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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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, SUITE 200, 06905
STAMFORD, CONNECTICUT
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 321-8999
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Former address: 300 Atlantic Street, Stamford, Connecticut, 06901 (Former name,
former address and former fiscal year, if changed since last report).
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 August 1, 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 JUNE 30, 2003
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002. 1
Consolidated Statements of Operations for the Three and Six-Month Periods Ended June 30, 2003 2
and 2002
Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2003 and 2002. 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
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 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
------------- -------------
ASSETS
Investments:
Fixed maturity securities available for sale $ 12,348,434 $ 13,135,718
Equity securities available for sale -- 759,000
------------- -------------
Total Investments 12,348,434 13,894,718
Cash and cash equivalents 6,968,262 9,281,625
Accrued investment income 201,514 202,979
Deferred acquisition costs 2,451,062 3,063,793
Intangible assets 4,348,765 4,348,765
Other assets 992,428 929,220
Separate account assets 126,605,886 134,284,573
------------- -------------
Total Assets $ 153,916,351 $ 166,005,673
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred gain from modified coinsurance agreement $ 2,018,936 $ 2,301,897
Payable to affiliate 53,798 429,954
Reinsurance payables 1,633,778 851,368
Unearned revenue 17,012 23,951
Deferred federal income taxes 535,380 346,007
Accrued expenses and other liabilities 4,992,455 5,877,338
Separate account liabilities 126,605,886 134,284,573
------------- -------------
Total Liabilities 135,857,245 144,115,088
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 (41,650,440) (37,618,830)
Accumulated other comprehensive gain 871,792 671,661
------------- -------------
Total Stockholder's Equity 18,059,106 21,890,585
------------- -------------
Total Liabilities and Stockholder's Equity $ 153,916,351 $ 166,005,673
============= =============
See accompanying notes to consolidated financial statements.
1
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES:
Net investment income $ 236,246 $ 401,483 $ 631,883 $ 782,184
Realized capital (losses) gains 98,279 (898,244) 98,279 (910,840)
Administrative service fees 17,778 (1,797) 32,224 17,240
Contract charges and fees 461,265 105,368 764,192 264,827
----------- ----------- ----------- -----------
Total Revenues 813,568 (393,190) 1,526,578 153,411
BENEFITS AND EXPENSES:
Contract owner benefits 286,899 394,836 794,660 701,982
Acquisition expenses 164,773 (37,793) 378,693 460,558
General & administrative expenses 1,231,949 2,535,307 4,384,835 4,599,693
----------- ----------- ----------- -----------
Total Benefits and Expenses 1,683,621 2,892,350 5,558,188 5,762,233
----------- ----------- ----------- -----------
Net Loss $ (870,053) $(3,285,540) $(4,031,610) $(5,608,822)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
SAGE LIFE ASSURANCE OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-----------------------------
2003 2002
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,031,610) $ (5,608,822)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of acquisition costs 378,693 460,558
Amortization of bond discount/premium 56,786 150,854
Realized capital (gains)/losses (61,566) 24,403
Changes in:
Accrued investment income 1,465 21,426
Payable to affiliates (376,156) 1,080,464
Unearned revenue (6,939) 17,888
Reinsurance payables 782,410 (721,611)
Acquisition costs deferred 66,563 (626,335)
Deferred gain from modified coinsurance agreement (282,961) 702,851
Accrued expenses and other liabilities (497,001) 824,606
Other assets (63,208) 4,076
----------- ------------
Net Cash Used In Operating Activities (4,033,152) (3,669,642)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayment of fixed maturity securities 900,000 883,680
Proceeds from sale of equity securities 820,161 --
----------- ------------
Net Cash Provided By Investing Activities 1,720,161 883,680
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent -- 3,740,773
----------- ------------
Net Cash Provided By Financing Activities 3,740,773
----------- ------------
(Decrease)/Increase in Cash and Cash Equivalents (2,313,363) 954,811
Cash and Cash Equivalents at Beginning of Period 9,281,625 9,383,386
----------- ------------
Cash and Cash Equivalents at End of Period $ 6,968,262 $ 10,338,197
=========== ============
See accompanying notes to consolidated financial statements.
3
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 and six-month
periods ended June 30, 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, 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.
4
In April 2003, the Derivatives Implementation Group released Statement 133
Implementation Issue No. B36 "Embedded Derivatives: Modified Coinsurance
Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That
Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor
under Those Instruments" (Issue B36). Issue B36 affects modified coinsurance
arrangements between reinsurers and ceding insurance companies and similar
arrangements, which typically include an arrangement for passing a return that
is linked to the performance of investments held by the ceding company to the
reinsurer. Issue B36 requires bifurcation and fair value accounting and
reporting of instruments that expose a creditor/lender to credit or default risk
of a company other than the debtor/issuer, even if the debtor/issuer owns as
investment assets the third-party securities to which the creditor/lender is
exposed. The Company is reviewing its reinsurance contracts to determine the
impact of this implementation guidance, which is effective October 1, 2003.
3. COMPREHENSIVE LOSS
The components of comprehensive loss, net of deferred federal income taxes, for
the three and six-months ended June 30, 2003 and 2002 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- -----------------------------
2003 2002 2003 2002
---------- ------------ ------------ ------------
Net loss $(870,053) $(3,285,540) $(4,031,610) $(5,608,822)
Change in net unrealized investment gains
and losses 329,679 236,293 200,131 (64,439)
--------- ----------- ----------- -----------
Comprehensive loss $(540,374) $(3,049,247) $(3,831,479) $(5,673,261)
========= =========== =========== ===========
Accumulated other comprehensive gain at June 30, 2003 and December 31, 2002,
consist entirely of unrealized gains (losses) on investments, net of related
deferred federal income taxes.
4. REINSURANCE
At the date of issue, the Company's variable insurance products (the
"Contracts") resulted 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 Company amended the Modco Agreement to
include certain variable annuity products introduced 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 $610,000, $636,000 and $94,000,
respectively, for the period ended June 30, 2003, compared with $33,295,000,
$188,000 and $98,000 for the period ended June 30, 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
5. SEGMENT REPORTING
The Company operates in one business segment, the variable insurance product
market. Products we offered before the general business retrenchment discussed
in Item 2 included combination fixed and variable deferred annuities and
combination fixed and variable life insurance products.
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 expenses 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
June 30, 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. The Company further revised its assumptions of future
surrender and withdrawal experience and the level of future administrative
service fees at June 30, 2003. These revisions had an immaterial effect on DAC
at June 30, 2003.
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 $3,095,000 and $5,404,000, respectively, at
June 30, 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.
6
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 United States Securities and Exchange Commission
("SEC") filings.
The risks described herein 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 establishing the facilities
necessary to administer its in-force business and meet its ongoing contract
holder obligations. 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.
7
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"). Currently, Sage Insurance Group Inc. ("SIGI") owns 90.1% and
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 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 the Company's 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 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
8
October 1, 2002. This amendment expired on December 31, 2002. Nonetheless, 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 is in the process of forming a subsidiary broker-dealer to replace
Sage Distributors as the principal securities underwriter of the Contracts and
of shares of the Company's separate accounts. The Company took this action due
to concerns that Sage Distributors might be unable to satisfy the net capital
requirements of a limited purpose broker-dealer as prescribed by the SEC and the
National Association of Securities Dealers ("NASD") Rules due to litigation that
Sage Distributors was involved in and any other unforeseeable events that could
adversely impact Sage Distributors net capital. Once the new broker-dealer is
established as a subsidiary of the Company, the Company will capitalize such
subsidiary at least at a level satisfying the net capital requirements,
currently $6,000, for a limited purpose broker-dealer.
The Company's products formerly included as investment options four series funds
of Sage Life Investment Trust (the "Trust"), a registered management investment
company sponsored by the Company. The Trust was managed by Sage Advisors, Inc.
("Sage Advisors"), an SEC-registered investment adviser and a subsidiary of
SIGI. SIGI determined that it was unable to fund the continuing operating losses
that Sage Advisors incurred in connection with its management agreement with the
Trust. Accordingly, Sage Life 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
substitution of shares occurred at the close of business 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 permitted the termination of Sage Advisors' agreement
with the Trust.
In connection with the closure of the Trust, the Company obtained approval from
the Delaware Insurance Department to settle certain business obligations of Sage
Advisors and the Trust that Sage Advisors was unable to satisfy which the
Company believed was in the best interests of its contract holders. These
obligations related to services provided to the Trust for the month of May 2003
by third party service providers and certain legal costs incurred in closing the
Trust. The amounts borne by the Company were approximately $70,000.
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
represented a significant portion of the Company's revenues during 2002. 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
majority of the increased levels of contract charges and fees in 2003 have been
driven by significantly higher surrender charges resulting from increased
contract holder surrender activity. Surrender charges were $471,000 and $53,000
for the six month periods ended June 30, 2003 and 2002, respectively.
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 Sage Life's in-force
Contracts. Effective January 1, 2003, the Company suspended all marketing and
underwriting activities and ceased all
9
new sales. As a result, the Company's entire internal and external wholesaling
and marketing staff were terminated in mid-January 2003 and further staff
retrenchments were effected in subsequent months during the year. The Company
has retained a core group of employees to effect the phased implementation of
business discontinuance activities over the remainder 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.
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
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 had 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,
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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.
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
and Sage Group also agreed to defer the December 31, 2002 dividends payable by
Sage Life Holdings and 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 State 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 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 approvals. Sage Group and Swiss Re have agreed the terms
under which an affiliate of Swiss Re would acquire all of the common stock of
the Company's immediate parent, Sage Life Holdings. Pursuant to this agreement,
Swiss Re filed an application with the Delaware Insurance Department on June 20,
2003, in order to obtain the necessary regulatory approval. This 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, 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.
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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."
- "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 six
months ended June 30, 2003. 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,
2002.
ITEM 4. CONTROLS AND PROCEDURES
(1) DISCLOSURE CONTROLS AND PROCEDURES: As of the end of the period covered by
this report, the Company evaluated the effectiveness of the design and operation
of disclosure controls and procedures. The Company conducted this evaluation
under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer.
a) Definition of Disclosure Controls and Procedures: Disclosure controls and
procedures are controls and other procedures that are designed with the
objective of ensuring that information required to be disclosed in our
periodic reports filed under the Exchange Act, such as this report, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As defined by the SEC, such
disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial
Officer, in such a manner as to allow timely disclosure decisions.
b) Limitations on the Effectiveness of Disclosure Controls and Procedures and
Internal Control over Financial Reporting: The Company recognizes that a
system of disclosure controls and procedures as well as a system of
internal control over financial reporting, no matter how well conceived
and operated, cannot provide absolute assurance that the objectives of the
system are met. Further, the design of such a system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute
assurance that all control issues have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented in a number of ways. Because of
the inherent limitations in a cost-effective control system, system
failures may occur and not be detected.
c) Conclusions with Respect to Our Evaluation of Disclosure Controls and
Procedures: Subject to the limitations described above, the Chief
Executive Officer and Chief 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.
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(2) CHANGES IN INTERNAL CONTROLS. As part of the general business retrenchment,
the Company has reduced the number of permanent employees to a core group of 10
key individuals that the Company believes is adequate to meet the current needs
of the business. This new management structure places greater reliance on
certain key personnel and third party service providers. Subject to the
foregoing, 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 our evaluation. As of the date
hereof, there were no significant deficiencies or material weaknesses in the
Company's internal controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiary, Sage New
York, are involved in any lawsuits. However, the Company's affiliated
broker-dealer, Sage Distributors, recently settled litigation previously
disclosed in the Company's periodic reports. This litigation was brought against
Sage Distributors and not the Company. A release obtained in connection with
this settlement fully discharges the Company from all potential claims by the
plaintiff.
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
ITEMS 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002
32.0 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended June 30,
2003.
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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: August 1, 2003
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