BENNING April 15, 2003
-------------------
John A. Benning
Director
/s/ MITCHELL R. KATCHER April 15, 2003
-----------------------
Mitchell R. Katcher
Senior Executive Vice President, Chief
Operating Officer, Chief Actuary and Director
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Robin I. Marsden, President and Chief Executive Officer certify that:
1. I have reviewed this Annual Report on Form 10-K of Sage Life Assurance of
America Inc.;
2. Based on my knowledge, this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation Date"); and
(c) Presented in this Annual 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
Annual 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: President & Chief Executive Officer
Date: April 15, 2003
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Terry Eleftheriou, Chief Financial Officer certify that:
1. I have reviewed this Annual Report on Form 10-K of Sage Life Assurance of
America Inc.;
2. Based on my knowledge, this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation Date"); and
(c) Presented in this Annual 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
Annual 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: April 15, 2003
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Articles of Incorporation of Sage Life Assurance of America,
Inc., as amended to date was filed as Exhibit 6 to the
Registration Statement on Form N-4 (File No.333-43329) dated
December 24, 1997, and is incorporated herein by reference.
3.2 Amended and restated By-Laws of Sage Life Assurance of
America, Inc. was filed as Exhibit 3.2 to the Company's Form
10-K for the Fiscal year ended December 31, 2001, and is
incorporated herein by reference.
10.1 Services Agreement with Financial Administrative Services,
Inc. was filed as Exhibit 8 to Pre-Effective Amendment No. 2
to the Registration Statement on Form N-4 (File No.333-43329)
dated January 28, 1999, and is incorporated herein by
reference.
10.2 Reinsurance Agreement (Modified Coinsurance Treaty) with Swiss
Re Life and Health America, Inc. (formerly Life Reassurance
Corporation of America) was filed as Exhibit 10.2 to the
Company's Form 10K for the Fiscal Year ended December 31,
2000, and is incorporated herein by reference. Confidential
treatment has been requested for portions of this document.
Amendment No.1 to Modified Coinsurance Treaty was filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
March 31, 2002.
10.3+ Employment Agreement with Robin I. Marsden was filed as
Exhibit 10.3 to the Company's Form 10-K for the Fiscal Year
ended December 31, 2000 and is incorporated herein by
reference.
10.3(a)+* Letter dated November 11, 2002, amending Employment
Agreement with Robin I. Marsden.
10.4+ Employment Agreement with Mitchell R. Katcher was filed as
Exhibit 10.4 to the Company's Form 10-K for the Fiscal Year
ended December 31, 2000 and is incorporated herein by
reference.
10.4(a)+* Letters dated November 11, 2002, and September 15, 2002,
amending Employment Agreement with Mitchell R. Katcher.
10.5+ Employment Agreement with Lincoln B. Yersin was filed as
Exhibit 10.5 to the Company's Form 10-K for the Fiscal Year
ended December 31, 2000 and is incorporated herein by
reference.
10.6+ Sage Insurance Group, Inc. Non-qualified Compensation Plan was
filed as Exhibit 10.6 to the Company's Form 10-K for the
Fiscal Year ended December 31, 2000 and is incorporated herein
by reference.
10.7+ Sage Insurance Group Rabbi Trust Agreement was filed as
Exhibit 10.7 to the Company's Form 10-K for the Fiscal Year
ended December 31, 2000 and is incorporated herein by
reference.
10.8+ Employment Agreement with Nancy F. Brunetti
10.8(a)+* Letters dated June 10, 2002, and December 17, 2002, amending
Employment Agreement with Nancy F. Brunetti.
10.9+ Employment Agreement with Jeffrey C. Gordon
10.10+* Employment Agreeent with Terry Eleftheriou
10.11* Cost Sharing Agreement with Sage Insurance Group, Inc.,
including Amendments No.1 and 2
10.12* Underwriting Agreement with Sage Distributors, Inc., including
Amendment No.1
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 15(c).