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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _______________
COMMISSION FILE NUMBERS -- 333-77441, 333-77437, 333-78583, 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 OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
969 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06905
(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). [ ]Yes [X]No
As of May 20, 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.
SAGE LIFE ASSURANCE OF AMERICA, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
Part I -- Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002. 3
Consolidated Statements of Operations for the Three-Month Periods
Ended March 31, 2003 and 2002. 4
Consolidated Statements of Cash Flows for the Three-Month Periods
Ended March 31, 2003 and 2002. 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II -- Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters to Vote of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K Not Applicable
Signatures 16
Certification of Principal Executive Officer 17
Certification of Principal Financial Officer 18
Page 2 of 18
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -------------
ASSETS
Investments:
Fixed maturity securities available for sale $ 13,134,806 $ 13,135,718
Equity securities available for sale 758,000 759,000
------------- -------------
Total Investments 13,892,806 13,894,718
Cash and cash equivalents 5,153,486 9,281,625
Accrued investment income 249,010 202,979
Receivable from affiliate 546,224 --
Deferred acquisition costs 2,526,028 3,063,793
Intangible assets 4,348,765 4,348,765
Other assets 894,663 929,220
Separate account assets 124,214,006 134,284,573
------------- -------------
Total Assets $ 151,824,988 $ 166,005,673
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred gain from modified coinsurance agreement $ 2,142,419 $ 2,301,897
Payable to affiliate -- 429,954
Reinsurance payables 1,258,990 851,368
Unearned revenue 23,425 23,951
Deferred federal income taxes 283,498 346,007
Accrued expenses and other liabilities 5,303,169 5,877,338
Separate account liabilities 124,214,006 134,284,573
------------- -------------
Total Liabilities 133,225,507 144,115,088
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 56,337,754
Deficit (40,780,386) (37,618,830)
Accumulated other comprehensive gain 542,113 671,661
------------- -------------
Total Stockholder's Equity 18,599,480 21,890,585
------------- -------------
Total Liabilities and Stockholder's Equity $ 151,824,988 $ 166,005,673
============= =============
See accompanying notes to consolidated financial statements.
Page 3 of 18
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------------
2003 2002
----------- -----------
REVENUES:
Net investment income $ 395,637 $ 380,702
Realized capital (losses) gains -- (12,596)
Administrative service fees 14,446 19,037
Contract charges and fees 302,927 159,459
----------- -----------
Total Revenues 713,010 546,602
BENEFITS AND EXPENSES:
Contract owner benefits 507,761 307,146
Acquisition expenses 213,920 498,351
General & administrative expenses 3,152,886 2,064,387
----------- -----------
Total Benefits and Expenses 3,874,567 2,869,884
----------- -----------
Net Loss $(3,161,557) $(2,323,282)
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4 of 18
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,161,557) $(2,323,282)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of acquisition costs 213,920 498,351
Amortization of bond discount/premium 26,470 20,342
Realized capital losses -- 12,596
Changes in:
Accrued investment income (46,031) (43,032)
Receivable from affiliate (976,178) (1,688,836)
Unearned revenue (526) 8,336
Reinsurance receivables 407,623 (1,597,617)
Acquisition costs deferred 52,546 (434,937)
Deferred gain from modified coinsurance agreement (159,478) 410,678
Accrued expenses and other liabilities (519,647) 714,154
Other assets 34,720 (37,979)
----------- -----------
Net Cash Used In Operating Activities (4,128,139) (4,461,226)
CASH FLOWS FROM INVESTING ACTIVITIES
Net Cash Provided By Investing Activities -- 483,680
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent -- 3,000,000
----------- -----------
Net Cash Provided By Financing Activities -- 3,000,000
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (4,128,139) (977,546)
Cash and Cash Equivalents at Beginning of Period 9,281,625 9,383,386
----------- -----------
Cash and Cash Equivalents at End of Period $ 5,153,486 $ 8,405,840
=========== ===========
See accompanying notes to consolidated financial statements.
Page 5 of 18
SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Sage Life
Assurance of America, Inc. ("Sage Life" or the "Company" or "We") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by accounting principles generally accepted in the
United States for complete financial statements. These unaudited financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Form 10-K for the
year ended December 31, 2002. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, reference
should be made to the consolidated financial statements and footnotes thereto
included in Sage Life's annual report on Form 10-K for the year ended December
31, 2002.
2. NEW ACCOUNTING STANDARDS
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 discontinue new business and 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 at December 31, 2002.
The remaining balance included in 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.
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.
Page 6 of 18
3. COMPREHENSIVE LOSS
The components of comprehensive loss, net of deferred federal income taxes, for
the three months ended March 31, 2003 and 2002 were as follows:
THREE MONTHS ENDED
MARCH 31
----------------------------
2003 2002
----------- -----------
Net loss $(3,161,557) $(2,323,282)
Change in unrealized investment gains and losses (129,548) (300,732)
----------- -----------
Comprehensive loss $(3,291,105) $(2,624,014)
=========== ===========
4. REINSURANCE
At the date of issue, the Company's variable insurance products (the
"Contracts") result in a net cash outflow in that 100% of Contract owner
premiums received by the Company are invested in separate accounts supporting
the Contracts, leaving a cash strain caused by the payment of commissions and
other policy acquisition expenses. In 2000, the Company entered into a
multi-year quota share modified coinsurance agreement (the "Modco Agreement")
with Swiss Re Life and Health America Inc. ("Swiss Re", formerly Life
Reassurance Corporation of America) under which the Company 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 cash
flow strain from new business.
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 Contract
owner benefits ceded to Swiss Re were $537,000, $312,000 and $30,000,
respectively, for the quarter ended March 31, 2003, compared with $16,464,000,
$84,000 and $38,000 for the quarter ended March 31, 2002.
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.
5. SEGMENT REPORTING
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.
Page 7 of 18
6. SIGNIFICANT ACCOUNTING POLICIES
Deferred Acquisition Costs, Deferred Gain and Unearned Revenue
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. At
March 31, 2003 and December 31, 2002, we 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 and place itself in
run-off. This revision in future assumptions had an immaterial effect on DAC at
December 31, 2002.
Restructuring Costs
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 maintained provisions of $3,060,000 and $5,404,000, respectively, at
March 31, 2003 and December 31, 2002 for involuntary termination benefits,
contract termination and other exit costs resulting from its decision to cease
new business activities.
Other Accounting Policies
For fuller information on the Company's significant accounting policies,
reference should be made to the consolidated financial statements and footnotes
thereto included in Sage Life's annual report on Form 10-K for the year ended
December 31, 2002.
Page 8 of 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS - CAUTIONARY LANGUAGE
The pages that follow review the results of operations of Sage Life and its
consolidated financial condition including liquidity and capital resources.
Where appropriate, factors that may affect future financial performance are
identified and discussed. Certain statements made in this report are
"forward-looking statements" within the meaning of the Securities Litigation
Reform Act of 1995 that provides a "safe-harbor" for forward-looking statements.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and include words like "believe", "expect", "anticipate",
"project", "will", "shall" and other words or phrases with similar meaning which
speak only as of their dates.
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are not historical facts. Although such
forward-looking statements reflect the current views of the Company and
management with respect to future events and financial performance, there are
known and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those contemplated or indicated by such
forward-looking statements. These include, but are not limited to, risks and
uncertainties inherent in or relating to: (i) the ability of the Company and
certain of its affiliates to obtain access to capital for the funding of their
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) increasing
competition in the markets in which the Company operates; (vi) changes in
generally accepted accounting principles; and (vii) the risks and uncertainties
included in the Company's Securities and Exchange Commission filings.
The risks included here are not exhaustive. The Company operates in a rapidly
changing and competitive environment. New risk factors emerge from time to time
and it is not possible for management to predict all such risk factors. Further,
it is not possible to assess the impact of all risk factors on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ from those contained in any forward-looking statements.
Accordingly, there can be no assurance that actual results will conform to the
forward-looking statements in the Quarterly Report. In addition, neither the
Company nor its management undertakes any obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
BUSINESS OVERVIEW
Sage Life is a stock life insurance company 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. Subject to the
matter noted below, 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. 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 now 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 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 to prohibit any new product sales.
Page 9 of 18
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 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. Additional information regarding the current
state of affairs with respect to Swiss Re's investment in Sage Life Holdings is
provided below in the "Liquidity and Capital Resources" section.
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 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.
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
Page 10 of 18
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 expired on December 31, 2002. Sage Distributors' ongoing
operating costs were largely eliminated with the termination of its wholesaling
and marketing staff and the cessation of new business activities as a result of
the general business retrenchment.
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 1 of Part II, "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, currently
$6,000, for a limited purpose broker-dealer.
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. 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 obtained approval from the SEC for an
Order of Substitution allowing it to substitute shares of other unaffiliated
registered management investment companies for the shares of the Trust in its
products. The Company plans to effect the substitution of shares on May 30,
2003, thereby removing all assets of the Trust and substituting for the benefit
of affected Contract Owners shares of unaffiliated registered management
investment companies. This in turn will permit the termination of Sage Advisors'
agreement with the Trust and end the operating losses.
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 the most 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.
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 a core group of
employees to effect the phased implementation of business discontinuance
activities over the course of 2003 and the first quarter of 2004. This includes
further planned retrenchments to reduce staff down to a number appropriate for
the efficient administration of the run-off of the in-force business. General
and administrative expenses for the current quarter include regular operating
expenses that are expected to decline from their current levels over the course
of 2003.
Page 11 of 18
We do not currently reflect the benefits of deferred federal income taxes in our
results.
LIQUIDITY AND CAPITAL RESOURCES
Funding of Cash Needs
From the beginning of 1997 until the general business retrenchment, the
Company's primary cash needs were for the funding of the distribution of its
insurance products and the establishment and maintenance of its operating
infrastructure. 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, 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.
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) 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.
Page 12 of 18
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.
At December 31, 2002, the Company's statutory capital and surplus had declined
to 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 were
established in accordance with statutory accounting principles prescribed by the
Insurance Department of the Commonwealth of Delaware (the "Delaware Insurance
Department") and comprised $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 (referred to as the
"statutory run-off reserve") 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 statutory run-off reserve. The
Company intends to perform a detailed review of the statutory run-off reserve
annually as part of its cash flow testing.
Given this decline in the Company's statutory-basis capital and surplus, Swiss
Re has recently indicated to Sage Group its intent to exercise its rights under
the Preferred Stock Agreement and assume control of the Company subject to
obtaining the required regulatory approval. Sage Group and Swiss Re have
discussed terms under which an affiliate of Swiss Re would acquire all of the
common stock of the Company's immediate parent, Sage Life Holdings. Swiss Re and
the Company's management now intend to seek approval for such a transaction from
the Delaware Insurance Department, the Company's primary state regulator. This
regulatory approval process is expected to be completed in August 2003. Pending
completion of this transaction, certain material management decisions, including
(i) any change in management or employee agreements, plans or commitments, (ii)
the incurral of any indebtedness, and (iii) any payments, distributions, or
transfers by the Company or Sage Life Holdings to any affiliate outside of the
ordinary course of business, will continue to require the formal approval of
Swiss Re in accordance with the terms of the September 30, 2002 Letter Agreement
between Sage Group and Swiss Re.
Contract Obligations and Customer Service
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
separate accounts that are 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.
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 "BBB"
(Good) by Fitch Ratings, and the rating is described as "evolving." 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."
Page 13 of 18
- - "BBB" (Good) per Fitch Ratings: "Insurers are viewed as possessing good
capacity to meet policyholder and contract obligations. Risk factors are
somewhat high, and the impact of any adverse business and economic factors
is expected to be material, yet manageable."
Each of the foregoing agencies downgraded the Company's ratings on April 9 and
April 23, 2003, respectively. These rating declines are related to matters
disclosed above, including uncertainty about the future ownership of the
Company. There can be no assurances that the rating agencies will not lower the
Company's ratings further.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk during the
three months ended March 31, 2002. The Company has provided a discussion of its
market risks in Item 7A "Quantitative and Qualitative Disclosures About Market
Risk" of Part II Sage Life's annual report on Form 10-K for the year ended
December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Principal
Executive Officer and Principal Financial Officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures [as
defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act")] as of a date within 90 days before the filing date
of this quarterly report. Based on that evaluation, the Principal Executive
Officer and the Principal Financial Officer have concluded that the Company's
disclosure controls and procedures are effective, providing them with material
information relating to the Company as required to be disclosed in the reports
the Company files or submits under the Exchange Act on a timely basis.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls.
Page 14 of 18
PART II. OTHER INFORMATION
ITEM 1. 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 claim seeks $1 million
in damages, which includes $500,000 for defamation, $234,776 for contract
damages, and $265,224 for punitive damages and attorneys' fees.
The wholesaler sought, and received, an ex parte prejudgment remedy in the
amount of $1 million from a Connecticut state court; the prejudgment remedy
attached 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. Sage Distributors exercised its right to challenge the
prejudgment remedy. On April 29, 2003, the court granted Sage Distributor's
motion to dissolve the ex-parte prejudgment remedy in full, finding that the
wholesaler did not demonstrate that there is a probable cause to believe that he
will ultimately prevail on the merits of his claims against Sage Distributors
and prevail in the amount of $1,000,000. No claims have been brought against
the Company with respect to this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- --------------------------------------------
99.1 Certification of Chief Executive Officer
99.2 Certification of Principal Financial Officer
(b) Reports on Form 8-K
There were two reports filed on Form 8-K during the quarter ended March
31, 2003.
The 8-K report filed on January 3, 2003, reported that the Company had
suspended its marleting and underwriting activities and had ceased all new
sales of variable annuity and variable life insurance products with effect
from January 1, 2003.
The 8-K report filed on March 25, 2003, reported that the Company's
statutory capital and surplus had fallen below levels agreed to with Swiss
Re after making provisions for certain non-recurring changes arising from
the general business retrenchment. It also reported that Swiss Re had the
right under the preferred stock agreement to exercise control over Sage
Life Holdings, the Company's parent, but had not indicated its intent to
do so.
Page 15 of 18
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: May 20, 2003
Page 16 of 18
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Robin I. Marsden, President and Chief Executive Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sage Life Assurance of
America Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Robin I. Marsden
Name: Robin I. Marsden
Title: Chief Executive Officer
Date: May 20, 2003
Page 17 of 18
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Terry Eleftheriou, Chief Financial Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sage Life Assurance of
America Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Terry Eleftheriou
Name: Terry Eleftheriou
Title: Chief Financial Officer
Date: May 20, 2003
Page 18 of 18