10-Q 1 y63081e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _______________ COMMISSION FILE NUMBERS - 333-77441, 333-77437, 333-87174, 333-87178, 333-87182 AND 333-87950 SAGE LIFE ASSURANCE OF AMERICA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ~~DELAWARE 51-0258372 (STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)~~

300 ATLANTIC STREET, STAMFORD, CONNECTICUT 06901 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS) (ZIP CODE) (203) 602-6500 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]Yes [ ]No As of August 14, 2002 there were 1,000 shares of outstanding common stock, par value $2,500 per share, of the registrant. All outstanding shares were owned by Sage Life Holdings of America, Inc. SAGE LIFE ASSURANCE OF AMERICA, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2002 TABLE OF CONTENTS

2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SAGE LIFE ASSURANCE OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements. 3 SAGE LIFE ASSURANCE OF AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to consolidated financial statements. 4 SAGE LIFE ASSURANCE OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to consolidated financial statements. 5 SAGE LIFE ASSURANCE OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated unaudited financial statements of Sage Life Assurance of America, Inc. (the "Company") have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. 2. NEW ACCOUNTING STANDARDS On January 1, 2002, the Company adopted Statement of Financial Accounting Standards Nos. 141, Business Combinations and 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the new Standards. Other intangible assets will continue to be amortized over their useful lives. In adopting the new Standards, the Company reclassified certain intangible assets, namely state insurance licenses, that were previously reported as a component of goodwill arising from the original purchase of the predecessor company, which became Sage Life Assurance Company of America, Inc. Those assets, totaling $4,349,000, have indefinite lives and, as a result, are not being amortized. The Company reviewed the fair value of those assets, based on recent transactions, and determined that no impairment of those assets exists. The remaining goodwill, totaling $1,428,000, also is not being amortized in accordance with the Statements and was reviewed for impairment during the first half of 2002. Using a discounted cash flow approach, the Company determined that its goodwill was not impaired. The Company reviews its goodwill and intangible assets annually and records impairment, if any, in current period operations. 3. COMPREHENSIVE LOSS The components of comprehensive loss, net of deferred federal income taxes, for the three and six months ended June 30, 2002 and 2001 were as follows:

Accumulated other comprehensive gain at June 30, 2002 and December 31, 2001, consist entirely of unrealized gains/(losses), net of related deferred federal income taxes. 6 4. MODIFIED COINSURANCE AGREEMENT During the first quarter of 2002, the Company's quota share modified coinsurance agreement ("the Modco Agreement") with Swiss Re Life and Health America, Inc. ("Swiss Re", formerly Life Reassurance Corporation of America) was amended to include certain variable annuity products introduced by the Company during the fourth quarter of 2001. The amendment resulted in a reduction of gross written premium, contract charges and contract owner benefits of approximately $9,312,000, $8,000 and $5,000, respectively. Excluding the aforementioned retroactive effects of the amendment, premiums, contract charges and fees and contract owner benefits ceded to Swiss Re were $33,295,000, $188,000 and $98,000, respectively for the period ended June 30, 2002, compared with $14,146,000, $39,000 and $45,000 for the period ended June 30, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Business Overview Sage Insurance Group, Inc. ("SIGI") acquired the Company on December 31, 1996 and, since that date, the Company has been building an infrastructure, obtaining necessary financial ratings, and developing products, systems and administration, to support its insurance underwriting and marketing activities. The Company's ongoing business strategy is to focus on the development, underwriting, and marketing of variable annuity and variable life insurance products (the "Contracts"). Obligations under these Contracts are supported by (1) variable accounts -- determined by the value of investments held in separate accounts, and (2) fixed accounts -- backed by investments held in separate accounts. The assets in these separate accounts, supporting the Contracts to which they relate, are not chargeable with liabilities arising out of any other business the Company may conduct. The Company's initial marketing focus has been to distribute its products through banks, financial planning companies and regional broker dealers. The Company anticipates that, over the long-term, its distribution channels will expand to include wirehouses. The Company is a wholly-owned subsidiary of Sage Life Holdings of America, Inc. ("Sage Life Holdings"). SIGI owns 90.1% of the common stock of Sage Life Holdings. Swiss Re owns the remaining 9.9% of the common stock of Sage Life Holdings. Before acquiring Sage Life Holding's common stock, Swiss Re invested $12,500,000 in non-voting, non-redeemable cumulative, preferred stock of Sage Life Holdings. During 2000, Swiss Re exchanged a portion of the preferred stock it acquired for the common stock. Swiss Re's ultimate parent is Swiss Reinsurance Company, Switzerland, one of the world's largest life and health reinsurance groups. Results of Operations Gross premiums written (which, under accounting principles generally accepted in the United States, are not reported as revenue) for the three and six month periods ended June 30, 2002 and were approximately $21,553,000 and $42,762,000 compared to $14,214,000 and $20,180,000, respectively, in the prior year. Premiums, net of reinsurance for the three and six months periods ended June 30, 2002 were $4,670,700 and $52,824 compared to $4,191,000 and $5,987,000, respectively in the prior year. The small amount of net premium written during the period ended June 30, 2002, reflects the effect of an amendment to the Company's Modco agreement with Swiss Re to include certain variable annuity products introduced during 7 the fourth quarter of 2001. This amendment resulted in an additional $9,312,000 in premium ceded relating to business written during the fourth quarter of 2001. Contract owners pay us contract charges and fees, while the fund managers pay us administrative fees. These administrative fees, and most of the charges received from contract owners, are based on underlying variable and fixed account values. Therefore, these fees and charges vary with the amount of premiums we have received and investment performance of the funds. Annual contract charges we receive from contract owners are flat fees assessed on each contract's anniversary date. Accordingly, they vary according to the number of contracts in force during the period under review. Contract charges and fees increased significantly as compared with the first half of 2001 as a result of the growth in business. Net investment income includes interest earned on separate account assets allocated to options in the fixed account by contract owners as well as general account assets. The significant decrease in net investment income reflects a declining fixed income asset base in the general account along with an overall decrease in yields on such securities as compared to the same period of the prior year. Although gross premiums continue to show significant growth, they are still well below levels needed to generate significant charges based on variable and fixed account assets. Accordingly, net investment income continues to represent most of our revenues. We expect net investment income will continue to represent the majority of our revenues for the next several years as our sales and related variable and fixed account assets grow. The trend of increasing general and administrative expenses reflects our progress in implementing our business strategy and putting in place the necessary staff, systems and other elements needed to support our planned growth. The increase in general and administrative expenses is in large part due to an increase in the number of employees (including several senior positions), which were 66 at June 30, 2002 as compared to 55 at June 30, 2001. We do not currently reflect the benefits of deferred federal income taxes in our operating results. Liquidity and Capital Resources Since the beginning of 1997, our primary cash needs have been for the development of our insurance products and related infrastructure and the funding of our daily operations. Our cash needs have been met primarily through capital contributions from Sage Life Holdings and funding of the vast majority of our acquisition expenses through the Modco arrangement with Swiss Re, as well as through interest income on the invested assets of the general account. In accordance with the terms of the Preferred Stock Purchase Agreement (as amended) with Swiss Re, the Company is required to maintain statutory capital and surplus of at least $25,000,000. In addition, we have made a commitment to the Michigan Insurance Department to maintain statutory capital and surplus of at least $25,000,000. We had previously expected that our cash resources would be adequate to enable us to maintain this minimum capital and surplus requirement through the end of the first quarter of 2003. However, events in the current period including the diminution in the value of the Company's holdings in WorldCom debt securities, depressed levels of sales and assets under management resulting from volatility in world equity markets, and less than anticipated expense savings, have all contributed to higher than expected net cash outflows. Net operating cash outflows necessary to support our current underwriting and marketing activities are approximately $700,000 per month. Our ultimate parent, Sage Group, a publicly traded South African financial services group, is currently prohibited under South African currency controls from utilizing funds raised in South Africa for our cash needs other than through capital issues in foreign currency. Sage Group's current ability to issue stock outside of South Africa has been hindered by a devaluation of the South African Rand relative to the United States dollar and a decrease in their stock price reflective of a general decline of financial services stocks in South Africa. Sage Group is actively exploring a variety of alternatives for providing for our current and future cash needs, including issuing new capital to strategic investors of Sage Life Holdings and/or its affiliates, or a sale of the Company. Sage Group and its affiliates are currently engaged in discussions with potential strategic investers, acquirors and other providers of long-term capital. However, there can be no assurance that Sage Group will be successful in these efforts, as Sage Group has not yet finalized negotiations with any party. Our future marketing efforts and results of operations could be adversely affected if Sage Group is unable to raise, or does not provide, additional funding for us. 8 For the month ended July 31, 2002, the Company's statutory capital and surplus was approximately $24,755,000, below the minimum required level mentioned above but higher than the minimum capital and surplus required under the laws of Delaware. We have already notified Swiss Re of this situation and shall notify the insurance departments of the states of Delaware and Michigan. Should this situation remain uncured for 60 calendar days, the Preferred Stock Purchase Agreement provides that, subject to obtaining regulatory approval, each share of preferred stock shall be entitled to a number of votes sufficient to provide preferred shareholders of 51% of the voting interest in Sage Life Holdings, our direct parent. Should this occur, there can be no assurance that our current business strategy will be maintained. With regard to contract owners, our obligation under their contracts are supported by (1) variable accounts--determined by the value of investments held in separate accounts, and (2) fixed accounts--backed by investments held in separate accounts. The assets in these separate accounts, supporting the contracts to which they relate, are not chargeable with any of our other liabilities. The Company's financial ratings are important in its ability to accumulate and retain assets. The Company is rated "A" (Excellent) by A.M. Best and "AA-" (Very Strong) by Fitch-Duff & Phelps. Rating agencies periodically review the ratings they issue for any required changes. These ratings reflect the opinion of the rating agency as to the relative financial strength of the Company and its ability to meet its contractual obligations to its policyholders. Many financial institutions and broker-dealers focus on these ratings in determining whether to market an insurer's variable products. If any of the Company's ratings were downgraded from their current levels, sales of the Company's products and the Company's relationships with distributors could be adversely affected. Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe-harbor" for forward-looking statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are not historical facts. Although such forward-looking statements reflect the current views of the Company and management with respect to future events and financial performance, there are known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated or indicated by such forward-looking statements. These include, but are not limited to, risks and uncertainties inherent in or relating to (i) general economic conditions, including interest rate movements, equity market performance, inflation and cyclical industry conditions; (ii) governmental and regulatory policies, as well as the judicial environment; (iii) accessibility to reasonably priced reinsurance and the ability of the Company and/or its affiliates to access additional capital; (iv) continued financial support from the Company's ultimate parent, Sage Group Limited ("Sage Group"), a South African corporation; and the ability of the company and/or its affiliates to access additional capital; (v) increasing competition in the markets in which the Company operates; (vi) changes in generally accepted accounting principles; and (vii) the risks and uncertainties included in the Company's Securities and Exchange Commission filings. The words "believe", "expect", "anticipate", "project", and similar expressions identify forward-looking statements, which speak only as of their dates. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in this Quarterly Report. Neither the Company nor its management undertakes any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company's market risk during the six months ended June 30, 2002. The Company has provided a discussion of its market risks in Item 7A of Part II of the December 31, 2001 Form 10-K. 9 PART II. OTHER INFORMATION ITEMS 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 99.1 Certification of Chief Executive Officer 99.2 Certification of Principal Financial Officer (b) Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended June 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sage Life Assurance of America, Inc. /s/ Robin I. Marsden Robin I. Marsden President and Chief Executive Officer /s/ Gregory S. Gannon Gregory S. Gannon Vice President and Controller (Chief Accounting Officer) Date: August 19, 2002 10

SAGE LIFE ASSURANCE OF AMERICA INC 10-Q