-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDMESPB89/VoAjSLPgVH5zx3ykodKbSxW3lVYjD+vvidyMkOkLY1G7BoElbK5cv0 dH3IKGfpgYDid3U+cgNEHw== 0000950123-03-004276.txt : 20030415 0000950123-03-004276.hdr.sgml : 20030415 20030415160537 ACCESSION NUMBER: 0000950123-03-004276 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAGE LIFE ASSURANCE OF AMERICA INC CENTRAL INDEX KEY: 0000777199 IRS NUMBER: 510258372 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-36010 FILM NUMBER: 03650652 BUSINESS ADDRESS: STREET 1: 300 ATLANTIC ST STREET 2: SUITE 302 CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033246338 MAIL ADDRESS: STREET 1: 300 ATLANTIC ST STREET 2: SUITE 302 CITY: STAMFORD STATE: CT ZIP: 06901 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY STANDARD LIFE INSURANCE CO DATE OF NAME CHANGE: 19980105 10-K 1 y85446e10vk.txt SAGE LIFE ASSURANCE OF AMERICA, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBERS--333-77441, 333-77437, 333-78583, 333-87172, 333-87174, 333-87178, AND 333-87950 SAGE LIFE ASSURANCE OF AMERICA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 51-0258372 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION) 969 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06902 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (203) 321-8999 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO AS OF APRIL 15, 2003 THERE WERE 1,000 SHARES OF OUTSTANDING COMMON STOCK, PAR VALUE $2,500 PER SHARE, OF THE REGISTRANT. ALL OUTSTANDING SHARES WERE OWNED BY SAGE LIFE HOLDINGS OF AMERICA, INC. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements made in this Annual Report on Form 10-K are "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 that provides a "safe-harbor" for forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and include words like "believe", "expect", "anticipate", "project", "will", "shall" and other words or phrases with similar meaning which speak only as of their dates. This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are not historical facts. Although such forward-looking statements reflect the current views of the Company and management with respect to future events and financial performance, there are known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated or indicated by such forward-looking statements. These include, but are not limited to, risks and uncertainties inherent in or relating to (i) the ability of the Company and certain of its affiliates to obtain access to capital for the funding of its future cash needs; (ii) the Company's future financial ratings; (iii) general economic conditions, including interest rate movements, equity market performance, inflation and cyclical industry conditions; (iv) governmental and regulatory policies, as well as the judicial environment; (v) accessibility to reasonably priced reinsurance; (vi) increasing competition in the markets in which the Company operates; (vii) changes in generally accepted accounting principles; and (viii) the risks and uncertainties included in the Company's Securities and Exchange Commission filings. The risks included here are not exhaustive. The Company operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the effect of all risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ from those contained in any forward looking statements. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in the Annual Report. In addition, neither the Company nor its management undertakes any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 2 Sage Life Assurance of America, Inc. Annual Report on Form 10-K Year Ended December 31, 2002 TABLE OF CONTENTS
Page PART I Item 1. Business 4 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 10. Directors and Executive Officers of the Registrant 17 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 23 Item 13. Certain Relationships and Related Transactions 23 Item 14. Controls and Procedures 23 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
3 PART I ITEM 1. BUSINESS History and General Sage Life Assurance of America, Inc. ("Sage Life" or the "Company" or "We") is a stock life insurance company incorporated in Delaware in 1981 with its principal offices in Stamford, Connecticut. We have licenses to conduct an insurance business in 49 states and the District of Columbia. The Company is authorized to write variable annuity contracts in all jurisdictions in which it is licensed, and is authorized to write variable life insurance in all but three states. As will be discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in December of 2002 the Boards of Directors of the Company and its intermediate and ultimate parents approved plans to suspend the Company's marketing and underwriting activities and to cease all new sales of variable annuity and variable life insurance products effective January 1, 2003. This action was taken due to the inability of the Company and its parents to raise the capital necessary to meet the ongoing needs of the Company. The Company is currently proceeding towards establishing the facilities necessary to administer an orderly "run-off" of the in-force business. This development will be alluded to throughout this report, and may sometimes be referred to as a "general business retrenchment." One of the consequences of the general business retrenchment relating to the Company's insurance licenses is that in March 2003, the Company was notified by the Insurance Department of the State of North Carolina that its license would be restricted in that state for any new product sales. The Company is not licensed in New York. However, its wholly owned subsidiary, Sage Life Assurance Company of New York ("Sage New York") had applied to the New York Insurance Department for an insurance license. On February 10, 2003, as a result of the Company's general business retrenchment, the Company and Sage New York withdrew that application and began the process of dissolving Sage New York. Sage New York had not been capitalized. We are a wholly owned subsidiary of Sage Life Holdings of America, Inc. ("Sage Life Holdings"). Sage Insurance Group Inc. ("SIGI") owns 90.1% of the common stock of Sage Life Holdings. Swiss Re Life and Health America Inc. ("Swiss Re", formerly Life Reassurance Corporation of America), owns the remaining 9.9% of the common stock of Sage Life Holdings. Before acquiring Sage Life Holdings' common stock, Swiss Re invested $12,500,000 in non-voting, non-redeemable cumulative preferred stock of Sage Life Holdings. During 2000, Swiss Re exchanged a portion of such preferred stock for common stock of Sage Life Holdings. Swiss Re's ultimate parent is Swiss Reinsurance Company, Switzerland, one of the world's largest life and health reinsurance groups. Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation," and Item 8 "Financial Statements and Supplementary Data" set forth additional information regarding the current state of affairs with respect to Swiss Re's investment in Sage Life Holdings. SIGI is a wholly owned, indirect subsidiary of Sage Group Limited ("Sage Group"), a South African corporation quoted on the Johannesburg Stock Exchange. Sage Group is a holding company with a thirty-six year history of extensive operating experience in mutual funds, life assurance and investment management. Sage Group has directly and indirectly engaged in insurance marketing activities in the United States since 1977. Effective December 31, 1996, SIGI purchased all of the outstanding stock of Sage Life, then named Fidelity Standard Life Insurance Company ("Fidelity Standard"), from Security First Life Insurance Company ("SFLIC"). Prior to the purchase and effective October 31, 1996, Fidelity Standard entered into a modified coinsurance arrangement to cede all of its separate account liabilities to its then parent, SFLIC. Assets equal 4 to the total reserves and related liabilities were transferred to SFLIC. The remaining general account liabilities were ceded under a 100% coinsurance arrangement with SFLIC. In connection with the purchase of Fidelity Standard, the Company entered into a service agreement with SFLIC to provide all necessary administrative services for all ceded business. Effective September 30, 1998, all of the in-force business of the Company was novated to SFLIC. Segment Information The Company operates in one business segment, the variable insurance product market. Products we offered before the general business retrenchment included combination fixed and variable deferred annuities and combination fixed and variable life insurance products. Refer to Item 8, "Financial Statements and Supplementary Data," for revenues from external customers and a measure of operating results and total assets for the last three years. Products and Distribution Before the general business retrenchment, the Company's business strategy had been to focus on the development, underwriting, and marketing of variable annuity and variable life insurance products (the "Contracts"). Our obligations under these Contracts are supported by (i) variable accounts--determined by the value of investments held in separate accounts, and (ii) fixed accounts--backed by investments held in separate accounts. The assets in these separate accounts supporting the Contracts to which they relate are not chargeable with liabilities arising out of any other business we may conduct. Our initial marketing focus was to distribute our products through banks and financial planning companies and regional broker-dealers, and then, over the long-term, we intended to expand our distribution channels to include wirehouses. As mentioned above, the Company is no longer marketing or distributing its products. Since it began marketing its products, Sage Distributors Inc. ("Sage Distributors") has acted as the principal securities underwriter of the Contracts issued by the Company and of shares of its separate accounts. Effective July 24, 2000, the Company entered into a new distribution agreement with Sage Distributors (the "Underwriting Agreement") whereby Sage Distributors was permitted to enter into selling agreements with unaffiliated broker-dealers whose registered representatives sold Sage Life products to the public. The Underwriting Agreement provides that Sage Distributors receives no compensation for providing underwriting services to Sage Life and that the Sage Distributors is responsible for all of its costs in marketing Sage Life products, except for any commissions payable to registered representatives of Sage Distributors. Since Sage Distributors has inadequate revenues with which to fund these marketing and distribution costs, SIGI has historically undertaken to fund these expenses under the terms of an Expense Reimbursement Agreement between SIGI and Sage Distributors. The Company, Sage Distributors and SIGI agreed to amend the Underwriting Agreement and Expense Reimbursement Agreement so that Sage Life would bear, subject to certain limitations, the full costs of Sage Distributors marketing, distribution and overhead costs effective October 1, 2002. This amendment lapsed on December 31, 2002. The Company has begun the process of forming a subsidiary broker-dealer that would replace Sage Distributors as the principal securities underwriter of the Contracts and of shares of the Company's separate accounts. The Company has undertaken this step due to concerns that Sage Distributors might be unable to satisfy the net capital requirements of a limited purpose broker-dealer as prescribed by United States Securities and Exchange Commission ("SEC") and NASD Rules due to litigation that Sage Distributors is currently involved in. (See Item 3., "Legal Proceedings" for more details.) If a new broker-dealer is established as a subsidiary of the Company, the Company will be obligated to capitalize it at a level that satisfies the net capital requirements. 5 The Company's products currently include as investment options four series funds of Sage Life Investment Trust (the "Trust"), a registered management investment company sponsored by the Company. The Trust is managed by Sage Advisors, Inc. ("Sage Advisors"), an SEC-registered investment adviser and a subsidiary of SIGI. In connection with the general business retrenchment, SIGI has determined that it is unable to fund the continuing operating losses that Sage Advisors incurs in connection with its management agreement with the Trust. Accordingly, Sage Life has applied to the SEC for an Order of Substitution allowing it to substitute shares of other registered management investment companies for the shares of the Trust in its products. If the order is granted, the Company will effect the substitution of shares thereby removing all assets of the Trust. This in turn will permit the termination of Sage Advisors' agreement with the Trust and end the operating losses. The Company's application to the SEC is currently pending and therefore the Company has not yet obtained a firm date on which it can effect the substitution of shares. Rating Agencies The Company's financial ratings are important in its ability to accumulate and retain assets. Rating agencies periodically review the ratings they issue for any required changes. These ratings reflect the opinion of the rating agency as to the relative financial strength of the Company and its ability to meet its contractual obligations to its Contract owners. Many financial institutions and broker-dealers focus on these ratings in determining whether to market an insurer's variable products. The Company is rated "B++" (Very Good) by A.M. Best Co., and the current rating remains under review with "negative implications." The Company is rated "A-" (Strong) by Fitch Ratings. These ratings have the following meanings: - "B++" (Very Good) per A.M. Best Company: "Assigned to companies which have, in [A.M. Best Company's] opinion, a good ability to meet their ongoing obligations to policyholders." - "A-" (Strong) per Fitch Ratings: "Insurers are viewed as possessing strong capacity to meet policyholder and contract obligations. Risk factors are moderate, and the impact of any adverse business and economic factors is expected to be small." Each of the foregoing agencies downgraded the Company's ratings since the date of the Company's last Annual Report on Form 10-K. These rating declines are related to matters disclosed in the "Liquidity and Capital Resources" section of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation," including uncertainty about the future ownership of the Company and, in the case of Fitch Ratings, a further factor was an industry-wide rating review of U.S. life insurance companies. There can be no assurances that the rating agencies will not lower the Company's ratings further. Competition Before the general business retrenchment, we were engaged in a business that is highly competitive due to the large number of stock and mutual life insurance companies as well as other entities marketing insurance products comparable to our products. There are approximately 1,600 stock, mutual and other types of insurers in the life insurance business in the United States, of which approximately 230 write variable products business. A substantial number of these entities are significantly larger than us. We are one of the few life insurers confining our activities to separate account variable insurance products. 6 Employees At December 31, 2002, we had 70 salaried employees. Many of these employees also perform duties for affiliated companies. The salary obligations for these employees are shared amongst us and these companies according to the terms of a Cost Sharing Agreement that has been filed with, and approved by, the Delaware Insurance Department. After scheduled staff retrenchments discussed in more detail in Item 7, we had 26 salaried employees as of April 9, 2003. The Company plans to keep its remaining staff to effect the phased implementation of general business retrenchment activities over the course of 2003. This includes further planned retrenchments to reduce staff down to a group required to efficiently manage the administration of the Company's in-force business during run-off. ITEM 2. PROPERTIES We had previously maintained our corporate offices in space leased by SIGI. On March 10, 2003, SIGI executed a lease termination agreement with its landlord to terminate its current lease and cancel all future rental obligations with effect from April 15, 2003. The Company is relocating to alternative offices effective April 15, 2003, under a monthly renewable operating agreement. The Company's principal offices are now located at 969 High Ridge Road, Stamford, CT 06902. ITEM 3. LEGAL PROCEEDINGS As of the date of this filing, neither the Company nor its subsidiary are involved in any lawsuits. However, a former external wholesaler of Sage Distributors, an affiliated company, has challenged his termination in an arbitration claim brought before the NASD. The claim alleges that Sage Distributors breached a provision of his contract providing for an additional 18 months' of guaranteed compensation, and that it defamed him by stating in a Form U-5 that he was terminated for "lack of production." The wholesaler sought, and received, an ex parte prejudgment remedy in the amount of $1 million from a Connecticut state court; the prejudgment remedy attaches the assets of Sage Distributors (and amounts owed to Sage Distributors by the Company and SIGI) to be maintained until the NASD arbitration panel issues its award. The $1 million includes $500,000 for defamation, $234,776 for contract damages, and $265,224 for punitive damages and attorneys' fees. Sage Distributors exercised its right to challenge the prejudgment remedy. After a two-day evidentiary hearing, the parties submitted briefs on February 7, 2003. To date, no decision has been issued. Sage Distributors has filed an appearance and an answer in the NASD action. For the purpose of the court action (with respect to the prejudgment remedy), Sage Distributors conceded that the court could issue a prejudgment remedy for $22,917, the amount of the wholesaler's monthly guarantee for one month, which Sage Distributors argues is all he would be owed even if he established he was terminated without cause. Neither we nor NASD Dispute Resolution nor the Connecticut court have made any determination as to whether the Company would be liable for any judgment against Sage Distributors. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's outstanding shares are owned by Sage Life Holdings. The Company did not pay any dividends to its parent in 2002, 2001 and 2000. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes information with respect to our operations. The selected financial data should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Financial Statements and Supplementary Data." All amounts presented in the following table were derived from our financial statements for the periods indicated and certain amounts have been reclassified to conform to the 2002 presentation.
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Revenues: Net investment income $ 1,534,629 $ 2,108,497 $ 1,888,172 $ 1,290,196 $ 1,243,522 Realized capital gains (1,232,740) 14,088 - - - Administrative service fees 50,663 39,260 49,940 37,671 - Contract charges and fees 650,853 108,986 3,979 861 - ----------------------------------------------------------------------- Total revenues 1,003,405 2,270,831 1,942,091 1,328,728 1,243,522 Benefits and expenses: Contract owner benefits 1,284,163 1,078,918 490,964 - - Acquisition expenses 647,466 (50,182) - - - Goodwill amortization expense 1,427,535 217,378 234,468 234,468 548,818 General & administrative expenses 13,614,804 8,303,361 5,969,108 5,521,186 1,263,678 ----------------------------------------------------------------------- Total benefits and expenses 16,973,968 9,549,475 6,694,540 5,755,654 1,812,496 ----------------------------------------------------------------------- Loss before cumulative effect adjustment (15,970,563) (7,278,644) (4,752,449) (4,426,926) (568,974) Cumulative effect adjustment for change in accounting for development costs - - - (4,269,488) - ----------------------------------------------------------------------- Net loss $(15,970,563) $ (7,278,644) $ (4,752,449) $(8,696,414) $ (568,974) ======================================================================= Written premiums (1): Gross $ 86,752,785 $ 68,900,272 $ 21,109,921 $ 79,942 $ - Reinsurance - Current Year (2) (67,863,858) (39,969,620) (14,106,155) (4,200) - - Retroactive (3) (9,312,250) - - - - ----------------------------------------------------------------------- Net $ 9,576,677 $ 28,930,652 $ 7,003,766 $ 75,742 $ - ======================================================================= BALANCE SHEET DATA Total assets $166,005,673 $114,237,585 $ 54,726,227 $31,736,580 $36,542,531 ======================================================================= Total liabilities $144,115,088 $ 82,330,012 $ 22,209,130 $ 233,435 $ 70,474 ======================================================================= Total stockholder's equity $ 21,890,585 $ 31,907,573 $ 32,517,097 $31,503,145 $36,472,057 =======================================================================
(1) Under accounting principles generally accepted in the United States, premiums from the types of products sold by the Company are not reported as revenue. (2) In 2000, the Company entered into a multi-year modified coinsurance agreement whereby a significant portion of the Company's variable insurance business is ceded to Swiss Re on a quota share basis. This arrangement is more fully described in the "Reinsurance" subsection below. In addition, the Company has entered into reinsurance arrangements that reinsure certain mortality risks associated with the guaranteed minimum death benefit feature of the Contracts, as well as other Contract guarantees. (3) During the first quarter of 2002, the Company's reinsurance agreement with Swiss Re was amended to include certain variable annuity products introduced by the Company during the fourth quarter of 2001. This retroactive amendment resulted in a reduction of written premium, contract charges and contract owner benefits relating to such previously issued contracts of approximately $9,312,250, $8,000 and $5,000, respectively, for the quarter ended March 31, 2002. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying financial statements and notes thereto and Item 6, "Selected Financial Data." Results of Operations Contract owners pay us contract charges and fees, while the managers of the funds available as investment options in our Contracts (the "Fund Managers") pay us administrative fees. These administrative fees, and most of the charges received from Contract owners, are based on underlying variable and fixed account values. Therefore, these fees and charges vary with the amount of premiums we have received and investment performance of the funds. Annual Contract charges we receive from Contract owners are flat fees assessed on each Contract's anniversary date. Consequently, the aggregate amount of these fees received by the Company also varies according to the number of Contracts in force during the course of the year. Prior to June 30, 2000, the Company sold a limited number of Contracts as it focused most of its efforts on obtaining strong ratings from rating agencies and developing the staff, systems and other elements necessary to begin underwriting and marketing activities. Although gross premiums continued to show significant growth through December 31, 2002 when compared to the levels of the prior year, they remained well below levels needed to generate significant charges based on variable and fixed account assets. Accordingly, net investment income has continued to represent a significant portion of the Company's revenues. Net investment income includes interest earned on the Company's general account assets and assets in the fixed sub-accounts of the separate account. The decrease in net investment income is primarily attributable to the fall in assets in the general account and the fixed sub-accounts as well as a decline in yields on short-term investments. The Company's net income for the year ended December 31, 2002 was adversely impacted by realized losses on certain fixed maturity investments and impairment losses on seed capital investments of approximately $1.2 million. In addition, the Company incurred a charge of $1.4 million representing the impairment of goodwill as a result of the decision to discontinue business activities. The trend of increasing general and administration expenses over the five-year period ended December 31, 2002 reflects the Company's implementation of its business strategy and the establishment of an operational infrastructure to support the growth estimates in the Company's business plan. In light of capital considerations discussed below, the Company initiated cost curtailment initiatives in April 2002 to minimize operating expenses. However, general and administrative expenses for the year ended 2002 include, among other things, certain costs of discontinuing business operations, including as discussed below, non-recurring staff termination and other exit related costs of approximately $4.0 million. Additionally, marketing and distribution costs of approximately $1.6 million were incurred during the fourth quarter of 2002 as a result of the amendment to the Underwriting Agreement with Sage Distributors that is discussed in more detail in Item 1, "Products and Distribution." On December 17, 2002, the Board of Directors approved plans to suspend all sales, marketing and distribution activities, the closure of the Trust, and the termination of all staff not required to administer the run-off of Sage Life's in-force Contracts. Effective January 1, 2003, the Company suspended all marketing and underwriting activities and ceased all new sales. As a result, the Company's entire internal and external wholesaling and marketing staff were terminated in mid-January 2003. The Company plans to retain its remaining staff to effect the phased implementation of business discontinuance activities over the course of 2003. This includes further planned retrenchments to reduce staff down to a number appropriate for the 9 efficient administration of the run-off of the in-force business. General and administrative expenses for the year ended December 31, 2002 include non-recurring charges of approximately $4.0 million for involuntary termination benefits and other exit related costs. We do not currently reflect the benefits of deferred federal income taxes in our results. Liquidity and Capital Resources Funding of Cash Needs: Since the beginning of 1997, and until the general business retrenchment, the Company's primary cash needs have been for the funding of the distribution of its insurance products and the establishment and maintenance of related infrastructure. This included, among other things, creating and licensing innovative products, developing and maintaining a marketing and distribution franchise to sell the insurance products through retail broker-dealers, and establishing technological and operational platforms necessary to support the development and growth of the business. These cash needs were met primarily through capital contributions from Sage Group, the funding of commission and acquisition expenses through a modified coinsurance arrangement with Swiss Re, issuance of preferred and common stock in Sage Life Holdings to Swiss Re, and through interest income on the invested assets of the Company's general account. During the second quarter of 2001, management determined that the cash needs of the Company and the maintenance of its capital commitments to Swiss Re and the Michigan Insurance Department discussed in more detail in the next section could not be met solely by the methods mentioned above. Sage Group has been, and is currently, prohibited under South African currency control regulations from utilizing funds raised in South Africa for the Company's cash needs, other than with funds raised through capital issues denominated in currencies other than the South African rand. Furthermore, Sage Group's ability to issue stock outside of South Africa has been hindered by a severe devaluation of the South African rand relative to the United States dollar and a decrease in its stock price reflective of a general decline of financial services stocks in South Africa and elsewhere. Consequently, Sage Group has not issued new securities in the international markets to provide for the cash needs of the Company. During the fourth quarter of 2001, Sage Group announced a search for a strategic partner to fund its US interests in the face of continued currency and equity market weakness and appointed a regional investment bank to assist with the process. This capital raising effort was accompanied by expense containment programs that were initiated during the first quarter of 2002 to conserve working capital within Sage Life. Sage Group accelerated its capital-raising efforts in August 2002 by appointing Merrill Lynch to explore transactions involving a number of alternative strategic approaches, including financing of cash needs through a strategic partnership or the outright sale of Sage Group's interests. Although a number of interested parties were identified, Sage Group was unable to secure the necessary capital to sustain the Company's new business activities due, in part, to prolonged weak global capital markets and the negative sentiment that has severely impacted the life insurance sector. Accordingly, as described above in Results of Operations, on December 17, 2002, the Boards of Directors of Sage Group, SIGI and Sage Life approved the general business retrenchment plans. Thereafter, on January 1, 2003, the Company suspended all marketing and underwriting activities and ceased all new sales of the insurance products. Capital Commitments: In 1997, pursuant to a commitment to the Michigan Insurance Department in connection with the Company's application to renew its insurance license in that state, the statutory capital and surplus of the Company was increased to $25 million by a capital contribution from Sage Group. In 1998, Sage Life Holdings further committed to maintaining this $25 million level of capital and surplus pursuant to the terms of a Preferred Stock Purchase Agreement ("Preferred Stock Agreement") with Swiss Re. 10 Initial projections management had developed indicated that the Company would require additional capital during the first quarter of 2003 to enable it to maintain its $25 million commitments to Michigan and Swiss Re. Based on these projections, Sage Group began the capital raising exercise discussed in more detail in the prior section. However, events in the six months ended June 30, 2002, including the diminution in the value of the Company's holdings in two formerly highly-rated debt securities, lower than projected levels of asset based fees due to depressed equity markets, lower than projected sales levels, and a slower reduction in expenses than anticipated - all contributed to higher than expected net cash outflows and a faster than projected reduction in capital levels. As a result, the Company's statutory capital and surplus fell below $25 million during the third quarter of 2002. Under the terms of the original Preferred Stock Agreement with Swiss Re, if the Company's statutory-basis capital and surplus fell below $25 million and remained uncured for 60 days then, subject to obtaining regulatory approval, each share of Swiss Re preferred stock would be entitled to a number of votes sufficient to provide preferred shareholders a majority of the voting interest in Sage Life Holdings, the Company's direct parent. In response to the developments noted above, Sage Group conferred with Swiss Re and on September 30, 2002 reached an agreement to amend certain terms of the Preferred Stock Agreement. The required minimum level for the Company's statutory capital and surplus was reduced from $25 to $20 million, subject to the elimination of any cure rights with respect to the new minimum capital level. In addition, Swiss Re also agreed to defer the December 31, 2002 dividends payable (by Sage Life Holdings) with respect to its preferred shares until the earlier of June 30, 2003 or the closing of any material financing or sale of any material component of the Company's business. Further, Swiss Re and Sage Group agreed that Swiss Re would remain actively involved in Sage Group's capital raising activities and be consulted on material decisions affecting the Company's business. The Company's statutory capital and surplus at December 31, 2002, stood at approximately $8.6 million, after making provision of approximately $12.7 million for certain non-recurring charges arising from the Company's decision to discontinue new business activities. These non-recurring reserves have been established in accordance with statutory accounting principles prescribed by the state of Delaware. They comprise $7.7 million for asset adequacy analysis liabilities related primarily to anticipated future run-off expenses projected to be incurred by the Company over the next twenty years and $5.0 million for involuntary termination benefits and other exit-related costs. By letter dated March 18, 2003, the Delaware Insurance Department approved the additional statutory reserves for future run-off expenses. Under accounting principles generally accepted in the United States, the Company's total stockholder equity at December 31, 2002 was approximately $21.9 million. Given this decline in the Company's statutory-basis capital and surplus, then subject to obtaining requisite regulatory approvals, Swiss Re now has the right to exercise its option under the terms of the Preferred Stock Agreement to assume voting control of Sage Life Holdings. Swiss Re has not yet exercised, and has yet to indicate whether it would exercise, such an option. However, Swiss Re is working with the Company to develop and implement plans for the efficient and effective administration of existing Contract owner service obligations during run-off. Officials in the Company Regulation Bureau of the Delaware Insurance Department, the Company's primary state regulator, have been made aware of these developments. Management also contacted officials in the Company Regulation Bureau of the Michigan Insurance Department to inform them that our statutory capital and surplus had fallen below $25 million, as committed to them, and of our capital-raising initiatives. The Michigan Insurance Department has not restricted the Company's license. Management continues to keep both the Insurance Departments of Delaware and Michigan apprised of the Company's financial condition. 11 Management maintains its belief that the Company has adequate capital resources to meet its Contract benefit and servicing obligations to existing Contract holders. Additionally, Contract holder investments are fully funded and held in a separate account and protected from the general creditors of the Company. The death benefit and other guaranteed rider features in the Company's products have been reinsured with highly-rated reinsurers. Reinsurance At the date of issue, the Company's variable insurance Contracts result in a net cash outflow in that 100% of Contract owner premiums received by the Company are invested in separate accounts supporting the Contracts, leaving a cash strain caused by the payment of commissions and other policy acquisition expenses. In 2000, the Company entered into a multi-year quota share modified coinsurance agreement (the "Modco Agreement") with Swiss Re under which the Company ceded a significant portion of its variable insurance business to Swiss Re. Depending on the product, the Company has ceded to Swiss Re between 65% to 81% of Contract revenues and related expenses in return for an expense allowance from Swiss Re that substantially covered commission and other Contract acquisition costs. The Modco Agreement provided the Company with additional capacity by funding our cash flow strain from new business. During 2002 and 2001, the Company ceded premiums including amounts relating to guaranteed benefits of $77,170,000 and $39,970,000, respectively. Contract charges and fees for 2002 and 2001 are net of $883,000 and $230,000, respectively, ceded to Swiss Re. Contract owner benefits are net of $6,000 and $123,000 ceded to Swiss Re in 2002 and 2001, respectively. During the first quarter of 2002, the Modco Agreement was amended to include certain variable annuity products introduced by the Company during the fourth quarter of 2001. The amendment resulted in reductions of written premium, Contract charges and Contract owner benefits of $9,312,250, $8,000, and $5,000, respectively, relating to the prior year. Excluding the aforementioned retroactive effects of the amendment, premiums, contract charges and fees and Contract owner benefits ceded to Swiss Re were $67,564,000, $875,000 and $1,000, respectively, for the year ended December 31, 2002, compared with $39,816,000, $230,000 and $123,000 for the year ended December 31, 2001. In addition, the Company has entered into reinsurance arrangements that reinsure certain risks associated with the guaranteed minimum death benefit feature of the Contracts, as well as other Contract guarantees. The Company uses only highly rated reinsurance companies to reinsure these risks. Reinsurance does not relieve the Company from its obligations to Contract owners. The Company remains primarily liable to the Contract owners to the extent that any reinsurer does not meet its obligations under the reinsurance agreements. Reserves The insurance laws and regulations under which we operate obligate us to record, as liabilities, actuarially determined reserves to meet our obligations on outstanding Contracts. We base our reserves involving life contingencies on mortality tables in general use in the United States. Where applicable, we compute our reserves to equal amounts that, together with interest on such reserves computed annually at certain assumed rates, are estimated to be sufficient to meet our Contract obligations at their maturities or in the event of the covered person's death. As discussed above, the Company has established a reserve for asset adequacy analysis liabilities related primarily to anticipated future run-off expenses over the next twenty years. 12 Critical Accounting Policies We amortize deferred acquisition costs ("DAC"), deferred gain on modified coinsurance, and unearned revenue over the life of our Contracts in relation to estimated gross profits ("EGPs"). Both the deferred amounts and the EGPs are net of reinsurance. EGPs are based on assumptions about future Contract experience including, persistency, growth rate of elected investment options, and the level of expense required to maintain the Contracts. At each balance sheet date, EGPs are replaced with actual gross profits. Future EGPs are also recast taking into account the volume and mix of the Contracts actually in force and warranted changes in assumptions about future experience. Finally, amortization is derived based on the combination of actual gross profits to date and the recast EGPs. For 2002, we have replaced EGPs with actual gross profits and EGPs have been recast taking into consideration the volume and mix of Contracts in force. The Company revised its assumptions about future lapse experience at December 31, 2002 to reflect the anticipated Contract holder behavior resulting from the Company's decision to discontinue new business activities. This revision in future assumptions had an immaterial effect on DAC as at December 31, 2002. Investments Our cash and invested assets are comprised entirely of investment grade securities, money market funds and equity securities representing seed money in two funds in Sage Life Investment Trust. Dividend Restrictions We are subject to state regulatory restrictions that limit the maximum amount of dividends payable. Subject to certain net income carryforward provisions as described below, we must obtain approval of the Insurance Commissioner of the State of Delaware in order to pay, in any 12-month period, "extraordinary" dividends which are defined as those in excess of the greater of 10% of surplus as regards Contract owners as of the prior year-end and statutory net income less realized capital gains for such prior year. We may pay dividends only out of earned surplus. In addition, we must provide notice to the Insurance Commissioner of the State of Delaware of all dividends and other distributions to Sage Life Holdings, within five business days after declaration and at least ten days prior to payment. At December 31, 2002, we could not pay a dividend to Sage Life Holdings without prior approval from state regulatory authorities, as we currently do not have earned surplus. Additionally, we have paid no dividends since the commencement of our operations. State Regulation We are subject to the laws of the State of Delaware governing insurance companies and to the regulations of its Department of Insurance (the "Insurance Department"). Annually, we file a detailed financial statement in the prescribed form (the "Statement") with the Insurance Department covering our operations for the preceding year and our financial condition as of the end of that year. Regulation by the Insurance Department means that it may examine our books and records to determine, among other things, whether reported contract liabilities and reserves are computed in accordance with statutory accounting practices prescribed or permitted by the Insurance Department. The Insurance Department, under the auspices of the National Association of Insurance Commissioners ("NAIC"), periodically conducts a full examination of the Company's operations. 13 In addition, we are subject to regulation under the insurance laws of all jurisdictions in which we operate. These laws establish supervisory agencies with broad administrative powers with respect to various matters, including licensing to transact business, overseeing trade practices, licensing agents, approving contract forms, establishing reserve requirements, fixing maximum interest rates on life insurance contract loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements, and regulating the types and amounts of investments permitted. We must file the Statement with supervisory agencies in each of the jurisdictions in which we operate, and our operations and accounts are subject to examination by these agencies at regular intervals. Our statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Delaware Insurance Department. Prior to January 1, 2001, "prescribed" statutory accounting practices were interspersed throughout state insurance laws and regulations, the NAIC's Accounting Practices and Procedures Manual and a variety of NAIC publications. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. Effective January 1, 2001, the NAIC has revised the Accounting Practices and Procedures Manual in a process referred to as Codification. Delaware has adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices used to prepare statutory-basis financial statements. However, the effect of these changes did not result in a reduction in our statutory-basis capital and surplus upon adoption at January 1, 2001. On an annual basis, the NAIC requires insurance companies to report information regarding minimum Risk Based Capital ("RBC") requirements. These requirements are intended to allow insurance regulators to identify companies that may need regulatory attention. The RBC Model Law requires that insurance companies apply various factors to asset, premium and reserve items, all of which have inherent risks. The formula includes components for asset risk, insurance risk, interest risk and business risk. At December 31, 2002, our total adjusted capital exceeded RBC requirements. Further, many states regulate affiliated groups of insurers like us and our affiliates, under insurance holding company legislation. Under such laws, intercompany transfers of assets, agreements and arrangements, as well as dividend payments from insurance subsidiaries, may be subject to prior notice or approval, depending on the size of the transfers and payments in relation to the financial positions of the companies involved. Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed (up to prescribed limits) for contract owner losses incurred when other insurance companies have become insolvent. Most of these laws provide that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. Although the federal government ordinarily does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Our insurance products are subject to various federal securities laws and regulations. In addition, current and proposed federal measures that may significantly affect the insurance business include: (i) regulation of insurance; (ii) company solvency; (iii) employee benefit regulation; (iv) tax law changes affecting the taxation of insurance companies; (v) tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles; and (vi) privacy protection initiatives. 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk At December 31, 2002, we held in our general account $13,135,718 of fixed maturity securities that are sensitive to changes in interest rates. Pursuant to the Company's investment policy, all fixed maturity investments are held in investment grade corporate securities, government agency or U.S. government securities. We determine the sensitivity of the fair value of our fixed maturity portfolio based on increases or decreases in interest rates. The effects of an increase or decrease of 100 and 200 basis points ("bps") on the fair value of our fixed maturity general account portfolio at December 31, 2002 are:
- ----------------------------------------------------------------------------------------------------------- -200 bps -100 bps Fair value +100 bps +200 bps - ----------------------------------------------------------------------------------------------------------- General Account $13,950,977 $13,538,972 $13,135,718 $12,769,553 $12,405,398 - -----------------------------------------------------------------------------------------------------------
In addition, the Company's deferred annuity and life insurance products offer a fixed option which also subjects the Company to interest rate risk. These fixed options provide interest rate guarantees to Contract holders for periods extending up to 10 years. At December 31, 2002, there was $21,749,426 of fixed maturity securities held in the separate account in support of fixed accounts. Pursuant to the Company's investment policy, all fixed maturity investments consist of investment grade corporate, mortgage-backed and asset-backed securities. The effects of an increase or decrease of 100 and 200 bps on the fair value of the fixed maturity separate account portfolio at December 31, 2002 are:
- ---------------------------------------------------------------------------------------------------------- -200 bps -100 bps Fair value +100 bps +200 bps - ---------------------------------------------------------------------------------------------------------- Mortgage-backed $ 2,973,126 $ 2,875,646 $ 2,754,014 $ 2,596,042 $ 2,415,433 - ---------------------------------------------------------------------------------------------------------- Other securities 19,883,422 19,420,626 18,995,412 18,594,093 18,209,136 - ---------------------------------------------------------------------------------------------------------- Total Fixed Account $22,856,548 $22,296,272 $ 21,749,426 $ 21,190,135 $ 20,624,569 - ----------------------------------------------------------------------------------------------------------
In accordance with the terms of our products, Contract owner withdrawals or transfers to variable investment options before the end of the guarantee period subject the Contract owner to a market value adjustment ("MVA"). In the event of a rising interest rate environment, which makes the fixed maturity securities underlying the guarantees less valuable, the MVA could be negative. Conversely, in a declining interest rate environment, which increases the fair value of fixed maturity securities underlying the guarantees, the MVA could be positive. The increase or decrease in the value of the fixed option resulting from the MVA should substantially offset the increase or decrease in the market value of the securities underlying the guarantees. The Company maintains asset/liability matching procedures designed to achieve this offset. However, the Company still takes on the default risk for the underlying securities, the interest rate risk of reinvestment of interest payments and the risk of failing to maintain the asset/liability matching program with respect to duration and convexity risks. Equity Market Risk The primary equity market risk to the Company comes from the nature of the variable annuity and variable life products sold. Various fees and charges earned by the Company are substantially derived as a percentage of the market value of the assets under management. In a sustained equity market decline, this income would be reduced because the value of assets under management would be reduced. The impact would be compounded if the market decline led to an increase in surrenders or withdrawals. In addition, a prolonged equity market decline would result in adjustments to the carrying value of deferred acquisition costs and deferred gain on modified coinsurance. The estimated impacts, net of reinsurance, from each of these 15 sources to annual profit next year of an immediate uniform 10% and 20% increase or decrease in variable funds are:
- ----------------------------------------------------------------------------------------------- -10% -20% +10% +20% - ----------------------------------------------------------------------------------------------- Contract Charges (282,763) (565,527) 282,763 565,527 - ----------------------------------------------------------------------------------------------- Mutual Fund Revenue (68,391) (136,783) 68,391 136,783 - ----------------------------------------------------------------------------------------------- Seed Capital (75,900) (151,800) 75,900 151,800 - ----------------------------------------------------------------------------------------------- Impact to DAC, bonus credits, sales inducements and Deferred Gain 169,717 339,435 (169,717) (339,435) - ----------------------------------------------------------------------------------------------- Total Impact to Profits (257,337) (514,674) 257,337 514,674 - -----------------------------------------------------------------------------------------------
Deferred acquisition costs, bonus credits and sales inducements and deferred gains on modified coinsurance are determined using a long-term expectation of variable Contract holder fund performance. The impact of a revision in our expectation of future performance by 100 bps or 200 bps has very little effect as the following table illustrates:
- -------------------------------------------------------------------------------------------------------- -200 -100 Current +100 +200 - -------------------------------------------------------------------------------------------------------- DAC, bonus credits, sales inducements and Deferred Gain $1,546,030 $1,553,560 1,561,004 1,568,163 1,576,015 - --------------------------------------------------------------------------------------------------------
Another equity market exposure for the Company relates to the ancillary benefits available to Contract owners in the form of guaranteed minimum death benefit, guaranteed minimum account balance benefit, and guaranteed minimum income benefit features. The Company's risks from these ancillary benefit features increases as variable Contract holder investments decline. Conversely, the Company's exposure to earnings enhancement benefits increases as variable contract holder investments increase. The Company has entered into reinsurance arrangements that reinsure the risks associated with the guaranteed minimum death benefit feature of the Contracts, as well as other Contract guarantees. These reinsurance arrangements are subject to certain caps and limitations. Even under a range of substantially adverse mortality scenarios, the Company believes that its net exposure to these risks is immaterial at December 31, 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's audited consolidated financial statements begin on page F-1. Reference is made to the Index to Financial Statements on page 27. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following are the Directors and Executive Officers of the Company:
POSITION WITH SAGE, NAME, AGE YEAR OF ELECTION OTHER PRINCIPAL POSITIONS FOR PAST FIVE YEARS - -------------------------------------------------------------------------------------------------------------------------- Robin I. Marsden, 37 Director, January 1997 President and Trustee, Sage Life Investment Trust, July to present; President and 1998 to present; Director, Sage Distributors, Inc., January Chief Executive Officer, 1998 to August 2001 and February 2002 to present; President February 1998 to present Sage Distributors, Inc., February 2002 to present; Director, January 1997 to present, President and Chief Executive Officer, February 1998 to present, Sage Insurance Group, Inc.; Director, President and CEO, Sage Advisors, Inc., 1998 to present; Director and Chief Executive Officer, Sage Life (Bermuda), Ltd., June 2000 to present. Sage Life Limited, Director, December 1994 to present; Sage Life Holdings Limited, Director, December 1994 to May 2001; Sage Unit Trusts Limited, Director, December 1994 to present; Sage Group Limited, Director, May 2001 to present. H. Louis Shill, 72 Director, January 1997 Chairman, Sage Life Assurance of America, Inc. January 1997 to present; Chairman to February 1998; Chairman, Sage Insurance Group, Inc., December 2001 to present January 1997 to present; Founder, Chairman, Sage Group Limited, 1965 to present. Paul C. Meyer, 50 Director, January 1997 Partner, Clifford Chance US LLP, 1986 to present (formerly, to present* Rogers & Wells, and Clifford Chance Rogers & Wells). Richard D. Starr, 58 Director, January 1997 Chairman and Chief Executive Officer, Financial Institutions to present* Group, Inc., October 1978 to present; Vice Chairman and Director, ABN Amro Financial Services, Inc., 1997 - 2002. Dr. Meyer Feldberg, 61 Director, January 2000 Dean/Professor, Columbia University Graduate School of to present* Business, July 1989 to present; Director of Revlon, Inc., Federated Department Stores, Primedia, Sappi Ltd., Select Medical, and UBS Funds. John A. Benning, 68 Director, April 2000 to Senior Vice President and General Counsel, Liberty Financial present* Companies, 1986 to December 1999; Director of ICI Mutual Insurance Company and T.T. International U.S.A. Feeder Trust; Trustee, Liberty All-Star Equity Fund and Liberty All-Star Growth Fund (both closed-end funds listed on NYSE), October 2002 to present.
17
POSITION WITH SAGE, YEAR NAME, AGE OF ELECTION OTHER PRINCIPAL POSITIONS FOR PAST FIVE YEARS - -------------------------------------------------------------------------------------------------------------------------- Donald C. Waite, III, 61 Director, May 2002 to Director, Executive in Residence Program, Columbia present* University Graduate School of Business, February 2002 to present; McKinsey and Company, Director and Senior Partner, 1966 to February 2002; Presstek, Inc., Director; The Guardian Life Insurance Company of America, Director. Mitchell R. Katcher, 49 Director, December 1997 Vice President, Sage Life Investment Trust, July 1998 to to present; Senior present; Director, Sage Distributors, Inc., January 1998 to Executive Vice President August 2001; Treasurer, July 1997 to December 2001; and Chief Actuary May Director and Senior Executive Vice President, December 1997 1997 to present; Chief to present, Sage Insurance Group, Inc.; Director, Executive Operating Officer, Vice President and Chief Actuary, Sage Life (Bermuda), January 2003 to present Ltd., May 2000 to present; Sage Life Assurance of America, Inc., Chief Financial Officer, May 1997 to October 2000. Nancy F. Brunetti, 40 Executive Vice President, Executive Vice President and Chief Administrative Officer, Operations Sage Insurance Group Inc., January 2001 to present; Consultant, NFB Consulting, January 2000 to December 2000; Executive Vice President and Chief Operating Officer, January 1998 to December 1999 and Senior Vice President January 1996 to December 1997, American Skandia Life Assurance Corporation; Sage Life Assurance of America, Inc., Executive Vice President and Chief Administrative Officer, January 2001 to December 2002. Terry Eleftheriou, 43 Executive Vice President Executive Vice President & Chief Financial Officer, Sage & Chief Financial Insurance Group, Inc., August 2002 to present; Senior Vice Officer, August 2002 to President - Finance, American General Corporation, June present 2000 to September 2001; Ernst & Young, Insurance Industry Services, January 1985 to May 2000.
All entities listed above with "Sage" in their name are affiliates of Sage Life. All entities listed above not having "Sage" in their names are not affiliates of Sage Life. The executive officers of Sage Life hold various other offices and directorships with affiliates not named above. None of these, however, are considered to be principal positions. In connection with the general business retrenchment of the Company, Messrs. Meyer, Starr, Feldberg, Benning, and Waite (the "outside directors") are resigning as directors of the Company as of April 16, 2003. The outside directors are not executives of the Company or of any of its affiliates. The Company is not required by federal securities or state insurance law to have independent or outside directors on its Board. Nevertheless, the change in the Board composition will be reported to the Delaware Insurance Department and other state insurance departments as required by their regulations. The consensus of the Board, including the outside directors, was that the resignation of the outside directors was in the best interest of the Company given the Company's run-off status and the resulting material cost savings to the Company. 18 ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation paid to the Chief Executive Officer and certain other Executive Officers of the Company:
OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2) - --------------------------------------------------------------------------------------------------------- Robin I. Marsden 2002 $ 430,000 $ 240,000 $ 21,000 $ 25,600 (President & CEO) 2001 390,750 108,800 17,850 132,179 2000 354,750 100,000 17,850 119,399 Mitchell R. Katcher 2002 $ 345,625 $ 162500 $ 21,000 $ 19,458 (Sr. EVP, COO & Chief Actuary) 2001 318,750 150,000 17,850 20,535 2000 293,750 137,500 17,850 17,824 Nancy F. Brunetti 2002 $ 295,250 $ 140,500 $ 21,000 $ 16,001 (EVP, Operations) 2001 279,500 34,375 - 31,000 Terry Eleftheriou 2002 $ 291,017(3) $ 0 $ 0 $ 0 (EVP & Chief Financial Officer) Lincoln B. Yersin (4) 2002 $ 33,833 $ 25,000 $ 3,552 $ 0 (Former EVP Marketing) 2001 199,750 150,000 17,850 3,124 2000 186,250 150,000 13,300 47,191 Jeffrey Gordon (5) 2002 $ 107,250 $ 83,000 $ 9,319* $ 0 (Former Sr.V.P. CFO) 2001 205,250 40,000 4,528* 100,229
* These amounts were forfeited due to non-vesting upon employment termination. (1) Represents amounts credited to executives under a SIGI sponsored money-purchase, defined contribution plan. (2) All Other Compensation consists of the following for the executive officers: Mr. Marsden: 2002, $24,150 - contribution to non-qualified retirement plan, $1,450 - tax return preparation services; 2001, $23,179 -- contribution to non-qualified retirement plan, $109,000 deferral of partial 2000-2001 fiscal year earned bonus; 2000, $19,399 -- contribution to non-qualified retirement plan, $100,000 - deferral of partial 1999-2000 fiscal year earned bonus. Mr. Katcher: 2002 - $15,291 contribution to non-qualified retirement plan, $4,167 contribution to non-qualified retirement plan in lieu of employee benefit; 2001, $20,535 -- contribution to non-qualified retirement plan; 2000, $12,994 -- contribution to non-qualified retirement plan, $4,830 -- contribution to non-qualified plan in lieu of employee benefit. Mr. Yersin: 2002, $27,721 - pay-out of paid-time-off benefit; 2001, $3,124 -- contribution to non-qualified retirement plan; 2000, $47,191 -- moving expenses. 19 Mr. Gordon: 2002, $2,264 contribution to non-qualified plan, $38,769 - moving expenses, $17,290 pay-out of paid-time-off benefit; 2001, $43,750 -- recruitment bonus, $5,736 -- contribution to non-qualified retirement plan; $62,880 -- moving expenses. Ms. Brunetti: 2002, $10,001 - contribution to non-qualified retirement plan, $6,000 commuter allowance; 2001, $25,000 -- recruitment bonus, $6,000 -- commuter allowance. (3) Mr. Eleftheriou's salary is comprised of $75,807 reported on Form W-2 as employee compensation, and $215,210 reported on Form 1099 pursuant to his consulting contract with the Company. (4) Mr. Yersin's employment with the Company terminated February 27, 2002. (5) Mr. Gordon's employment with the Company terminated June 28, 2002. Employment Contracts. Mr. Marsden and the Company are parties to an Employment Agreement effective April 1, 2000. The agreement provides for Mr. Marsden's title and duties with the Company, and establishes certain restrictive covenants. It sets forth his annual remuneration for the year from April 1, 2000, to March 31, 2001, and provides that such remuneration will be reviewed annually thereafter. Further, the agreement provides that Mr. Marsden is eligible to participate in the Company's short-term incentive bonus plan for executive employees, and in a long-term capital incentive plan to be established by SIGI. The agreement also provides that if his employment is terminated (except for a "with cause" termination): (i) he shall continue to be paid 24 months of then-current base salary with a proportionate bonus under the Company's short-term incentive plan for the months of service since the last bonus payment; (ii) that his employee welfare benefits will be continued for 24 months; (iii) that unvested pension contributions would immediately vest; and (iv) that unvested allocations or options under the long-term capital incentive plan would be treated in the same manner as a retirement under the rules of the plan. In addition, if the Company is no longer controlled by Sage Group and its effective place of business is relocated by its new owners, Mr. Marsden may, in lieu of relocating and being reimbursed thereof, elect to terminate his employment and receive the benefits he would otherwise have received if terminated without cause. This provision was amended by letter dated November 11, 2002, to include "material reduction in compensation" as a triggering event. Mr. Katcher and the Company are parties to an Employment Agreement effective February 1, 1997. The agreement provides for Mr. Katcher's title and duties with the Company, sets forth his remuneration through March 31, 1999, and provides that such remuneration will be reviewed annually thereafter. The agreement also provides that Mr. Katcher is eligible to participate in the Company's short-term incentive bonus plan for executive employees, and provides that bonuses payable on certain dates ending April 1, 1999, will not be less than indicated amounts. The agreement also provides that Mr. Katcher may participate in a long-term capital incentive plan to be established by SIGI. The agreement also provides that if his employment is terminated (except for a "with cause" termination): (i) his monthly compensation and employee welfare benefits shall be continued for a period of time as determined by a formula; (ii) that unvested allocations or options under the long-term capital incentive plan and unvested employer contributions attributable to Mr. Katcher under any pension plan would be accelerated and deemed to immediately vest; and (iii) by letter dated September 15, 2002, amending the employment agreement, guaranteeing a proportionate bonus up to the point of termination based on his most recent annual performance bonus. In addition, pursuant to a "change of control" provision, if during the twelve months following such change of control there is a material reduction in Mr. Katcher's responsibilities, or a material reduction in his compensation, or a required job relocation or assignment beyond specified areas, then Mr. Katcher may elect to terminate his employment and receive the benefits he would otherwise have received if terminated without cause. In addition, by letter dated September 15, 2002, Mr. Katcher is guaranteed a "capital raising success and 20 retention bonus" of not less than $14,687.50 per month for 12 months following the successful closing of a capital raising effort. Ms. Brunetti and SIGI are parties to an agreement dated December 21, 2000. The agreement provides for Ms. Brunetti's title and duties with SIGI and the Company, sets forth her initial annual remuneration and other incidental allowances, and provides that such remuneration will be reviewed on an annual basis. The agreement also provides that Ms. Brunetti is eligible to participate in the Company's short-term incentive bonus plan for employees, and that for the period through March 31, 2002, such bonus will be guaranteed at 50% of base gross salary. The agreement also provides that she is eligible to participate in a long-term capital incentive plan to be established by SIGI, and an Executive Non-Qualified Deferred Compensation Plan ("Rabbi Trust"). The agreement provides for indemnification of personal liability arising in the ordinary course of business. The December 21, 2000 agreement was updated by letter dated June 10, 2002, wherein Ms. Brunetti's annual compensation was reset and a change of control provision was added. Pursuant to the change of control provision, if within the twelve months following the change of control Ms. Brunetti's employment is terminated, or if there is a material reduction in her responsibilities without her consent causing her to terminate her employment, she is guaranteed 12 monthly payments of her then monthly salary and a proportionate bonus up to the date of termination based on her most recent bonus. By letter dated December 17, 2002, the Company guaranteed severance pay and various insurance protection benefits for a period of 12 months. Mr. Eleftheriou was appointed Chief Financial Officer by a consulting agreement dated June 20, 2002. The Board subsequently ratified this appointment in August of 2002. Thereafter, Mr. Eleftheriou and the Company entered into an Employment Agreement dated November 1, 2002, effective until April 30, 2003, unless extended by the parties pursuant to terms prescribed in the agreement. Among other things, the agreement provides for Mr. Eleftheriou's title and duties with the Company (and SIGI); guarantees his access to committees and persons necessary for him to fulfill his professional obligations and duties under the agreement; sets forth his remuneration and provides for certain customary benefits; and provides for the covering or reimbursement of certain expenses in consideration of Mr. Eleftheriou's residence in Houston. The agreement provides for the extension of salary and benefits for a period of 26 weeks if the Company terminates Mr. Eleftheriou's employment while the agreement is in force or declines to extend employment pursuant to the prescribed terms. If the Company makes an offer to extend employment, the terms of which are at least as favorable as those prescribed in the agreement (and which also include relocation from Houston), and Mr. Eleftheriou declines to accept the offer, then the agreement terminates with no extension of salary. Mr. Eleftheriou may terminate the agreement and his employment and be entitled to 26 weeks of continued salary and benefits for reasons stipulated in the agreement, including substantial changes in his position, failure of the Company to comply with the terms of the Agreement, failure of the Company to implement policies, programs or systems he deems necessary, material reduction in his salary and change of control provisions. Mr. Yersin resigned February 27, 2002. Prior to his resignation, Mr. Yersin and the Company were parties to an employment agreement with an effective date of May 3, 1999. The agreement provided for Mr. Yersin's title and duties with the Company, and set forth his base salary and other compensation based on sales ("override"), with stated minimums on the override for the first two years. It also provided for compensation to Mr. Yersin in recognition of long-term incentives he forfeited with his former employer. Half of the value was advanced in cash and vested pro rata over the next two years. The other half was credited to Mr. Yersin's participation in a long-term capital incentive plan to be established by SIGI. Mr. Gordon resigned June 28, 2002. Prior to his resignation, Mr. Gordon and SIGI were parties to an agreement dated September 11, 2000. The agreement provided for Mr. Gordon's title and duties with SIGI and the Company, set forth his initial annual remuneration, and provided that such remuneration will be reviewed on an annual basis. The agreement also provided that Mr. Gordon was eligible to participate in the 21 Company's short-term incentive bonus plan for employees. The agreement also provided that he be eligible to participate in a long-term capital incentive plan to be established by SIGI. In addition, the agreement provided that for the first year of employment, SIGI will make a special fully vested monthly contribution of 4% of base salary to an Executive Non-Qualified Deferred Compensation Plan ("Rabbi Trust"). The agreement provided for bridge financing payable over three years should stock loan obligations to Mr. Gordon's former employer materialize. Under this provision, during 2002, the Company provided Mr. Gordon with a $15,000 non-interest bearing loan payable December 31, 2002. Directors' Compensation. Messrs. Marsden, Katcher and Shill are also officers-employees of Sage Life and/or its affiliates and parent companies, and are not therefore separately compensated for serving on the Board. Compensation for the other directors is inclusive of their services as directors for any of our affiliates. Messrs. Meyer, Starr, Benning and Waite are paid an annual retainer of $12,000, and $2,000 per meeting attended. Dr. Feldberg, who is also chairman of our subsidiary, Sage Life Assurance Company of New York, is paid an annual retainer of $30,000, and $8,000 per meeting attended. Messrs. Meyer, Starr, Benning, Waite and Feldberg do not receive retirement benefits. Mr. Benning, as chairman of the audit committee, receives an annual retainer of $3,000, and $500 per meeting attended. 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Paul C. Meyer, a director of the Company, is a partner with the law firm Clifford Chance US L.L.P. Since 1997, the Company has retained Clifford Chance US L.L.P., and its predecessor firms, Clifford Chance Rogers & Wells, and Rogers & Wells, to provide legal counseling to the Company. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures [as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")] as of a date within 90 days before the filing date of this Annual Report. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that the Company's disclosure controls and procedures are effective, providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis. (b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. 23 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page (a) 1. Consolidated Financial Statements Report of Independent Auditors F-1 Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and F-3 2000 Consolidated Statements of Stockholder's Equity for the years ended December 31, 2002, F-4 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and F-5 2000 Notes to Consolidated Financial Statements F-6 (b) Reports on Form 8-K Reports on Form 8-K filed on December 9 and 18, 2002 were the only filings by the Registrant during the quarter ended December 31, 2002. (c) Exhibit Index E-1
24 Report of Independent Auditors Board of Directors Sage Life Assurance of America, Inc. We have audited the accompanying consolidated balance sheets of Sage Life Assurance of America, Inc. and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sage Life Assurance of America, Inc. and subsidiary at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1, during 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. /s/ Ernst & Young LLP Hartford, CT March 21, 2003 F-1 Sage Life Assurance of America, Inc. Consolidated Balance Sheets
DECEMBER 31 2002 2001 -------------------------------------- ASSETS Investments: Fixed maturity securities available for sale (amortized cost: $ 13,135,718 $ 13,652,254 2002- $12,476,000; 2001 - $13,486,000) Equity securities, at fair value (cost: 2002 - $759,000; 2001 - 759,000 1,097,000 $1,082,000) -------------------------------------- Total investments 13,894,718 14,749,254 Cash and cash equivalents 9,281,625 9,383,386 Accrued investment income 202,979 252,983 Receivable from affiliates - 1,081,710 Reinsurance receivables - 746,661 Deferred acquisition costs 3,063,793 2,569,876 Intangible assets 4,348,765 5,776,300 Other assets 929,220 794,834 Separate account assets 134,284,573 78,882,581 -------------------------------------- Total assets $ 166,005,673 $ 114,237,585 ====================================== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Deferred gain from modified coinsurance $ 2,301,897 $ 1,283,790 Payable to affiliate 429,954 - Reinsurance payables 851,368 - Unearned revenue 23,951 6,024 Deferred federal income taxes 346,007 60,807 Accrued expenses and other liabilities 5,877,338 2,096,810 Separate account liabilities 134,284,573 78,882,581 -------------------------------------- Total liabilities 144,115,088 82,330,012 Stockholder's equity: Common stock, $2,500 par value, 1,000 shares authorized, issued and outstanding 2,500,000 2,500,000 Additional paid-in capital 56,337,754 50,937,804 Deficit (37,618,830) (21,648,267) Accumulated other comprehensive gain 671,661 118,036 -------------------------------------- Total stockholder's equity 21,890,585 31,907,573 -------------------------------------- Total liabilities and stockholder's equity $ 166,005,673 $ 114,237,585 ======================================
See accompanying notes to consolidated financial statements. F-2 Sage Life Assurance of America, Inc. Consolidated Statements of Operations
YEAR ENDED DECEMBER 31 2002 2001 2000 --------------------------------------------------- REVENUES Net investment income $ 1,534,629 $ 2,108,497 $ 1,888,172 Realized capital (losses) gains (1,232,740) 14,088 - Administrative service fees 50,663 39,260 49,940 Contract charges and fees 650,853 108,986 3,979 --------------------------------------------------- Total revenues 1,003,405 2,270,831 1,942,091 BENEFITS AND EXPENSES Contract owner benefits 1,284,163 1,078,918 490,964 Acquisition expenses 647,466 (50,182) - Goodwill impairment 1,427,535 - - General and administrative expenses 13,614,804 8,520,739 6,203,576 --------------------------------------------------- Total benefits and expenses 16,973,968 9,549,475 6,694,540 --------------------------------------------------- Net loss $ (15,970,563) $ (7,278,644) $ (4,752,449) ===================================================
See accompanying notes to consolidated financial statements. F-3 Sage Life Assurance of America, Inc. Consolidated Statements of Stockholder's Equity
ACCUMULATED OTHER ADDITIONAL PAID- COMPREHENSIVE COMMON STOCK IN CAPITAL DEFICIT INCOME (LOSS) TOTAL --------------------------------------------------------------------------------------- Balances at December 31, 1999 $ 2,500,000 $ 39,351,096 $ (9,617,174) $ (730,777) $ 31,503,145 Net loss - - (4,752,449) - (4,752,449) Change in unrealized loss on investments, net of federal income taxes - - - 446,336 446,336 ------------ Comprehensive loss - - - - (4,306,113) Additional capital contributions - 5,320,065 - - 5,320,065 --------------------------------------------------------------------------------------- Balances at December 31, 2000 2,500,000 44,671,161 (14,369,623) (284,441) 32,517,097 Net loss (7,278,644) - (7,278,644) Change in unrealized loss on investments, net of federal income taxes - - - 402,477 402,477 ------------ Comprehensive loss - - - - (6,876,167) Additional capital contributions - 6,266,643 - - 6,266,643 --------------------------------------------------------------------------------------- Balances at December 31, 2001 2,500,000 50,937,804 (21,648,267) 118,036 31,907,573 Net loss (15,970,563) (15,970,563) Change in unrealized loss on investments, net of federal income taxes 553,625 553,625 ------------ Comprehensive loss 15,416,938) Additional capital contributions 5,399,950 5,399,950 --------------------------------------------------------------------------------------- Balances at December 31, 2002 $ 2,500,000 $ 56,337,754 $(37,618,830) $ 671,661 $ 21,890,585 =======================================================================================
See accompanying notes to consolidated financial statements. F-4 Sage Life Assurance of America, Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 2002 2001 2000 ------------------------------------------------ OPERATING ACTIVITIES Net loss $ (15,970,563) $ (7,278,644) $ (4,752,449) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of acquisition costs 647,466 - - Goodwill impairment 1,427,535 - - Amortization of bond discount/premium 114,504 109,529 114,223 Realized capital losses (gains) 1,232,740 (14,088) - Amounts transferred to separate account for realized losses (885,338) - - Changes in: Accrued investment income 50,004 (29,843) (16,877) Receivable (payable) from affiliates 1,511,663 618,304 (1,028,744) Unearned revenue 17,927 5,123 901 Reinsurance receivables (payables) 1,598,029 (456,359) (290,302) Deferred acquisition costs (1,141,382) (2,242,156) (327,720) Deferred gain from modified coinsurance 1,018,107 965,762 318,028 Agreement Accrued expenses and other liabilities 4,128,378 1,525,082 438,600 Other assets (257,655) (462,919) 139,938 ------------------------------------------------ Net cash used in operating activities (6,508,585) (7,260,209) (5,404,402) INVESTING ACTIVITIES Purchases of fixed maturity securities - - (453,975) Proceeds from sales, maturities and repayments of fixed maturity securities 883,680 1,509,785 2,535,000 Proceeds from sale of other invested assets 123,194 - - ------------------------------------------------ Net cash provided by investing 1,006,874 1,509,785 2,081,025 Activities FINANCING ACTIVITIES Capital contributions from parent 5,399,950 5,184,643 5,320,065 ------------------------------------------------ Net cash provided by financing activities 5,399,950 5,184,643 5,320,065 ------------------------------------------------ (Decrease) increase in cash and cash equivalents (101,761) (565,781) 1,996,688 Cash and cash equivalents at beginning of year 9,383,386 9,949,167 7,952,479 ------------------------------------------------ Cash and cash equivalents at end of year $ 9,281,625 $ 9,383,386 $ 9,949,167 ================================================
See accompanying notes to consolidated financial statements. F-5 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND ORGANIZATION Sage Life Assurance of America, Inc. (the "Company" or "Sage Life") is a Delaware domiciled stock life insurance company with its principal offices in Stamford, Connecticut. The Company is a wholly owned subsidiary of Sage Life Holdings of America, Inc. ("SLHA") which is owned 9.9% by Swiss Re Life and Health America, Inc. ("Swiss Re") and 90.1% owned by Sage Insurance Group, Inc. ("SIGI"), a wholly owned indirect subsidiary of Sage Group Limited, a South African financial institution. Before the general business retrenchment described below in "Restructuring Costs" the Company was engaged in the manufacture, marketing and distribution of variable annuity and variable life insurance contracts (the "Insurance Products") and shares of a registered investment company. The Company is licensed to write business in 49 states and the District of Columbia. Sales of these products to the retail public are made by registered representatives of unaffiliated broker-dealers that have entered into selling agreements with the principal underwriter for the product. Gross premiums for 2002, 2001, and 2000 were approximately $86,753,000, $68,900,000, and $21,110,000, respectively. Sage Life's affiliated companies include: Sage Life Assurance Company of New York ("Sage New York"), a subsidiary of Sage Life that had been seeking to obtain a license in the State of New York; Sage Advisors, Inc. an affiliated investment manager for the registered investment company ("Sage Life Investment Trust" or the "Trust") sponsored by Sage Life whose shares (the "Shares") are available as investment options in the Insurance Products; Sage Distributors, Inc. ("Sage Distributors") a registered broker-dealer that acts as the principal underwriter of the Insurance Products and the Shares; Sage Re (Bermuda) Ltd., an insurance company licensed in Bermuda; and Finplan Holdings, Inc. As stated in Note 6 - Common and Preferred Stock of Parent, the Company's statutory capital and surplus at December 31, 2002 fell below the minimum $20 million level required by the Preferred Stock Purchase Agreement between SLHA and Swiss Re. Consequently, subject to obtaining requisite regulatory approvals, Swiss Re now has the right to exercise its option under the terms of the Preferred Stock Purchase Agreement to assume voting control of SLHA. Swiss Re has not yet exercised, and has yet to indicate whether it would exercise, such an option. RESTRUCTURING COSTS On December 17, 2002, the Board of Directors approved plans to discontinue business activities including the suspension of all sales, marketing and distribution activities, the closure of the Trust, and the termination of all staff not required to administer the run-off of Sage Life's in-force contracts. Effective January 1, 2003, the Company suspended all marketing and underwriting activities and ceased all new sales. As a result, the Company's entire internal and external wholesaling and marketing staff were terminated in mid-January 2003. The Company plans to keep its remaining staff to effect the phased implementation of business discontinuance activities over the course of 2003. This includes further planned retrenchments to reduce staff down to a minimum group to administer the in-force business during run-off. F-6 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESTRUCTURING COSTS (CONTINUED) In accordance with the provisions of Emerging Issues Task Force 94-3, Liability Recognition for Certain Employee Termination and Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), the Company has established provisions of $5,404,000 at December 31, 2002 for involuntary termination benefits, contract termination and other exit costs (principally the write off of goodwill) resulting from its decision to cease new business activities. BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States and reflect the consolidated accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions relate to the amortization of deferred acquisition costs and deferred gain from the modified coinsurance agreement. These assumptions involve surrenders, investment return, growth in allocations to variable funds options by contract owners, and maintenance expenses. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. INVESTMENTS The Company has classified all of its fixed maturity investments as available-for-sale. Those investments are carried at fair value and changes in unrealized gains and losses are reported as a component of stockholder's equity, net of applicable deferred federal income taxes. Fair values are determined by quoted market prices. Equity securities, consisting of seed money investments, are carried at fair value based on the net asset values of the fund shares and the related unrealized capital gains (losses) are reported as a component of stockholder's equity, net of applicable deferred federal income taxes. F-7 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) The Company reviews its investment portfolio quarterly for indicators of other than temporary impairment of securities. Based on the facts and circumstances, when the Company determines that a decline in fair value below cost is other than temporary, the Company records the difference as a realized loss in the statement of operations. Realized gains on the disposal of investments are determined by the specific identification method. In 2002 and 2001, the reclassification adjustments for realized capital losses previously included in accumulated other comprehensive income were approximately $5,000 and $38,000, respectively. FAIR VALUES The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments in the accompanying financial statements and notes thereto: Cash, Cash Equivalents, and Short-term Investments: The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate their fair values. Investment Securities: Fair values for fixed maturity securities are based on quoted market prices, where available. The fair values for equity securities are based on quoted market prices, where available; for equity securities that are not actively traded, estimated fair values are based on values of issues of comparable yield and quality. See Note 2. Investment Contracts: The carrying amounts of the Company's liabilities under variable life and annuity contracts approximates fair value. DEFERRED ACQUISITION COSTS AND SALES INDUCEMENTS The costs of acquiring new business, which vary with and are primarily related to the production of new business, are deferred net of reinsurance. These costs include commissions, costs of contract issuance, and certain selling expenses. These deferred costs are being amortized in proportion to expected gross profits from interest, expense, mortality and surrender margins. This amortization is adjusted retrospectively and prospectively when estimates of current and future gross profits to be realized from a group of products are revised. During 2002, 2001, and 2000, the Company capitalized $1,141,000, $2,192,000, and $328,000, net of reinsurance ceded. During 2002 and 2001, the Company recorded, net of reinsurance ceded, amortization and interest accretion of $892,000 and $245,000, and $45,000 and $95,000 respectively. The Company began amortizing deferred acquisition costs in 2001. The Company also offers sales inducements that enhance the investment yield on the amount allocated to the fixed option by contract owners. Such inducements are deferred and amortized in a manner similar to deferred acquisition costs. At December 31, 2002 and 2001 deferred sales inducements were $823,000 and $604,000, respectively, and are included in other assets in the accompanying balance sheets. F-8 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REINSURANCE Reinsurance contracts are accounted for in a manner consistent with the underlying contracts. Reinsurance does not relieve the Company from its obligations to contract owners. The Company remains primarily liable to the contract owners to the extent that any reinsurer does not meet its obligations under the reinsurance agreements. Deferred acquisition costs in the accompanying balance sheets are net of amounts ceded under a modified coinsurance agreement with Swiss Re. The deferred gain from this agreement shown in the accompanying consolidated balance sheets represents the commission and expense allowance received by the Company in excess of the quota share percentage. Contract liabilities and associated assets are reported on a gross basis. Reinsurance premiums ceded for the guarantees in the contracts and the corresponding reinsurance recoveries on benefits and claims incurred are included in contract owner benefits. SEPARATE ACCOUNTS The separate account assets and liabilities reported in the accompanying balance sheets represent funds that are separately administered, principally for the benefit of certain contract owners who bear the investment risk. The separate account assets and liabilities are carried at fair value based on quoted market prices. The change in fair value of fixed maturity and marketable equity securities are recognized in other comprehensive income as if those securities were in the general account. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account contract owners, are excluded from the amounts reported in the accompanying statements of operations. Separate account assets consist of mutual funds, bonds, short-term investments, transfers due from the general account and cash and cash equivalents. The Company provides return guarantees determined periodically by management that vary based on the length of the guarantee period ranging from one to ten years subject to a minimum guaranteed return of 3%, or the rate on an analogous Treasury Note less 225 basis points, of the average investment balance to contract owners selecting any of the fixed options. Withdrawals from fixed options prior to the end of the guarantee period are subject to a market value adjustment based on interest rate levels at the time of the withdrawal. At December 31, 2002 and 2001, the separate account liabilities included approximately $21,597,000 and $28,521,000, respectively, relating to contracts for which the contract owner is guaranteed a fixed rate of return. For contract owners that do not select the fixed option, there are no minimum guarantees and the investment risk associated with market value changes are borne entirely by the contract owner. F-9 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONTRACT LIABILITIES The Company has no contract liabilities in its general account at December 31, 2002 and 2001. All contract liabilities are in the separate account and are comprised of all payments received adjusted for investment experience, contract owner charges, assessments and withdrawals related to the underlying contracts. RECOGNITION OF REVENUE AND CONTRACT BENEFITS Revenues for variable annuity contracts consist of charges against contract owner account values for mortality and expense risks, administration fees, surrender charges and annual maintenance fees. Revenues for variable life insurance contracts consist of charges against contract owner account values for mortality and expense risks, administration fees, cost of insurance fees, surrender charges and annual maintenance fees. Contract owner benefits include first year bonus credits and the amount of guaranteed investment income credited to the fixed account. Benefit reserves for variable annuity and variable life insurance contracts represent the account values of the contracts and are included in the separate account liabilities. The Company defers the non-level portions of mortality and expense risk fees and annual maintenance fees as unearned revenue. Such revenue is recognized generally in proportion to expected gross profits on the underlying business. GOODWILL On December 31, 1996 the Company was purchased by SIGI from Security First Life Insurance Company. The amount paid in excess of the acquired assets was recorded as goodwill and was being amortized on a straight-line basis over thirty years. The carrying value of goodwill is regularly reviewed for indications of impairment in value. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). With the adoption of SFAS No. 142, goodwill is no longer subject to periodic amortization over its estimated useful life, but rather will be subject to at least an annual assessment for impairment by applying a fair-value based test. Acquired intangible assets must be recognized and amortized over their useful lives. Acquired intangible assets with indefinite lives are not subject to periodic amortization under the new rules but would be subject to periodic assessment for impairment. At adoption, the Company performed an impairment test for its carrying value of goodwill. Utilizing sales forecasts to project future distributable earnings, the Company computed an embedded value that supported the carrying value of goodwill. However, concurrent with the Company's decision to place itself in run-off, the Company concluded that its goodwill was impaired. Therefore, the Company wrote off the goodwill balance of $1,428,000 in current year operations. F-10 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL (CONTINUED) The remaining balance included in goodwill and identified intangibles represents state insurance licenses acquired in the acquisition of Fidelity Standard Life Insurance Company. Those identified intangibles are not subject to amortization under SFAS No. 142 because of their indefinite lives. The Company reviews those identified intangibles at least annually for impairment based on fair value of the insurance licenses. If SFAS No. 142 were in effect beginning January 1, 2000, the financial statement impact would have been approximately $217,000 and $234,000 for the years ended December 31, 2001 and 2000, respectively. FEDERAL INCOME TAXES Federal income taxes are accounted for using the liability method. Using this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. SEGMENT INFORMATION The Company's operations are classified into one reportable segment: manufacture, marketing and distribution of variable annuity and variable life insurance contracts. RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, ("SFAS No. 146") which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than the current practice of recognizing those costs at the date of a commitment to exit or disposal plan. The provisions of SFAS No. 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial condition or results of operations. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statement amounts to conform to the 2002 presentation. F-11 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS Investments in fixed maturity securities at December 31 consist of the following (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------- 2002 U.S. Government obligations $ 6,499 $ 486 $ - $ 6,985 Corporate obligations 5,977 251 77 6,151 ------------------------------------------------------- $ 12,476 $ 737 $ 77 $ 13,136 ======================================================= 2001 U.S. Government obligations $ 6,988 $ 90 $ 5 $ 7,073 Corporate obligations 6,498 144 63 6,579 ------------------------------------------------------- $ 13,486 $ 234 $ 68 $ 13,652 =======================================================
The amortized cost and fair value of fixed maturity securities by contractual maturity at December 31, 2002 are summarized below (in thousands). Actual maturities will differ from contractual maturities because certain borrowers have the right to call or prepay obligations.
AMORTIZED FAIR COST VALUE -------------------------- Due in one year or less $ 2,008 $ 2,040 Due after one year through five years 7,896 8,467 Due after five years through ten years 2,572 2,629 -------------------------- Total $ 12,476 $ 13,136 ==========================
Investments in equity securities at December 31 consist of the following (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------- 2002 Nasdaq 100 Index Fund $ 273 $ - $ - $ 273 Eagle All-Cap Fund 486 - - 486 ----------------------------------------------------- $ 759 $ - $ - $ 759 ===================================================== 2001 Nasdaq 100 Index Fund $ 428 $ 11 $ - $ 439 Eagle All-Cap Fund 654 4 - 658 ----------------------------------------------------- $ 1,082 $ 15 $ - $ 1,097 =====================================================
F-12 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 2. INVESTMENTS (CONTINUED) During 2002 and 2001, the Company recognized impairment losses in the above funds of $323,000 and $918,000, respectively. Such losses are included in realized capital losses in the accompanying statements of operations. In addition, during 2002, the Company recorded realized capital losses of $863,000 on a WorldCom bond which was held in the separate account to support insurance contracts in guaranteed fixed options. Proceeds from the sale of fixed maturity securities were $884,000 and 1,510,000 during 2002 and 2001, resulting in gross realized gains (losses) of $(24,000) and $14,000, respectively. During 2001, the Company's parent contributed equity securities with a fair value of $1,082,000 to the Company. Such equity securities represent seed money in two funds sponsored by Sage Life Investment Trust. At December 31, 2002 and 2001, unrealized capital gains of $235,000 and $7,000, respectively, net of tax, on fixed maturity securities held in the separate account was reflected in accumulated other comprehensive gains. Investment income by major category of investment is summarized as follows (in thousands):
2002 2001 2000 ------------------------------------------- Fixed maturity securities $ 1,483 $ 1,875 $ 1,398 Cash and cash equivalents 157 370 572 ------------------------------------------- Total investment income 1,640 2,245 1,970 Investment expenses (105) (136) (82) ------------------------------------------- Net investment income $ 1,535 $ 2,109 $ 1,888 ===========================================
At December 31, 2002 securities with an amortized cost and fair value of approximately $6,398,000 and $6,878,000, respectively, were held by trustees in various amounts in accordance with the statutory requirements of certain states in which the Company is licensed to conduct business. 3. REINSURANCE At the date of issue, the Company's variable insurance products result in a net cash outflow in that 100% of contract owner premiums received by the Company are invested in separate accounts supporting the contracts, leaving a cash strain caused by the payment of commissions and other policy acquisition expenses. In 2000, the Company entered into a multi-year modified coinsurance agreement (the "Modco Agreement") under which Sage Life has ceded a significant portion of the variable insurance business to Swiss Re. Depending on the product, the Company ceded to Swiss Re between 65% to 81% of contract revenues and related expenses in return for an expense allowance from Swiss Re that substantially covers commission and other contract acquisition costs. This Modco Agreement provided the Company with additional capacity for growth by substantially funding the cash flow strain from new business. F-13 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 3. REINSURANCE (CONTINUED) During 2002, 2001, and 2000 the Company ceded premiums of $76,876,000, $39,816,000, and $14,106,000, respectively. Contract charges and fees for 2002, 2001, and 2000 are net of $883,000, $230,000, and $8,000, respectively, ceded to Swiss Re. Contract owner benefits are net of $6,000, $123,000, and $30,000 ceded to Swiss Re in 2002, 2001, and 2000, respectively. During the first quarter of 2002, the Modco Agreement was amended to include certain variable annuity products introduced by the Company during the fourth quarter of 2001. The amendment resulted in reductions of written premium, Contract charges and Contract owner benefits of $9,312,000, $8,000, and $5,000, respectively, relating to the prior year. In addition, the Company has entered into reinsurance arrangements that reinsure certain mortality risks associated with the death benefit and accidental death benefit features of the contracts, as well as other contract guarantees. The premium ceded under these arrangements in 2002 and 2001 was $294,000 and $154,000, respectively. The Company uses only highly rated reinsurance companies to reinsure these risks. 4. FEDERAL INCOME TAXES Prior to 2002, the Company had filed a separate life insurance company federal income tax return. Beginning in 2002, the Company may elect to join in a life/non-life consolidated tax return of Sage Holdings (U.S.A.), Inc. and its subsidiaries. The Company files a separate life insurance company federal income tax return and intends to do so through the year 2002. The provision for income taxes varies from the amount that would be computed using the federal statutory income tax rate as follows:
2002 2001 2000 ---- ---- ---- Pre-tax loss $(15,970,563) $(7,278,644) $(4,752,449) Application of the federal statutory tax rate - 34% (5,429,991) (2,474,739) (1,615,833) Change in valuation allowance 5,428,929 2,551,734 1,614,188 Other 1,062 (76,995) 1,645 -------------------------------------------- Total income tax provision - - - ============================================
F-14 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 4. FEDERAL INCOME TAXES (CONTINUED) The Company's deferred tax assets and liabilities are comprised of the following at December 31:
2002 2001 ------------------------------------ Deferred tax assets: Net operating loss carryforwards $ 10,571,506 $ 7,682,789 Capital loss carryforwards 419,132 - Reserves (2,234,396) 282,527 Deferred gain from Modco Agreement 782,645 436,489 Accrued expenses 3,997,952 - Unearned revenue 161,231 82,944 Other 155,030 37,718 ------------------------------------ Total deferred tax assets 13,853,100 8,522,467 Deferred tax liabilities: Goodwill (41,790) (378,729) Deferred policy acquisition costs (413,295) (712,167) Unrealized gain on appreciation of investments (346,007) (60,807) Other (272,717) (13,093) ------------------------------------ Total deferred tax liabilities (1,073,809) (1,164,796) Valuation allowance for deferred tax assets (13,125,298) (7,418,478) ------------------------------------ Net deferred tax liability $ (346,007) $ (60,807) ====================================
Based upon the lack of historical operating earnings and the uncertainty of operating earnings in the future, management has determined that it is not more likely than not that the deferred tax assets will be fully recognized. Accordingly, a valuation allowance has been recorded. At December 31, 2002, the Company has separate company net operating loss carryforwards of approximately $31,100,000, expiring between 2012 and 2017. 5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS The Company is a Delaware-domiciled life insurance company subject to the laws of Delaware governing insurance companies and to the regulations of its Insurance Department (the "Department"). Delaware's insurance laws require, among other things, that insurers maintain specified minimum levels of paid-in capital and surplus, and that their investments be of specified types and may not exceed specified amounts. The Department has broad authority to examine an insurer's books and records to ensure compliance with those and other insurance laws of the State, and may determine whether reported contract liabilities and reserves are computed in accordance with statutory accounting practices prescribed or permitted by the Department. In addition, the Company is subject to the regulation under insurance laws of all jurisdictions in which it operates (49 states and the District of Columbia). F-15 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS (CONTINUED) Changes in control of insurance companies are subject to Delaware's Insurance Holding Company System Registration law and regulation. All transfers of control must be submitted in advance to the Department for its approval and determination as to, among other things: the proposed transferee's competence, experience and integrity; whether the transfer is likely to be hazardous or prejudicial to the insurance buying public; and whether the plans or proposals which the proposed transferee has to liquidate the insurer or sell its assets, or make other material changes may be unfair or unreasonable to policyholders. The Delaware Insurance Commissioner has broad administrative powers allowing him or her to: (1) impose monetary penalties on insurers for violations of any provisions of the insurance laws; (2) to suspend or revoke an insurer's certificate of authority; (3) to obtain injunctions or receivership with respect to violations of the Insurance Holding Company System Registration law; and (4) to apply to the court for orders appointing him as a receiver for the purposes of rehabilitating or liquidating insolvent or financially unsound insurers. The insurance laws also set forth the order of priority of claims against a rehabilitating or liquidating insurer. The Company's insurance business has been entirely restricted to variable annuities and variable life insurance contracts. Pursuant to Delaware's insurance laws, the Company has established separate investment accounts to support these variable Insurance Products as well as for other purposes permitted by law. Assets equal to the reserves and other Insurance Products' liabilities with respect to the separate accounts are not chargeable with liabilities arising out of any other business or account of the Company. The Company's statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Delaware Insurance Department as codified in the NAIC's Accounting Practices and Procedures Manual. Statutory-basis net loss and capital and surplus of the Company were as follows (in thousands):
2002 2001 2000 ---------------------------------------------------- Net loss $ (22,336) $ (7,662) $ (1,949) Capital and surplus 8,562 25,368 26,506
The National Association of Insurance Commissioners ("NAIC") requires insurance companies to report information regarding minimum Risk Based Capital ("RBC") requirements. These requirements are intended to allow insurance regulators to identify companies that may need regulatory attention. The RBC model law requires that insurance companies apply various factors to asset, premium and reserve items, all of which have inherent risks. The formula includes components for asset risk, insurance risk, interest risk and business risk. At December 31, 2002, the Company's total adjusted capital exceeded RBC requirements. F-16 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 5. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS (CONTINUED) The Company is subject to state regulatory restrictions that limit the maximum amount of dividends payable. Subject to certain net income carryforward provisions as described below, the Company must obtain approval of the Insurance Commissioner of the State of Delaware in order to pay, in any 12-month period, "extraordinary" dividends which are defined as those in excess of the greater of 10% of surplus as regards contract owners as of the prior year-end and statutory net income less realized capital gains for such prior year. The Company may pay dividends only out of earned surplus. In addition, the Company must provide notice to the Insurance Commissioner of the State of Delaware of all dividends and other distributions to SLHA, within five business days after declaration and at least ten days prior to payment. At December 31, 2002, the Company could not pay a dividend to SLHA without prior approval from state regulatory authorities as the Company currently does not have earned surplus. Additionally, the Company has paid no dividends since the commencement of its operations. 6. COMMON AND PREFERRED STOCK OF PARENT On December 31, 1998, pursuant to a Preferred Stock Purchase Agreement (the "Preferred Stock Agreement"), SLHA issued 125,000 shares of non-voting, nonconvertible, Series A Cumulative Preferred Stock with a par value of $0.10 and a stated value of $100 to Swiss Re for a purchase price of $12,500,000. Under the Agreement, Swiss Re is entitled to a cumulative 7.53% dividend for each year through December 31, 2003, increasing by 0.50% per annum thereafter, payable annually in arrears on December 31 of each year, commencing on December 31, 1999, in cash, or, at the option of SLHA for the first two years, in additional shares of Series A Cumulative Preferred Stock. In the event of liquidation, Swiss Re is entitled to full face value plus any unpaid accrued dividends prior to any payment to common stockholders or other junior securities. The Preferred Stock Agreement also contains certain financial and non-financial covenants, including restrictions related to the types of investments the Company may hold, the incurrence of indebtedness, mergers and acquisitions, and the maintenance of minimum capital and surplus. On December 31, 1999, SLHA exercised its option to issue additional shares of Series A Cumulative Preferred Stock as payment for the dividend due to Swiss Re. The value of the shares issued in replacement of the dividend payment was $941,250. Effective October 1, 2000, SLHA entered into an Exchange Agreement with Swiss Re under which Swiss Re exchanged 20,965.13 shares of the preferred stock for 109.88 shares of SLHA's Class A Common Stock, representing a 9.9% interest in SLHA. In connection with the exchange, the Company also entered into a Stockholders' Agreement with Swiss Re which, among other things, provides Swiss Re with the right to designate one member of SLHA's board of directors as well as providing a "put option" exercisable in the event that SIGI, through a transfer of its ownership, would own less than 50% of SLHA. Under the put option, upon notice to Swiss Re of a proposed sale of SLHA shares that would reduce SIGI's ownership to less than 50%, Swiss Re could require SIGI to purchase all, but not less than all, of the preferred and common stock then owned by Swiss Re for an amount equal to $2,096,513 plus, for each share of preferred stock, $100 plus, all accrued but unpaid dividends. F-17 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 6. COMMON AND PREFERRED STOCK OF PARENT (CONTINUED) During 2000, the Preferred Stock Agreement was amended (the "Amended Agreement"), retroactive to April 1, 1999, to change the dividend rate applicable to preferred shares that were not received as a dividend paid in kind to 9.0474% for the period from April 1, 1999 through December 31, 2005. For preferred shares owned which were received as a result of dividends paid in kind, the dividend rate was changed to 7.53% through December 31, 2005. For the period from January 1, 2006 through December 31, 2006, the dividend rate on all outstanding preferred stock was changed to 9.3924% and thereafter increased by 0.58483% per annum. SLHA may redeem all or a portion of the outstanding preferred shares for the stated value plus all accrued and unpaid dividends on the redeemed shares, provided that: (a) the stated value of the preferred shares outstanding after any partial redemption must be equal to at least $5 million and (b) at the same time, the Company purchase an equal percentage of the common shares held by Swiss Re at a cost of $100 per share. Further, Swiss Re may not transfer or otherwise dispose of any of the preferred or common shares prior to January 1, 2006, after which time any such transfer or disposition is subject to certain first refusal rights of the Company. On September 30, 2002, Swiss Re and Sage Group reached an agreement to amend certain terms of the Preferred Stock Agreement. Under the terms of the original Preferred Stock Agreement, if the statutory-basis capital and surplus of Sage Life fell below $25 million and remained uncured for 60 days then, subject to obtaining regulatory approval, each share of Swiss Re preferred stock would be entitled to a number of votes sufficient to provide preferred shareholders a requisite majority of the voting interest in SLHA. Under the terms of the Amended Agreement, the required minimum level for Sage Life's statutory-basis capital and surplus was reduced from $25 to $20 million, subject to the elimination of any cure rights with respect to the new minimum capital level. In addition, Swiss Re also agreed to defer the December 31, 2002 dividends payable by SLHA with respect to its preferred shares until the earlier of June 30, 2003 or the closing of any material financing or sale of any material component of Sage Life's business. At December 31, 2002, Sage Life's statutory capital and surplus was approximately $8,562,000 million, after making provision of approximately $12,661,000 million for certain charges in connection with future run-off expenses, involuntary termination benefits, contract termination and other exit costs. Consequently, subject to obtaining requisite regulatory approvals, Swiss Re now has the right to exercise its option under the terms of the Preferred Stock Agreement to assume voting control of SLHA. Swiss Re has not yet exercised, and has yet to indicate whether it would exercise, such an option. 7. RELATED PARTY TRANSACTIONS The Company has a cost sharing agreement with SIGI whereby the entities share personnel costs, office rent and equipment costs. These costs are allocated between the companies based upon the estimated time worked, square footage of space utilized and upon estimated usage of equipment, respectively. At December 31, 2002 and 2001 amounts due (to) from SIGI under this agreement were approximately $(430,000) and $1,082,000, respectively. F-18 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 7. RELATED PARTY TRANSACTIONS (CONTINUED) The Company receives administrative service fees for investments held under management by Sage Advisors, an affiliated company. Sage Advisors is the investment advisor for Sage Life Investment Trust. At December 31, 2002, the Trust is comprised of four investment funds that are available to variable contract owners of the Company. Administrative service fees earned on investments held under management by Sage Advisors were approximately $40,000, $37,000, and $50,000 in 2002, 2001, and 2000, respectively. At December 31, 2002 and 2001, approximately $26,000 and $7,000, respectively, were due from Sage Advisors. The Company has a distribution agreement with Sage Distributors (the "Underwriting Agreement") whereby Sage Distributors is permitted to enter into selling agreements with unaffiliated broker-dealers whose registered representatives sell the Company's products to the public. The Underwriting Agreement provides that Sage Distributors receive no compensation for providing underwriting services to the Company and that Sage Distributors is responsible for all of its costs in marketing the Company's products, except for any commissions payable to registered representatives of Sage Distributors. During the first three quarters of 2002 and throughout 2001, the Company paid wholesaling allowances of approximately $404,000 and $413,000, respectively, to Sage Distributors, respectively. The Company, Sage Distributors and SIGI agreed to amend the Underwriting Agreement and Cost Sharing Agreement so that the Company would bear, subject to certain limitations, the full costs of Sage Distributors marketing, distribution and overhead costs effective October 1, 2002. This amendment lapsed on December 31, 2002. During 2002, 2001 and 2000, the Company paid $200,000, $226,000 and $60,000, respectively, to a law firm of which a director of the Company is a partner. Services provided by this law firm were primarily in the areas of regulatory compliance and general corporate matters. 8. COMMITMENTS The Company has made a commitment to the Michigan Department of Insurance to maintain statutory-basis capital and surplus at an amount not less than $25 million in order to remain a licensed insurer in that state. During the third quarter of 2002, the Company's surplus fell below that level. The Company contacted officials in the Company Regulation Bureau of the Michigan Insurance Department to inform them of this situation. The Michigan Insurance Department has not restricted the Company's license. The Company continues to keep the Insurance Department of Michigan appraised of the Company's capital raising / sale activities. 9. EMPLOYEE BENEFITS After completion of one year of service with the Company, all employees participate in a defined contribution pension plan (the "Plan") sponsored by SIGI. Under the Plan, benefits are based on a percentage of base annual salary and are vested 100% after three years of service with the Company. All contributions to the plan are directly expensed at the time of contribution and amounted to approximately $109,000, $86,000 and $78,000 in 2002, 2001 and 2000, respectively. The Plan was terminated with effect from January 1, 2003 with all assets vesting immediately to the benefit of participating employees who will receive a distribution of their fully vested accounts. F-19 Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Continued) 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes information with respect to the operations of the Company on a quarterly basis:
THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------------------------------------------------------------- (in thousands) 2002 Net investment income $ 381 $ 401 $ 372 $ 381 Total revenues 547 (392) 584 265 Total benefits and expenses 2,870 2,893 2,041 9,170 Net loss (2,323) (3,286) (1,458) (8,904) 2001 Net investment income $ 608 $ 652 $ 502 $ 346 Total revenues 626 680 536 429 Total benefits and expenses 1,999 2,593 2,458 2,499 Net loss (1,373) (1,914) (1,921) (2,071)
Certain quarterly amounts presented in the table above have been reclassified to conform to the financial statement presentation included in the accompanying statements of operations. F-20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Terry Eleftheriou Terry Eleftheriou Executive Vice President & Chief Financial Officer (Principal Financial Officer) /s/ Gregory S. Gannon Gregory S. Gannon Vice President and Controller (Chief Accounting Officer) Date: April 15, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE ------------------- ---- /s/ ROBIN I. MARSDEN April 15, 2003 -------------------- Robin I. Marsden President, Chief Executive Officer and Director (Principal Executive Officer) /s/ H. LOUIS SHILL April 15, 2003 ------------------ H. Louis Shill Chairman and Director /s/ PAUL C. MEYER April 15, 2003 ----------------- Paul C. Meyer Director /s/ RICHARD D. STARR April 15, 2003 -------------------- Richard D. Starr Director /s/ DR. MEYER FELDBERG April 15, 2003 ---------------------- Dr. Meyer Feldberg Director /s/ DONALD C. WAITE, III April 15, 2003 ------------------------ Donald C. Waite, III Director /s/ JOHN A. BENNING April 15, 2003 ------------------- John A. Benning Director /s/ MITCHELL R. KATCHER April 15, 2003 ----------------------- Mitchell R. Katcher Senior Executive Vice President, Chief Operating Officer, Chief Actuary and Director
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Robin I. Marsden, President and Chief Executive Officer certify that: 1. I have reviewed this Annual Report on Form 10-K of Sage Life Assurance of America Inc.; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and (c) Presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Robin I. Marsden Name: Robin I. Marsden Title: President & Chief Executive Officer Date: April 15, 2003 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Terry Eleftheriou, Chief Financial Officer certify that: 1. I have reviewed this Annual Report on Form 10-K of Sage Life Assurance of America Inc.; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and (c) Presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Terry Eleftheriou Name: Terry Eleftheriou Title: Chief Financial Officer Date: April 15, 2003 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Articles of Incorporation of Sage Life Assurance of America, Inc., as amended to date was filed as Exhibit 6 to the Registration Statement on Form N-4 (File No.333-43329) dated December 24, 1997, and is incorporated herein by reference. 3.2 Amended and restated By-Laws of Sage Life Assurance of America, Inc. was filed as Exhibit 3.2 to the Company's Form 10-K for the Fiscal year ended December 31, 2001, and is incorporated herein by reference. 10.1 Services Agreement with Financial Administrative Services, Inc. was filed as Exhibit 8 to Pre-Effective Amendment No. 2 to the Registration Statement on Form N-4 (File No.333-43329) dated January 28, 1999, and is incorporated herein by reference. 10.2 Reinsurance Agreement (Modified Coinsurance Treaty) with Swiss Re Life and Health America, Inc. (formerly Life Reassurance Corporation of America) was filed as Exhibit 10.2 to the Company's Form 10K for the Fiscal Year ended December 31, 2000, and is incorporated herein by reference. Confidential treatment has been requested for portions of this document. Amendment No.1 to Modified Coinsurance Treaty was filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 2002. 10.3+ Employment Agreement with Robin I. Marsden was filed as Exhibit 10.3 to the Company's Form 10-K for the Fiscal Year ended December 31, 2000 and is incorporated herein by reference. 10.3(a)+* Letter dated November 11, 2002, amending Employment Agreement with Robin I. Marsden. 10.4+ Employment Agreement with Mitchell R. Katcher was filed as Exhibit 10.4 to the Company's Form 10-K for the Fiscal Year ended December 31, 2000 and is incorporated herein by reference. 10.4(a)+* Letters dated November 11, 2002, and September 15, 2002, amending Employment Agreement with Mitchell R. Katcher. 10.5+ Employment Agreement with Lincoln B. Yersin was filed as Exhibit 10.5 to the Company's Form 10-K for the Fiscal Year ended December 31, 2000 and is incorporated herein by reference. 10.6+ Sage Insurance Group, Inc. Non-qualified Compensation Plan was filed as Exhibit 10.6 to the Company's Form 10-K for the Fiscal Year ended December 31, 2000 and is incorporated herein by reference. 10.7+ Sage Insurance Group Rabbi Trust Agreement was filed as Exhibit 10.7 to the Company's Form 10-K for the Fiscal Year ended December 31, 2000 and is incorporated herein by reference.
10.8+ Employment Agreement with Nancy F. Brunetti 10.8(a)+* Letters dated June 10, 2002, and December 17, 2002, amending Employment Agreement with Nancy F. Brunetti. 10.9+ Employment Agreement with Jeffrey C. Gordon 10.10+* Employment Agreeent with Terry Eleftheriou 10.11* Cost Sharing Agreement with Sage Insurance Group, Inc., including Amendments No.1 and 2 10.12* Underwriting Agreement with Sage Distributors, Inc., including Amendment No.1 21* Subsidiaries of Sage Life Assurance of America, Inc.
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(c). EX-10.3.A 3 y85446exv10w3wa.txt LETTER AMENDING ROBIN MARSDEN EMPLOYMENT AGREEMENT EXHIBIT 10.3(A) [SAGE LETTERHEAD] November 11, 2002 R.I. Marsden c/o 300 Atlantic Street, Suite 302 Stamford, CT 06901 Dear Robin, CLARIFYING AMENDMENT TO EMPLOYMENT CONTRACT I hereby confirm that your existing employment contract is altered to bring it into line with more recent executive contracts. In particular, the first paragraph under Section 10.4 ("Termination by the Company without Cause") is enhanced to include material reduction in compensation, to read as follows: "The Company expressly reserves the right to terminate the employment, or materially reduce the responsibilities or compensation, of Executive at any time for no reason or for any reason." If you are in agreement with the updated terms of employment, please sign below and return one copy. Yours truly, H. Louis Shill Accepted: /s/ Robin I. Marsden ---------------------- Chairman Date: 11/15/02 ---------------------- cc: Karen Kindermann, Director of Human Resources EX-10.4.A 4 y85446exv10w4wa.txt LETTERS AMENDING MITCHELL KATCHER EMPLOYMENT AGMT. EXHIBIT 10.4(A) [SAGE LETTERHEAD] November 11, 2002 M.R. Katcher c/o 300 Atlantic Street, Suite 302 Stamford, CT 06901 Dear Mitch, CLARIFYING AMENDMENT TO EMPLOYMENT CONTRACT I hereby confirm that your existing employment contract is altered to bring it into line with more recent executive contracts. In particular, item (i) under Section 10.6 ("Termination by the Executive for Special Limited Cause") is enhanced to include material reduction in compensation, to read as follows: "In the event of a "Change of Control" as herein defined, and if during a period of twelve months following such change of control, there is, (i) a material reduction in Executive's duties and responsibilities, scope of employment or compensation, ..." If you are in agreement with the updated terms of employment, please sign below and return one copy. Yours truly, H. Louis Shill Accepted: /s/ Mitchell R. Katcher ----------------------- Chairman Date: 11/15/02 ----------------------- cc: Karen Kindermann, Director of Human Resources September 15, 2002 M.R. Katcher c/o 300 Atlantic Street, Suite 302 Stamford, CT 06901 Dear Mitch, APPOINTMENT AS CHIEF OPERATING OFFICER It is with great pleasure that I confirm your appointment to a newly created position of Chief Operating Officer of Sage Life Assurance of America, Inc.. Your responsibilities will include oversight of operations, technology, product development, valuation and project management. In addition, you will stand in for me when I am unavailable to make executive decisions on behalf of the companies. We will discuss the transition and communication of your new position in order to ensure that you can accommodate your important role on the current capital raising initiative. PRO RATA BONUS IN THE EVENT OF TERMINATION WITHOUT CAUSE I hereby confirm that your existing employment contract is enhanced to bring it into line with more recent executive contracts. Should your employment be terminated without cause, you will be eligible to receive a proportionate bonus up to the period of termination based on your most recent annual performance bonus. GUARANTEED ANNUAL BONUS In recognition of your contribution to the company you will receive no less than $176,250 (50% of your current base salary) for your annual performance bonus for the review period ended March 2003, payable in April 2003. -2- CAPITAL RAISING SUCCESS AND RETENTION BONUS You will be taking on considerable additional effort and responsibilities to make the capital raising successful and will be key to the business thereafter. As acknowledgment of this, you will receive a capital raising success and retention bonus of twelve monthly payments equal to one twelfth of the annual performance bonus you receive in April 2003 (at least $14,687.50 per month). These payments will commence one week after the closing of the capital raising and continue for twelve months provided you remain with the company during this period. Should your services be terminated without cause, you will received the balance of payments due. Congratulations Mitch, this is a testament to the vast contribution that you have made and continue to make in building our business. I am very excited about your new role in terms of its growth opportunity for you and positioning the business for the future. If you are in agreement with the updated terms of employment, please sign below and return one copy. Yours truly, Robin I. Marsden Accepted: /s/ Mitchell R. Katcher ----------------------- President & CEO Date: 9/16/02 ----------------------- cc: Karen Kindermann, Director of Human Resources EX-10.8.A 5 y85446exv10w8wa.txt LETTERS AMENDING NANCY BRUNETTI EMPLOYMENT AGMT. EXHIBIT 10.8(A) June 10, 2002 Ms. Nancy F. Brunetti 30 Minna Court Cheshire, CT 06410 RE: TERMS OF EMPLOYMENT Dear Nancy: It is a pleasure to update your terms of employment with Sage Insurance Group, Inc. (the "Company") as follows: POSITION AND FOCUS: Executive Vice President: Operations The Executive Vice President of Operations directs the information technology strategy, projects and activities of the company's domestic and offshore operations. You will be a member of the Executive Management team of the Company. We will look to you to contribute to the company's strategic direction and general matters of Company management.. You will also transition to reporting to the Chief Operating Officer over the next few months. As President and CEO, I have considered that additional focus may be needed within Sage and in the future I may change your role to allow for you to concentrate on the critical elements of systems application development, and information technology, including new system implementations and electronic commerce. The success of these functions will be crucial to the long-term success of Sage. COMPENSATION: Your compensation will be $300,000.00 per annum, payable at the semi-monthly rate of $12,500. Payroll is processed by direct deposit to your designated bank account on or nearest to the 10th and 25th of the month. Your salary will be reviewed during our annual review process that takes place with effect from April of each year You will also be eligible for a bonus under the Company's short-term bonus plan for executive employees. COMMUTER ALLOWANCE: Your will receive a $250 semi-monthly commuter allowance. This allowance is fully taxable to you for Federal, State, Social Security and Medicare taxes and will be included in your semi-monthly payroll deposit (net of applicable taxes). LONG TERM INCENTIVE COMPENSATION: After one year's service you will be eligible to participate in the executive long-term capital incentive plan of the Company. Based on current projections we do not anticipate being in a position to take the Company public before seven years. As discussed there are buy-back provisions in the long-term plan should the Company not become public. An example of the structure of the plan has previously been discussed with you. HEALTH AND WELFARE BENEFIT PROGRAMS: You will be eligible to participate in the Company's benefit programs effective the first day of the month following your employment. These benefits include a major medical and dental program. The cost of the major medical and dental programs are shared between the employer, who pays 75% of the premiums and the employee, who is responsible for 25% of the cost of coverage for you and your eligible dependents. Employee premiums are payroll deducted. You are also covered under a term life insurance program for up to three times your annual salary. In addition, the Company sponsors a Vision Plan, Business Travel/Accidental policy, and short and long-term disability programs. The premiums for the Group Term Life, Excess Term Life, Vision Plan, Travel/Accident and disability programs are paid for at 100% by the Company. MONEY PURCHASE, 401(k) AND NON-QUALIFIED DEFERRED COMPENSATION PLANS: The Company has in place a Money Purchase defined contribution pension plan. You are eligible to participate in this plan after one anniversary year of service, i.e., January 2002. The Company contributes 10.5% of base salary, excluding bonus compensation, to the plan on behalf of an employee. This plan provides for qualified contributions up to the maximum income limits imposed by the IRS. For the year 2001, the limit has been set at $170,000. Once you have reached your maximum company contribution to the Money Purchase Plan, you are eligible for entry into the Executive Non-Qualified Deferred Compensation Plan (Rabbi Trust) that provides for a 10.5% contribution of base salary in excess of the IRS maximums. The Company also provides an additional retirement savings vehicle in the form of a 401(k) plan, designed to encourage savings to supplement your retirement income. There is not a Company match to the 401(k) program at this time and you are immediately eligible to participate in this plan. The maximum deferral limit established by the IRS for the year 2002 is $11,000.00. The Company reserves the right, at its sole discretion, to discontinue or change any or all of the benefits programs currently in place. CHANGE OF CONTROL: a) DEFINITION OF CHANGE OF CONTROL "Change of Control" would arise when and if the Sage Group Limited's direct or indirect voting interest in the Company is exceeded by another party or interest group unaffiliated with the Sage Group. b) TERMINATION WITHOUT CAUSE Should there be a Change of Control, and during the subsequent twelve (12) months, the Company, without cause, terminates your employment, or materially reduces your responsibilities without your consent such that you terminate your employment, you will be entitled to receive: - - Twelve (12) monthly payments of your then current salary, paid pursuant to the Company's normal payroll practices; and, - - A proportionate bonus up to the period of termination based on your most recent bonus payment. In addition to the above payments, you will continue to participate in the health and welfare benefit plans of the Company for the earlier of twelve months after your departure or until employed elsewhere. If coverage extensions are not permitted by law or under the plans, the Company will pay you as additional compensation the equivalent cost to the Company for such unavailable benefits. Your unvested pension contributions (if any) will become vested as of the date of your termination. Any unvested allocations or options granted to you under the Long Term Capital Incentive Compensation Plan will be treated in the same manner as a retirement under the rules of the Plan. c) COMPULSORY RELOCATION Should there be a Change of Control, and during the subsequent twelve (12) months the effective place of business of the Company is changed by its new controlling shareholders such that you would, in the view of a reasonable person, have to relocate to effectively continue your responsibilities, then you may elect in writing to (i) agree to work from such new premises, undertaking if so desired a relocation paid for by the Company in terms of its policy for executive relocations; or, (ii) upon giving 90 days written notice to the Company, terminate your employment and receive the payments provided for under b) above. GENERAL INFORMATION: Office Hours: Our normal business hours are 8:30 AM - 5:00 PM, Monday through Friday, 37.5 hours per week, and we have agreed that you are eligible for a flexible work schedule. Paid Time Off: You will be eligible for Paid Time Off at the rate of 27 days per annum, accrued at the rate of 2.25 days per month. Holiday Pay: The Company celebrates 9 paid holidays per annum, following the Holiday Schedule of the New York Stock Exchange. Parking: The Company will pay for your monthly parking fee in the 300 Atlantic Street Parking Garage. CONFIDENTIAL INFORMATION: During the course of your employment, you will have access to confidential and proprietary information and records of the Company. You are expected to treat such confidential information with all due care at all times. In the event of your departure from the Company, you will be required to return all confidential materials and refrain from discussing all confidential information with anybody at any time, unless compelled to do so by law. In addition, the Company shall be the sole owner of all the results and proceeds of your services with the Company, including without limitation, all ideas, designs, programs, materials, etc., relating to the business of the Company. SOLICITATION OF EMPLOYEES OR CUSTOMERS While you are employed with the Company, and for one year after your departure from the Company, you are prohibited from soliciting or causing an employee, distributor, broker or contract holder to sever or materially reduce their relationship with the Company. INDEMNIFICATION: The Company will indemnify you for any personal liability arising in the ordinary course of business from your position as an officer of the Company, including such personal liability materializing after termination of your employment, provided such liability does not arise from any misdeed on your part. Such indemnification shall be covered by appropriate insurance at all times. Nancy, I am confident that you will continue to make a significant contribution to the success of the company. If you are in agreement with the updated terms of employment, please sign the attached and return one copy. Yours truly, Robin I. Marsden Accepted: /s/ Nancy F. Brunetti --------------------- President & CEO Date: 6/10/02 --------------------- cc: Karen Kindermann, Director of Human Resources HAND DELIVERED Ms. Nancy F. Brunetti Sage Insurance Group, Inc. 300 Atlantic Street, 3rd Floor Stamford, CT 06901 December 17, 2002 Continued Employment Letter Dear Nancy: As announced, Sage will be discontinuing its new business operations on December 31, 2002 if we are unable to secure the necessary funding commitment. We are currently pursuing various ways in which to continue Sage's business, and are hopeful that Sage will secure the necessary financial backing. We believe that you will continue to play an important role at Sage, at least through March 31, 2003. Consequently, the purpose of this letter is to inform you of (1) your continued employment with Sage, and (2) the financial protection we are prepared to provide to you in the event your services are no longer required. The attached plan entitled "Separation Benefits Plan for Employees of Sage" highlights the pay and benefits, including bonus, Sage is prepared to provide to you if we must terminate your employment within the year as a result of cessation of the business. Please understand that the terms contained in this summary will not apply if: (1) Sage receives funding from an outside party, (2) you voluntarily terminate your employment, or (3) Sage terminates your employment for cause or unsatisfactory performance. Please be advised that we will be discontinuing contributions to the money purchase pension plan effective as of January 2003. If you have any questions, please feel free to contact Karen Kindermann in the Human Resources department or your department executive. I thank you for your continued assistance and support during this challenging time. Sincerely, /s/ Robin I. Marsden Robin I. Marsden President & CEO Attachments EX-10.10 6 y85446exv10w10.txt EMPLOYMENT AGREEMENT WITH TERRY ELEFTHERIOU EXHIBIT 10.10 EMPLOYMENT AGREEMENT BY AND BETWEEN SAGE LIFE ASSURANCE OF AMERICA, INC. AND TERRY ELEFTHERIOU EFFECTIVE: November 1, 2002 EMPLOYMENT AGREEMENT TABLE OF CONTENTS
PAGES ----- 1. EMPLOYMENT........................................................................................ 1 1.1 General Duties and Title...................................................................... 1 1.2 Access of Executive to Audit Committees, Boards of Directors and Auditors..................... 2 1.3 Full-Time Position............................................................................ 2 2. TERM.............................................................................................. 2 3. REMUNERATION...................................................................................... 2 4. WITHHOLDING....................................................................................... 3 5. INSURANCE AND OTHER BENEFIT PLANS................................................................. 3 6. VACATIONS......................................................................................... 3 7. BUSINESS EXPENSES................................................................................. 4 8. INDEMNIFICATION................................................................................... 4 9. TERMINATION OF EMPLOYMENT......................................................................... 5 9.1.A Termination on Expiration of the Initial Term without Offer................................ 5 9.1.B Termination on Expiration of the Initial Term with Offer................................... 6 9.2 Termination by the Company for Cause.......................................................... 7 9.3 Definition of Cause........................................................................... 7 9.4 Determination of For Cause Termination........................................................ 8 9.5 Termination by the Company Without Cause...................................................... 8 9.6 Termination by the Executive for Good Reason.................................................. 9 9.7 Voluntary Termination by the Executive........................................................ 10 9.8 Disability Termination........................................................................ 10 9.9 Termination Due to Executive's Death.......................................................... 10 10. RESTRICTIVE CONVENANTS; CONFIDENTIALITY; OWNERSHIP OF PROCEEDS OF EMPLOYMENT...................... 11 10.1 Solicitation of Employees; Customers; Agents or Representatives etc.......................... 11 10.2 Confidential Records......................................................................... 11 10.3 Ownership of Proceeds of Employment.......................................................... 12 10.4 Survival..................................................................................... 12 10.5 Enforceability; Remedies..................................................................... 12 11. MISCELLANEOUS PROVISIONS.......................................................................... 12 11.1 Severability................................................................................. 12 11.2 Execution in Counterparts.................................................................... 13 11.3 Notices...................................................................................... 13 11.4 Entire Agreement and Subsequent Amendments................................................... 14 11.5 Applicable Law............................................................................... 14 11.6 Headings..................................................................................... 14 11.7 Binding Effect; Successors and Assigns....................................................... 14 11.8 Waiver....................................................................................... 15 11.9 Warranty and Capacity to Contract............................................................ 15 11.10 Arbitration............................................................................... 15 11.11 Remedies.................................................................................. 15 11.12 Survival.................................................................................. 16 Exhibit A - Position Description Exhibit B - Benefits
EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") made and entered into this ______ day of November, 2002 and effective as of the 1st day of November, 2002 (the "Effective Date") by and between Sage Life Assurance of America, Inc. (the "Company"), a Delaware life insurance corporation, with its principal offices at 300 Atlantic Street, Stamford, Connecticut 06901 and Terry Eleftheriou an individual currently residing at 2 Chuckanut Lane, Houston, Texas 77024 ("Executive"). WITNESSETH THAT WHEREAS, the Company desires to employ Executive in accordance with the terms of this Agreement and Executive desires to be so employed by the Company; WHEREAS, the parties desire to set forth the employment understanding and terms and conditions of employment in a written agreement; and Executive wishes to accept such employment upon the terms and subject to the conditions hereinafter set forth; NOW THEREFORE, in consideration of the mutual promises contained herein, the parties hereto hereby agree as follows: 1. EMPLOYMENT 1.1 General Duties and Title On the Effective Date, the Company hereby employs Executive with the title/s designated in Exhibit A (the "Position Description") attached hereto and forming a part of this Agreement. Executive's primary responsibilities and duties are as described in Exhibit A. The primary responsibilities and duties of the Executive may be altered or amended by the mutual agreement of the Company and the Executive. Any modifications or alterations to the duties assigned to the Executive will be consistent with the education, background and experience of the Executive. Executive shall faithfully and diligently perform for the Company all such duties. Executive shall report to and take direction primarily from the Chief Executive Officer and the Board of Directors of the Company. Executive agrees to act in the capacity of a member or officer of such boards as he may be appointed without remuneration other than the remuneration to which Executive is otherwise entitled under this Agreement. Services rendered by Executive shall be rendered in accordance with recognized professional standards and recognized codes of conduct or ethics. Executive shall further promote and enhance the business purposes of the Company by entertainment and other means, including participation in professional organizations and activities, attendance at insurance or financial industry conventions and seminars, and membership in insurance or financial industry societies. 1 1.2 Access of Executive to Audit Committees, Boards of Directors and Auditors For the purpose of fulfillment of Executive's responsibilities to the Company and to those companies in addition to the Company, including Sage Insurance Group, Inc. ("SIGI") for which Executive is directed to perform any services, directly or indirectly, at all times during the Term of Employment, Executive shall have direct access to and contact with (i) each member of the Audit Committee of each such company, (ii) each member of the Board of Directors of the each such company and (iii) Ernst & Young, LLP and any other auditing or accounting firm that has performed or is performing external or internal audit services to the Company, SIGI and/or any other company for which Executive is directed to perform any services, directly or indirectly, including any consulting organization currently or formerly affiliated with any such auditing or accounting firm. 1.3 Full-Time Position Executive during the Term will devote Executive's best efforts, attention and skills to the business and affairs of the Company on a full-time basis, and shall devote all of Executive's business time and effort to the performance of the duties hereunder. 2. TERM The employment of Executive hereunder shall commence on the Effective Date and shall continue until April 30, 2003 or such earlier date as this Agreement is terminated as provided in Section 9 hereof. 3. REMUNERATION The Company (or an affiliate acting on behalf of the Company) will pay to Executive as compensation for services to be rendered under Section 1 hereof, the following amounts: (a) Base Salary A base salary ("Base Salary") of Ten Thousand Dollars ($10,000) per week to be paid weekly at the end of each week from the Effective Date hereof through and until April 30, 2003 (the "Term"). If Executive's employment by the Company continues beyond the term hereof as provided for in Section 9.1.B, the Base Salary shall be as agreed by the parties, payable semi-monthly in accordance with the Company's payroll policies for its executive officers and reviewable annually in March of each year, commencing with the first review being conducted for the performance period beginning on May 1, 2003 and terminating March 31, 2004. (b) Living Expenses The Company shall provide the Executive with appropriate living quarters in or proximate to Stamford, Connecticut, meals, and use of an automobile for the Initial Term. Weekly travel between Stamford, Connecticut and the Executive's residence in Houston, Texas will be paid for by the Company. Living expenses 2 payable by the Company shall not exceed $8,500 per month, cumulatively, during the Term. The Company requires the full-time presence of Executive in Stamford, Connecticut for the convenience of the Company. While the parties believe such living expenses will not be deemed taxable income of the Executive, if to any extent such living expenses are or become taxable to Executive, the Company shall gross up the Base Salary payable to Executive to equalize the value of such living expenses had they not been taxable to Executive. 4. WITHHOLDING Executive agrees that the Company shall withhold from any and all payments required to be made to Executive pursuant to this Agreement all actual or potential Federal, State, local and/or other taxes the Company determines are required or potentially will be required, to be withheld in accordance with applicable statutes and/or regulations from time to time in effect. 5. INSURANCE AND OTHER BENEFIT PLANS Executive shall be entitled during the period of employment with the Company, to participate in (i) the life insurance and disability insurance plans available to executives of the Company, including such accidental death or other benefits as may be provided under such plans, and (ii) the health and dental and vision plans available to officers (and their immediate families) of the Company, or at the election of Executive, Executive may purchase individual family health and dental coverage for which the costs will be reimbursed by the Company in an amount not to exceed that otherwise paid by the Company under its own benefit plan, and (iii) such other employee benefit plans, including all employee welfare benefit plans and employee pension benefit plans, that currently are or will be made generally available to executives and salaried employees of the Company. Descriptions of the current benefit plans are set forth in Exhibit B. Participation by or inclusion of the Executive in any benefit plan maintained by the Company shall be provided only to the extent that the Executive is eligible under the terms and conditions of the applicable plan and, if required pursuant to the plan, the Executive meets any insurance underwriting or other conditions validly required by the provider or carrier of the plan or the contracts, policies, or other terms of eligibility or participation issued in connection with the plan. 6. VACATIONS Executive shall be entitled to be absent from Executive's duties with the Company by reason of vacation and personal days for such periods as are consistent on a pro rata basis with the policy of the Company with respect to executive officers generally, which policy is more fully described in Exhibit B. In addition, the Executive shall be entitled to such national and religious holidays as generally approved by the Company. 3 7. BUSINESS EXPENSES The Company recognizes that, in connection with Executive's performance of his duties, functions and responsibilities hereunder, Executive will incur certain reasonable and necessary expenses. The Company agrees to promptly reimburse Executive for all such reasonable business expenses, which are incurred solely in connection with the Company's business, upon the presentation of statements setting forth the nature and amount of such expenses in reasonable detail, in accordance with the Company's generally applicable guidelines and procedures from time to time. To the extent that it is subsequently determined by the Company, using reasonable standards generally applicable to executive officers in like capacities, that any expense reimbursed by the Company to the Executive is not a reasonable or necessary business expense of the Company, and such determination is based upon false, misleading, incorrect or inadequate documentation supplied by the Executive, the Executive shall be liable to the Company for the amount of such excess reimbursement. 8. INDEMNIFICATION The Company agrees to defend and indemnify the Executive against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, together with counsel fees in each case reasonably incurred in connection with the defense, disposition or investigation of any action, suit, claim or other proceeding, whether civil, criminal or regulatory, in which Executive may be involved or with which he may be threatened during the Employment Term or thereafter, in each case to the extent incurred by reason of his serving or having served (a) as an executive, consultant or officer of the Company, SIGI and/or any subsidiary or affiliate of either of them (collectively the "Group"), or (b) at its request as a consultant, Executive, officer or in any other capacity for the performance of services by the Executive to any organization within or without the Group. The Company shall use its best efforts to purchase or cause the purchase and maintenance in force during the Employment Term and at least one year thereafter directors and officers' liability insurance for the benefit of Executive and others with policy limits and other terms no less favorable to the insured than those currently in effect. The Company shall be obligated to pay the claims or expenses of the Executive required under this Section 8, including defense cost, directly to the third party to whom payment is due and owing, without the necessity of the Executive making such payment and seeking reimbursement from the Company. The Company shall not indemnify the Executive if a determination shall be made that the Executive, (i) failed to act in good faith or not in a manner the Executive reasonably believed to be in or not opposed to the best interests of the Company or (ii) with respect to any criminal action or proceeding, had reasonable cause to believe that the Executive's conduct was unlawful at the time thereof, as follows: 4 (a) A committee of the independent members of the Board of Directors of the Company shall first make a preliminary written determination to the Company and the Executive. (b) Within ten (10) business days of Executive's receipt of the preliminary determination described above, Executive shall either (i) accept such preliminary determination, in which event such determination shall be final and binding upon the parties or (ii) reject the preliminary determination. (c) If the Executive shall reject the preliminary determination described above, the parties shall submit the matter to arbitration pursuant to Section 11.10 of this Agreement. Anything in the preceding paragraph to the contrary notwithstanding, the Company shall defend and indemnify the Executive as provided by this Section 8 unless and until there shall be a final determination that the Company is not required to do so. In the event of any such final determination, the Executive shall reimburse the Company within sixty (60) days from demand therefor such amounts as the Company shall have expended to defend and indemnify the Executive against matters found to be outside the scope of the Company's obligations under this Section 8. The provisions of this Section 8 shall survive the termination or expiration of Executive's employment under this Agreement irrespective of the reason for such termination. 9. TERMINATION OF EMPLOYMENT 9.1.A Termination on Expiration of the Initial Term without Offer If upon the expiration of this Agreement, the Company has not offered the Executive in writing an employment agreement providing at least those basic terms set forth in Section 9.1.B, this Agreement shall terminate. In the event that Executive's employment is so terminated or altered under this Section 9.1.A, Executive shall be entitled to receive: (a) Payments for twenty six (26) weeks of the current Base Salary, paid in accordance with the executive officer payroll policy of the Company at the time of termination; (b) Accrued vacation and personal days; and (c) Accrued business expenses pursuant to Section 7 not previously reimbursed. In addition to the above payments if permitted under the appropriate plan documentation and if allowed by law, all health, dental and life insurance coverage provided to executive under the Executive benefit plans will be extended for such period as the Company is obligated to make Base Salary payments to Executive in terms of this Section or, if longer, as required by otherwise applicable law, unless 5 Executive becomes covered by other employer plans. If coverage extensions are not permitted by law or under the plans, the Company shall pay to the Executive periodic bonuses equal to the insurance premium cost, which would have been required as if the Executive were covered under the plan. 9.1.B. Termination on Expiration of the Initial Term with Offer If upon the expiration of this Agreement, the Company has offered the Executive in writing an employment agreement providing at least the basic terms set forth below and Executive declines to accept such offer, this Agreement shall terminate. In the event that Executive's employment is so terminated under this Section, Executive shall be entitled to receive: a) Accrued vacation and personal days; and b) Accrued business expenses pursuant to Section 7 not previously reimbursed. In addition to the above payments if permitted under the appropriate plan documentation and if allowed by law, all health, dental and life insurance coverage provided to executive under the Executive benefit plans will be extended for such period as the Company is obligated to make Base Salary payments to Executive in terms of this Section or, if longer, as required by otherwise applicable law, unless Executive becomes covered by other employer plans. If coverage extensions are not permitted by law or under the plans, the Company shall pay to the Executive periodic bonuses equal to the insurance premium cost, which would have been required as if the Executive were covered under the plan. The minimum basic terms for an offer of employment agreement pursuant to this Section 9.1 B shall be as follows: (i) A term of not less than one year commencing May 1, 2003. (ii) Base Salary at the rate of not less than $300,000 per annum payable pursuant to the Company's payroll policies for executive officers. (iii) Living Expenses for the months of May, June and July 2003 as set forth in Section 3 (b) herein. (iv) The reasonable costs of Executive and his immediate family relocating from Houston, Texas to the greater Stamford, Connecticut area including, but not limited to (a) the real estate brokerage commission, legal and other expenses of selling Executive's home in Houston, Texas; (b) the costs of packing, transporting and, if appropriate, and storage of the furniture, furnishings and belongings of Executive and his family, including automobiles, until a new permanent residence is available for occupation; (c) the costs associated with the purchase of a new home including loan origination fees, legal expenses, title insurance, surveys and inspection reporting costs of home purchase but excluding discount points on 6 mortgage financing; (d) the duplicate costs of housing in the event that a new home is purchased in the greater Stamford area prior to the house in Houston being sold; and (e) the fees of professional relocation facilitators to assist Executive with locating suitable residence in or around Stamford, Connecticut and related services. (v) The aggregate of the costs under (iii) and (iv) of this Section 9.1.B., paid or reimbursed to Executive shall not exceed the sum of (a) $129,000 and (b) the difference, if any, between $51,000 and the Executive's total living expenses paid by the Company pursuant to Section 3 (b), together with such additional amount necessary to gross up the Base Salary payable to Executive to equal the taxes payable by Executive on those portions of Company paid expenses that are taxable to the Executive arising from the aforementioned sections. (vi) Provisions substantially equivalent to Section 1.1, 1.2, 4, 5, 6, 7, 8, 9.2, 9.3, 9.4, 9.5, 9.6, 9.7, 9.8, 9.9, 10, 11, Exhibit A and Exhibit B hereof and the entitlement of the Executive to participate in the Company's Short and Long Term Incentive Bonus Plans subject to all terms, conditions and qualifications thereof. 9.2 Termination by the Company for Cause In the event that Executive is removed from office by the Company for cause (as hereinafter defined), the employment of Executive under this Agreement shall terminate and Executive shall be entitled to receive only the Base Salary for the period to the date of such removal. No other or further payment of benefits under this Agreement will be due upon Termination for Cause, except as required by law, or under the Company's insurance and other employee benefit plans and the procedures referred to in Sections 5 and 7. 9.3 Definition of Cause For purposes of this Agreement, the term "cause" shall mean (i) any willful material neglect by Executive, or material failure by Executive to perform the duties and responsibilities of the Executive's office or offices (other than any such failures resulting from Executive's incapacity due to illness or injury), or (ii) any malfeasance or gross misconduct by Executive in connection with the performance of any of the duties or responsibilities or otherwise which would, in the view of a reasonable person, be materially prejudicial to the interests of the Company or any of its affiliates if Executive were retained in the respective office or offices, including without limitation, conviction of a felony, or (iii) actual indictment for, or formal admission to a felony or crime of moral turpitude, dishonesty, breach of trust or unethical business conduct or any crime involving the Company, or (iv) repeated material failure to adhere to the policies and directions of the Board of Directors, or failure to devote all of Executive's business time and efforts to the business of the Company and the duties and responsibilities hereunder, and with respect to subparts(i) or (ii) or (iv) of this Section 9.3, there has been a failure to cure such breach or a failure to modify 7 Executive's conduct within 30 days of receiving written notice of such breach specifying the factual reasons supporting the proposed dismissal for cause. 9.4 Determination of For Cause Termination A determination of a for cause termination shall be made by the Company as follows: (a) The Chief Executive Officer and/or the Chairman of the Company shall first make a preliminary determination that the Executive should be reviewed for discharge for cause. The Company will not be required to provide any preliminary notice to the Executive of its intention to investigate the possible discharge of the Executive for cause. (b) After investigating the circumstances surrounding the possible for cause termination of the Executive, the Company, through its Chief Executive Officer, may immediately relieve or suspend the Executive by providing notice to the Executive. Upon notice of the suspension, the Executive shall immediately vacate the premises and remove all personal property from the premises of the Company. The Company shall have the absolute right to review any and all material in the possession of the Executive on the Company premises to determine those items, which are proprietary to the Company. After sorting the appropriate items, all personal items shall be delivered to the Executive at the location designation reasonably selected by the Executive. (c) After concluding its investigation, the Company, through the Chief Executive Officer and/or the Chairman of the Company, shall make a determination whether the Executive should be discharged for cause. The determination for discharge for cause shall be timely communicated in writing, to the Executive. 9.5 Termination by the Company Without Cause The Company expressly reserves the right to terminate the employment, or materially reduce the responsibilities, of Executive at any time for no reason or for any reason. In the event that Executive's employment is so terminated or altered under this Section, Executive shall be entitled to receive: (a) Payments for twenty six (26) weeks of the current Base Salary, paid in accordance with the executive officer payroll policy of the Company at the time of termination; (b) Accrued vacation and personal days; and (c) Accrued business expenses pursuant to Section 7 not previously reimbursed. In addition to the above payments if permitted under the appropriate plan documentation and if allowed by law, all health, dental and life insurance coverage provided to Executive under the Executive benefit plans will be extended for such period as the Company is obligated to make Base Salary payments to Executive in terms of this Section, or, if longer, as required by otherwise applicable law, unless 8 Executive becomes covered by other employer plans. If coverage extensions are not permitted by law or under the plans, the Company shall pay to the Executive periodic bonuses equal to the insurance premium cost, which would have been required as if the Executive were covered under the plan. Any unvested employer contributions attributable to Executive under any pension plan, shall be accelerated and deemed vested as of the date of termination of employment without cause. If the acceleration of vesting is not permitted by law or under the terms of the plan, the Company shall, in lieu of accelerated vesting, pay a bonus to the Executive in the amount of the account forfeiture under the plan. 9.6 Termination by the Executive for Good Reason. Termination by the Executive for Good Reason shall mean termination of the Executive's employment by the Executive as a result of (i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or responsibility or any substantial change in any such position, authority or responsibility including title; (ii) any failure by the Company to comply with the terms of this Agreement or any other term of the Executive's employment (other than any insubstantial or inadvertent failure remedied promptly after receipt of notice from the Executive); (iii) any failure by the Company to diligently implement such policies, programs and systems as Executive, with the concurrence of the Company's auditors and the Company's Audit Committee, determines are necessary to prevent or correct "material weakness", as such term is used in auditing standards, in the financial and internal controls of the Company, its subsidiary, SIGI and any subsidiary, parent or affiliates of any of them for which the Executive is requested to perform any services hereunder, provided such failure is not attributable to the actions, inactions or other terms defined under "cause" above, by the Executive; (iv) any material reduction in salary or other compensation provided herein; (v) a requirement that the Executive be based at an office located more than 50 miles from the City of Stamford, Connecticut; (vi) any failure by the Company to obtain the assumption and agreement of any successor to perform this Agreement as contemplated herein. In the event that Executive's employment is so terminated or altered under this Section, Executive shall be entitled to receive: (a) Payments for twenty six (26) weeks of the current Base Salary, paid in accordance with the executive officer payroll policy at the time of termination; (b) Accrued vacation and personal days; and (c) Accrued business expenses pursuant to Section 7 not previously reimbursed. In addition to the above payments if permitted under the appropriate plan documentation and if allowed by law, all health, dental and life insurance coverage provided to Executive under the Executive benefit plans will be extended for such period as the Company is obligated to make weekly Base Salary payments to Executive in terms of this Section, or, if longer, as required by otherwise applicable 9 law, unless Executive becomes covered by other employer plans. If coverage extensions are not permitted by law or under the plans, the Company shall pay to the Executive periodic bonuses equal to the insurance premium cost, which would have been required as if the Executive were covered under the plan. 9.7 Voluntary Termination by the Executive Executive shall be entitled, with not less than one (1) month's written notice, to voluntarily terminate employment with the Company. If Executive elects such termination, Executive shall be entitled to receive the Executive's monthly Base Salary defined under Section 3 and benefits defined under Section 5 until the end of such notice period. Executive shall also be entitled to exercise any vested rights under Sections 5 and 6. Even though the Executive is required to give not less than one (1) month's advance written notice, the Company shall have the option to require that the Executive discontinue service on behalf of the Company at any time upon receipt of advance written notice of the Executive's election to terminate; provided, however, that in such event the Company shall be required to continue the Base Salary and benefit payments through the one (1) month notice period. 9.8 Disability Termination The Executive's employment shall terminate if the Executive becomes so disabled as to be unable to substantially perform the services of character contemplated by this Agreement, and such disability continues for a period of ninety (90) consecutive days. The Executive's employment shall terminate at the conclusion of the 90-consecutive day disability. In such event, the Executive shall be entitled to receive the Executive's Base Salary defined under Section 3 and benefits defined under Section 5 until the end of the 90-consecutive day disability period. Executive shall also be entitled to exercise any vested rights under Sections 5 and 6. For purposes of this Agreement the term "disability" or "disabled" shall mean a physical or mental condition resulting in a bodily injury or disease or mental disorder which renders the Executive incapable of engaging in substantial gainful activity of the character contemplated by this Agreement and which can be expected to be of a long and continued duration. The disability of the Executive shall be determined by the Board based upon competent medical authority. The determination of a disability may be made by the Board independent of such determination being made under any other disability insurance plan sponsored or funded by the Company. 9.9 Termination Due to Executive's Death This Agreement shall terminate if the Executive shall die, in which event the Executive's estate or personal representative shall not be entitled to continue to receive Base Salary payments permitted under Section 3 or other benefits permitted under this Agreement, other than the Base Salary for the period until death, benefits payable under the Company life insurance policies as provided in Exhibit B, and those 10 benefit continuation requirement imposed as a matter of law. With respect to other benefit entitlement under the bonus plan or other similar plans, the Executive's estate shall only be permitted to such rights or benefits as otherwise provided in those plan documents. 10. RESTRICTIVE CONVENANTS; CONFIDENTIALITY; OWNERSHIP OF PROCEEDS OF EMPLOYMENT 10.1 Solicitation of Employees; Customers; Agents or Representatives etc. Executive agrees that, during the term of employment hereunder, and for a period of one (1) year after the Company no longer employs Executive, Executive shall not, directly or indirectly: (a) solicit, entice, persuade or induce any individual who is then or has been within the preceding six-month period, an employee of the Company or any of its subsidiaries or affiliates, to terminate his or her employment with the Company or any of its subsidiaries or affiliates, or to become employed by or enter into contractual relations with any other individual or entity, and the Executive shall not approach any such employee for any such purpose or authorize or knowingly approve the taking of any such actions by any other individual or entity; or, (b) except in accordance with Executive's duties hereunder, solicit, entice, persuade or induce any individual or entity which is then, or has within the preceding twelve month period been, a customer, distributor or supplier, or policy owner, agent or representative of the Company or its subsidiaries or affiliates to terminate or materially reduce his, her or its contractual or other relationship with the Company or any of its subsidiaries or affiliates, and the Executive shall not approach any such customer, distributor, supplier, policy owner, agent or representative for such purpose or authorize or knowingly approve the taking of any such actions by any other individual or entity. 10.2 Confidential Records In the course of employment, Executive will have access to confidential information, records, data, specifications, and other knowledge owned by the Company or its subsidiaries or affiliates. Executive agrees that at no time during or after the term of employment shall the Executive remove or cause to be removed from the premises of the Company or its subsidiaries or affiliates, any record, file, memorandum, document, equipment or like item relating to the business of the Company or its subsidiaries or affiliates except in furtherance of Executive's duties hereunder, and immediately following the termination of Executive's employment hereunder or at any other time at the request of the Board of Directors, all such records, files, memoranda, documents, equipment and like items then in Executive's possession will promptly be returned to the Company. Executive further agrees that, during and after the term of employment, Executive shall not without the written consent of the Company or a person authorized thereby, disclose to any person, other than an employee of the Company its subsidiaries or affiliates or a person to whom disclosure 11 is reasonably necessary or appropriate in connection with the performance by Executive of duties as an executive of the Company, any confidential information obtained by Executive while in the employ of the Company with respect to any business methods, plans, policies, products and/or personnel of the Company or its subsidiaries or affiliates, the disclosure, including speaking with the press, of which would, in the view of a reasonable person, be injurious or damaging to the business of the Company or its subsidiaries, or affiliates, provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by Executive), or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. 10.3 Ownership of Proceeds of Employment Executive acknowledges that the Company shall be the sole owner of all the fruits and proceeds of the Executive's services hereunder, including without limitation all ideas, concepts, formats, suggestions, developments, arrangements, designs, packages, programs, promotions and other properties relating to the businesses of the Company, which Executive may create in connection with and during the term of employment hereunder, free and clear of any claims by the Executive of any kind or character whatsoever (other than Executive's right to compensation and benefits hereunder). 10.4 Survival The provisions of this Section 10 shall survive any termination or expiration of Executive's employment under this Agreement, irrespective of the reason therefore. 10.5 Enforceability; Remedies The parties hereto agree that a breach by Executive of any of the provisions of Section 10. hereof will cause the Company great and irreparable injury and damage. By reason of this, Executive acknowledges that, in the event of a breach by Executive of any of the provisions of Section 10 hereof, the Company shall be entitled, in addition and as a supplement to any other rights or remedies it may have at law, to the remedies of injunction, specific performance and other equitable relief. This section 10 shall not, however, be construed as a waiver of any of the rights which the Company may have for damages or otherwise. 11. MISCELLANEOUS PROVISIONS 11.1 Severability Executive acknowledges and agrees that (i) Executive has had an opportunity to seek advice of counsel in connection with this agreement and (ii) the Restrictive Covenants are reasonable in temporal and geographic scope and in all other respects. If in any jurisdiction any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or 12 render unenforceable such provision in any other jurisdiction, and the remaining provisions hereof shall be given full force and effect without regard to the invalid portions. The Employer and the Executive intend to and hereby confer jurisdiction to endorse the Restrictive Covenants upon the Courts of any jurisdiction within the geographical scope of the covenants. 11.2 Execution in Counterparts This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement (and all signatures need not appear on any one counterpart), and this Agreement shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 11.3 Notices Any notice or other communication in connection with this Agreement shall be deemed to be delivered if in writing (or in the form of a fax) addressed as provided below and if either (a) actually delivered at said address, or (b) in the case of a letter, three business days shall have elapsed after the same shall have been deposited in the US mail, postage prepaid and registered or certified, and (c) in the case of fax, one business day shall have elapsed after dispatch. If to the Company, to it at the following address: Sage Life Assurance of America, Inc. 300 Atlantic Street Suite 302 Stamford CONNECTICUT 06901 FAX (203) 324-6173 Attention: Chief Executive Officer with a copy to: Sage Life Assurance of America, Inc. 300 Atlantic Street Suite 302 Stamford CONNECTICUT 06901 FAX (203) 324-6173 Attention: Secretary Sage Group Limited, S.A. P.O. Box 7755 10 Fraser Street Johannesburg 2000 Republic of South Africa FAX 011 2711 834 2107 Attention: Chairman, Sage Life Assurance of America, Inc. 13 or at such other address as the Company shall have specified by written notice actually received by the addresser. If to Executive, to Executive at the address provided in the preamble with a copy to Executive at The Classic, Apt. 11E, 25 Forest Street, Stamford, Connecticut 06901 or at such other address as Executive shall have specified by written notice actually received by the addresser. 11.4 Entire Agreement and Subsequent Amendments This Agreement constitutes the entire agreement between the Company and Executive relating to Executive's employment and supersedes all prior agreements and understandings of the parties hereto, whether oral or written with respect to the subject matter herein. However, the consulting agreement relating to services by the Employee to SIGI as same may have been amended, is not superseded hereby but expressly continues to apply up to the date hereof and, only upon this Agreement becoming effective, any such consulting agreement shall hereby be terminated by the mutual agreement of the parties thereto. This Agreement may be amended or altered only by the written agreement of the Company and Executive. 11.5 Applicable Law This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to principles of conflict of law. 11.6 Headings The descriptive headings of the several sections of this Agreement are inserted for the sole purpose of convenience of reference, and do not constitute part of this Agreement or in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 11.7 Binding Effect; Successors and Assigns This Agreement shall be binding upon and shall inure to the benefit of: (a) the Company and its successors and assigns; and (b) Executive and to the benefit of Executive's heirs, executors, administrators and legal representatives. Executive's duties and obligations hereunder are personal and shall not be assignable or delegable in any manner whatsoever. The Company may assign the obligations under this Agreement (subject to a right of recourse by Executive to the Company in the event of any default under the obligations to Executive hereunder), to an affiliate or to any intermediate parent of the Company. 14 11.8 Waiver The failure of either of the parties hereto at any time, to enforce any of the provisions of this agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this agreement or any provision hereof or the right of either of the parties hereto, to thereafter enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is sought, and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 11.9 Warranty and Capacity to Contract The Company and Executive hereby represent and warrant to the other that: (a) they have full power and authority to execute this Agreement, and to perform their respective obligations hereunder; (b) such execution, delivery and performance will not (and with the giving of notice or lapse of time or both would not) result in any breach of any agreements or other obligations to which Executive or the Company is otherwise bound; and (c) this Agreement is a valid binding obligation on Executive and the Company. 11.10 Arbitration Except to the extent necessary for Executive or the Company to enforce rights under Section 8 above or for the Company to enforce its rights under Section 10 above, any case or controversy arising among the parties hereto under this Agreement, or the subject matter hereof, shall be settled by binding arbitration in Stamford, Connecticut under the then prevailing rules of the American Arbitration Association. The decision of the arbitrators shall be final and binding and the party against whom the award is rendered ("the non-prevailing party") shall be specifically instructed in any such award to pay all reasonable attorney's fees, disbursements of the prevailing party's legal counsel, arbitration costs, expenses and filing fees incurred by the prevailing party in the arbitration proceeding. The American Arbitration Association shall appoint three (3) arbitrators to preside at the said arbitration proceeding and the arbitrators will determine in their decision and award, which is the prevailing party, which is the non-prevailing party, the amount of the fees and expenses of the prevailing party and the amount of the arbitration expenses. The arbitrators will render their award, upon the concurrence of at least two (2) of their number, no later than thirty (30) days after the conclusion of the arbitration proceedings. Judgment may be entered on the award of the arbitrators and may be enforced in any court of competent jurisdiction. 11.11 Remedies All remedies hereunder are cumulative, are in addition to any other remedies provided by law and may be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed to be an election of such remedy exclusively or 15 to preclude the exercise of any other remedy. No failure or delay in exercising any right or remedy shall operate as a waiver thereof or modify the terms of this Agreement. 11.12 Survival Anything contained in this Agreement to the contrary notwithstanding, the provisions of Section 8, Section 9, and Section 10 and the other provisions of this Section 11 (to the extent necessary to effectuate the survival of Section 11) shall survive termination of this Agreement and any termination of Executive's contract hereunder. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first written above. Executive: SAGE LIFE ASSURANCE OF AMERICA, INC. /s/ Terry Eleftheriou By: /s/ Robin I. Marsden - --------------------- -------------------------- Terry Eleftheriou Name: Robin I. Marsden Title: President and CEO 16 EXHIBIT A - POSITION DESCRIPTION TITLES: Chief Financial Officer, Sage Life Assurance of America, Inc. Chief Financial Officer, Sage Insurance Group, Inc. REPORTING LINES: CEO, Sage Life Assurance of America, Inc. CEO, Sage Insurance Group, Inc. RESPONSIBILITIES AND DUTIES WITH REGARD TO COMPANIES MANAGED BY EXECUTIVE Responsible for leading and managing the financial function of the above listed companies and their subsidiaries (the "Sage US Group"), and acting as an advisor to executive management on financial matters impacting the Sage US Group. Executive will be responsible for managing the day-to-day financial operations including planning and budgeting, external and internal financial reporting, regulatory reporting, treasury and cash management, investment management and tax aspects of the businesses of the Sage US Group. 17 EXHIBIT B - BENEFITS SAGE INSURANCE GROUP, INC. [SAGE LETTERHEAD] OFFICER LEVEL MAJOR MEDICAL provided by Anthem Blue Cross/Blue Shield. Effective 1st of the month after date of hire. Company pays 75% - employee pays 25%. DENTAL provided by The Guardian. Effective 1st of the month after date of hire. Company pays 75% - employee pays 25%. VISION PLAN provided by Employers Vision Trust. Effective 1st of month after 30 days of employment. Small co-pay on annual eye exams - discounts on lenses, including contact lenses, discounts on laser surgery - 100% paid by Company. GROUP TERM LIFE provided by The Guardian. Effective 1st of month after date of hire - 3x annual compensation to $750,000 - guaranteed issue of first $400,000, simplified issue of remaining $350,000 - 100% paid by Company. EXCESS LIFE TO COVER OVER $750,000 - Personal policy paid for by Company (using standard rates) through Northwestern Mutual Life. Employee is owner. ACCIDENTAL DEATH AND DISMEMBERMENT provided by The Guardian. Effective 1st of month after date of hire - 3x annual guaranteed compensation to plan maximum of $1,000,000 - 100% paid by company. RETIREMENT PLAN - 10.5% company contribution of base annual salary to IRS cap of considered compensation ($200,000) (Principal - 17 Investment Options). 10.5% company contribution on base annual salary in excess IRS compensation cap - paid into deferred compensation plan (Rabbi trust), investments self directed through deferred compensation Schwab account. 1 year waiting period - 3 yr. Cliff vesting. 401(k) SAVINGS - can defer 15% of compensation up to IRS cap of $11,000. - Employee contributions only (no company match). Immediately eligible upon hire - (Principal - 17 Investment Options). SHORT TERM DISABILITY - 90 day salary continuance - paid for by the Company. LONG TERM DISABILITY provided by The Guardian - 90-day elimination period - 66.67% of monthly compensation to maximum benefit of $12,000 per month - paid for by the Company EXCESS LONG TERM DISABILITY - Personal policy to fulfill 66.67% salary which exceeds $12,000. per month. (Northwestern Mutual Life). PAID TIME OFF - VP and above receive 27 days per year (2.25 days monthly accrual) - carry forwards allowed for extended leave or cash out. Must take minimum of 2 weeks per year. 18 HOLIDAYS - 9 paid holidays per annum, following Holiday Schedule of the NYSE. DISCRETIONARY SHORT TERM INCENTIVE BONUS - At the discretion of the Board of Directors, Short Term Incentive Bonus payments may be made based on overall achievement of the company, personal performance and the attainment of personal goals and objectives. NYSC MEMBERSHIP - Interested CT employees may participate in annual membership at New York Sports Club (fitness center) - reduced rate of $50 per month. PARKING CARD or METRO NORTH TRANSIT DISCOUNT COUPON: Employee's choice, value is $65. per month. 19 EX-10.11 7 y85446exv10w11.txt COST SHARING AGREEMENT INCLUDING AMENDMENTS EXHIBIT 10.11 COST SHARING AGREEMENT This Cost Sharing Agreement is hereby entered into as of the 19th day of November, 1997, with effect at the date referred to in Section VII hereof, by and between SAGE INSURANCE GROUP INC., a corporation organized and existing under the laws of the State of Delaware with corporate offices at 300 Atlantic Street, Suite 302, Stamford, Connecticut 06901(hereinafter referred to as the "Parent") and SAGE LIFE ASSURANCE OF AMERICA, INC., a corporation organized and existing under the laws of the State of Delaware with corporate offices at 300 Atlantic Street, Suite 302, Stamford, Connecticut 06901 (hereinafter referred to as the "Life Company") which is a wholly owned subsidiary of the Parent. R E C I T A L S: WHEREAS, Parent provides or intends to provide the Life Company with office space, office equipment, and related office services; WHEREAS, each party employs certain individuals who may occasionally furnish incidental services to the other; WHEREAS, Parent and Life Company wish to enter into a formal cost sharing agreement with regard to the foregoing items; WHEREAS, the Life Company is a Delaware domiciled life insurance company and the Parent is part of the Life Company's holding company system so that applicable Delaware law requires that the terms of any cost sharing agreement between them be submitted to the Delaware Insurance Commissioner at least 30 days prior to the entry into any transaction pursuant to such agreement. WHEREAS, the parties hereto have agreed to the terms and conditions set out in this Agreement and do hereby incorporate the recitals set out herein as part of the Agreement. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, the parties hereto agree as follows: I. OFFICE SPACE Section 1.01. The Parent has entered into a lease for office premises that are being used by the Life Company. In the future, the Parent may enter into additional leases or acquire ownership of office space which will be utilized by the Life Company. Such premises or space provided by the Parent to the Life Company is hereinafter referred to as the "Office Space". Section 1.02. The parties agree that at the end of each calendar year the Parent shall charge the Life Company for the use of Office Space based on a fair rental value for such space as allocated to the Life Company use thereof. Section 1.03. In determining such allocation, there shall be taken into account the actual percentage area of the Office Space used for operations of the Life Company and the percentage of time such office space is utilized for operations of the Life Company. The parties shall maintain such reasonable records as are necessary to support such allocations and the Life Company agrees to abide by any allocation made by the Parent which is reasonable and does not materially distort any item of income, expense, 2 capital expenditure, or capital gain for purposes of tax, financial or life insurance statutory accounting. Section 1.04. In determining fair rental values for Office Space which is leased by the Parent the rentals paid or accrued by the Parent to the landlord of the Office Space for the year in question shall be used. In determining fair rental value for Office Space in which the Parent has an ownership interest the rental charge to the Life Company shall be the sum of the depreciation for the Office Space allocable to the year as permitted under the U.S Internal Revenue Code of 1986, as amended, plus the taxes, maintenance, repairs, utility costs, management expenses, and other similar expenditures connected with the Office Space paid or accrued by the Parent for such year, as well as charges for services rendered in connection with any transfer of the Office Space and other similar expenses connected with the possession, use or occupancy of the Office Space by the Subsidiary and paid or accrued by the Parent during the year, including capital expenditures incurred in any year to the extent they may be properly amortized for such year. II. TANGIBLE OFFICE EQUIPMENT Section 2.01. The Parent has entered, or will enter, into leases for and has acquired, or will acquire, ownership of various types of office equipment, furniture and fixtures, including but not limited to office furniture, office decorations and art, telephone systems, security systems, computer hardware and software equipment or systems, and general office equipment such as fax machines, photocopiers, and postage meters. Such items provided by the Parent to the Life Company are hereinafter 3 referred to as the "Office Equipment". Section 2.02. The parties agree that at the end of each calendar year during the term of this Agreement the Parent shall charge the Life Company for the use of Office Equipment based on a fair rental value for such equipment as allocated to the Life Company use thereof. Section 2.03. In determining such allocation, there shall be taken into account the percentage of time such Office Equipment is utilized for operations of the Life Company. The parties shall maintain such reasonable records as necessary to support such allocations and the Life Company agrees to abide by any allocation made by the Parent which is reasonable and does not materially distort any item of income, expense, capital expenditure, or capital asset for purposes of tax, financial or life insurance statutory accounting. Section 2.04. In determining fair rental values for Office Equipment which is leased by the Parent the rentals to paid or accrued by the Parent to the lessor of the Office Equipment for the year in question shall be used. In determining fair rental value for Office Equipment owned by the Parent the rental charge to the Subsidiary shall be the sum of the depreciation for the Office Equipment allocable to the year as permitted under the U.S Internal Revenue Code of 1986, as amended, plus the taxes, maintenance, repairs, utility costs, and other similar expenditures connected with the Office Equipment paid or accrued by the Parent for such year, as well as charges for similar expenses connected with the use of the Office Equipment by the Life Company and paid or accrued by the Parent during the year, including capital expenditures incurred for Office Equipment in any year to the extent they may be properly 4 amortized for such year. III. SERVICES Section 3.01. Each party employs persons who may from time to time perform management, clerical, administrative, technical or other services for the benefit of the other party. Such services are hereinafter referred to as the "Services". It is anticipated that the Services which will be rendered by the Life Company's employees to the Parent will not be an integral part of the business of the Life Company but rather only an incidental part of such business. Section 3.02. The parties agree that at the end of each calendar year during the term of this Agreement each party shall charge the other party for the Services based on the cost of the Services as allocated to the use thereof. Section 3.03. In determining such allocation, there shall be taken into account the percentage of time the employees of each party spend in providing Services to the other party. The parties shall maintain such reasonable records as are necessary to support such allocations and each party agrees to abide by any allocation made by the other party which is reasonable and does not materially distort any item of income, expense, capital expenditure, or capital gain for purposes of tax, financial or life insurance statutory accounting. IV. OTHER ITEMS Section 4.01. The parties recognize that other 5 accounting items in addition to those specifically treated above in this Agreement ("Other Items") may arise calling for allocation between the Parent and the Life Company. Section 4.02. The parties agree that allocation of such items will be made in accordance with Section 482 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. V. MISCELLANEOUS PROVISIONS Section 5.01. This Agreement and the Exhibits hereto contain the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior oral or written understanding of the parties with respect to such matters. No modification or amendment may be made except by a written instrument signed by both parties. Section 5.02. This Agreement is governed by and shall be construed in accordance with the laws of the State of Connecticut. Venue for any action brought to enforce any term or condition of this Agreement shall be brought in Stamford, Connecticut. Section 5.03. This Agreement may be amended from time to time by the parties hereto; provided, however, any such amendment shall be evidenced by written instrument that becomes attached to and made a part of this Agreement. Section 5.04. Should any portion of this Agreement be illegal, invalid or unenforceable, the remaining portions of this Agreement shall be of full force and effect as if the illegal, invalid or unenforceable portion were severable and not a part of this Agreement. Section 5.05. Nothing herein shall be construed to 6 permit nor does it permit, directly or indirectly, Parent to act as a life insurance company in the United States of America. Section 5.06. This Agreement may be executed in one (1) or more counterparts each of which shall be deemed a duplicate original, but all of which together shall constitute a single agreement. Section 5.07. No failure on the part of either party to exercise, and no delay in exercising, any right, power, or remedy hereunder shall operate as a waiver thereof. VI. TERMINATION Section 6.01. This Agreement shall commence on the effective date described in Section VII hereof, and shall continue in force for a period of five years, subject to the provisions of Section 6.02, and shall be automatically renewed at the end of each five-year term according to the provisions of Section 6.03. Section 6.02. During the initial five-year term, this Agreement may be terminated upon thirty (30) days written notice for cause. For the purposes of this Agreement, "cause" is defined to mean (i) a material breach of this Agreement by either party, or (ii) the insolvency or inability of either party to perform its duties under this Agreement. Section 6.03. After the expiration of the initial five-year term, this Agreement shall automatically be renewed for additional five-year terms, unless this Agreement is terminated, with or without cause, by the giving, at least ninety (90) days prior to the expiration of each five (5) year term, of a notice of termination by either Parent or the Life Company. 7 VII. APPROVAL BY DELAWARE INSURANCE COMMISSIONER; EFFECTIVE DATE Section 7.01. The parties agree this Agreement shall be submitted to Insurance Commissioner of the State of Delaware with notice (the "Notice") of the intention of the parties to make this Agreement effective and that a copy of the Notice containing the date thereof shall be attached hereto as Exhibit A. Section 7.02. This Agreement shall be of no force or effect and no transaction shall be entered into pursuant hereto until (i) at least thirty (30) days, or such shorter period as the Insurance Commissioner of the State of Delaware may permit, has elapsed from the date of the Notice and (ii) the Insurance Commissioner of the State of Delaware has not disapproved this Agreement during such period. 8 IN WITNESS WHEREOF, the undersigned parties hereto have duly executed this Agreement as of the day and year first above written. SAGE LIFE INSURANCE GROUP INC. By: /s/ Robin I. Marsden ------------------------------- Authorized Signatory SAGE LIFE ASSURANCE OF AMERICA,INC. By: /s/ Ronald S. Scowby ------------------------------- Authorized Signatory 9 EXHIBIT A [SAGE LETTERHEAD] November 19, 1997 The Honorable Donna Lee Williams Insurance Commissioner State of Delaware Department of Insurance 841 Silver Lake Boulevard Dover, DE 19904 RE: Cost Sharing Agreement Dear Commissioner Williams: Sage Life Assurance of America, Inc., a Delaware-domiciled insurer, intends to enter into a Cost Sharing Agreement with its immediate parent, Sage Insurance Group, Inc. (Please note that Sage Insurance Group, Inc. is not an insurer and does not transact insurance in Delaware or elsewhere.) Pursuant to Insurance Code Section 5005(a)(2)d. we are hereby providing notice to you of our intent. The Agreement will become effective in 30 days, or upon your prior approval. A copy of the Agreement is attached. If you have any questions, please do not hesitate to call me at 1-888-502-7243. Thank you for your consideration. Sincerely, James F. Bronsdon Vice President Legal and Compliance enc. AMENDMENT NO. 1 TO COST SHARING AGREEMENT The Cost Sharing Agreement entered into as of the 19th day of November, 1997, by and between SAGE INSURANCE GROUP, INC. and SAGE LIFE ASSURANCE OF AMERICA, INC., is hereby amended by adding the following Section 5.08 to Article "V. MISCELLANEOUS PROVISIONS" thereof: Section 5.08. Pursuant to Sections 1.02, 2.02, and 3.02 hereof, the charging party will submit to the reimbursing party the pertinent statements of charges within 90 days of the end of the calendar year, and the reimbursing party will pay such charges not later than 30 days thereafter. IN WITNESS WHEREOF, the undersigned parties hereto have duly executed this Agreement as of the day and year first above written. SAGE INSURANCE GROUP, INC. By: /s/ Ronald S. Scowby ------------------------------ Authorized Signatory SAGE LIFE ASSURANCE OF AMERICA, INC. By: /s/ Mitchell R. Katcher ------------------------------ Authorized Signatory AMENDMENT NO. 2 TO THE COST SHARING AGREEMENT This Amendment No. 2 ("Amendment No. 2") to the Cost Sharing Agreement by and between Sage Insurance Group, Inc. (the "Parent") and Sage Life Assurance of America, Inc. (the "Life Company"), dated as of November 19, 1997 (the "Cost Sharing Agreement"), is entered into as of October 1, 2002. WHEREAS, the Parent and the Life Company previously entered into the Cost Sharing Agreement pursuant to which the Parent provides the Life Company with office space, office equipment and related office services; WHEREAS, the Parent and the Life Company desire to amend the Cost Sharing Agreement to provide for payment of the amounts estimated to be owed by the Life Company for such office space, office equipment and related office services on a monthly basis; NOW, THEREFORE, in consideration of the covenants and mutual promises contained in this Amendment No. 2 and other good and valuable consideration, the receipt and legal sufficiency of which are acknowledged, the Parent and the Life Company hereby agree as follows: 1. AMENDMENTS TO THE COST SHARING AGREEMENT. 1.1 The introductory paragraph of the Cost Sharing Agreement is hereby amended by deleting the words "a wholly owned" from the seventh line thereof and substituting therefor the words "an indirect"; 1.2 Section 1.02 of the Cost Sharing Agreement is hereby amended by deleting the word "year" from the first line thereof and substituting therefor the word "month"; 1.3 Section 1.04 of the Cost Sharing Agreement is hereby amended by deleting the word "year" from the second, fifth, seventh, tenth (in two places) and eleventh lines thereof and substituting therefor the word "month"; 1.4 Section 2.02 of the Cost Sharing Agreement is hereby amended by deleting the word "year" from the first line thereof and substituting therefor the word "month"; 1.5 Section 2.04 of the Cost Sharing Agreement is hereby amended by deleting the word "year" from the second, fifth, seventh, ninth (in two places) and tenth lines thereof and substituting therefor the word "month"; 1.6 Section 3.02 of the Cost Sharing Agreement is hereby amended by deleting the word "year" from the first line thereof and substituting therefor the word "month"; 1.7 Section 5.08 of the Cost Sharing Agreement is hereby amended by deleting the words "90 days" from the third line thereof and substituting therefor the word "15 days" and by deleting the word "year" from the third line thereof and substituting therefor the word "month". 2. EFFECTIVE DATE. The Life Company shall file this Amendment No. 2 with the Insurance Commissioner of the State of Delaware, and this Amendment No. 2 shall be of no force and effect until (i) a thirty-day period, or such shorter period as the Insurance Commissioner of the State of Delaware may permit, has elapsed since the date of such filing and (ii) the Insurance Commissioner of the State of Delaware has not disapproved this Amendment No. 2 during such period. Upon so becoming in force and effect, this Amendment No. 2 shall be effective from and after October 1, 2002. 3. CONFIRMATION OF THE AGREEMENT. Except as amended hereby, the Cost Sharing Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 2 as of the date first above written. SAGE INSURANCE GROUP, INC. By: /s/ Robin I. Marsden ------------------------------------- Robin I. Marsden President and Chief Executive Officer SAGE LIFE ASSURANCE OF AMERICA, INC. By: /s/ Robin I. Marsden ------------------------------------- Robin I. Marsden President and Chief Executive Officer EX-10.12 8 y85446exv10w12.txt UNDERWRITING AGREEMENT INCLUDING AMENDMENT NO. 1 EXHIBIT 10.12. UNDERWRITING AGREEMENT AGREEMENT dated as of July 24, 2000, by and between SAGE LIFE ASSURANCE OF AMERICA, INC. (Insurer), a Delaware insurance company, and SAGE DISTRIBUTORS, INC. (Distributor), a Delaware corporation. WITNESSETH: WHEREAS, Insurer is licensed to issue variable annuity contracts and variable life insurance policies (Variable Products) in all states except New York; and WHEREAS, Insurer has registered its Separate Accounts that hold assets for the Variable Products with the SEC (SEC) as investment companies under the Investment Company Act of 1940 (1940 Act) and interests in the Separate Accounts for offer and sale to the public under the Securities Act of 1933 (1933 Act); and WHEREAS, Insurer is required to offer and sell its registered Variable Products to the public through an underwriter; and WHEREAS, Distributor is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 (1934 Act) and is a member in good standing of the National Association of Securities Dealers, Inc. (NASD); and WHEREAS, Distributor desires to serve as underwriter of the Variable Products. NOW THEREFORE, in consideration of the covenants and mutual promises contained in this Agreement and other good and valuable consideration, the receipt and legal sufficiency of which are acknowledged, Insurer and Distributor hereby agree as follows: 1. APPOINTMENT OF UNDERWRITER a. APPOINTMENT. Insurer hereby appoints Distributor and Distributor hereby accepts appointment as underwriter in connection with the offer and sale to the public of all of the Sage Variable Products issued by Insurer, which are currently subject to an effective registration statement with the SEC and those Variable Products issued by Insurer that may be so registered in the future (Sage Variable Products). It is understood that, in connection with its duties as underwriter, Distributor shall be an agent for Insurer only with respect to the sale and redemption of the Sage Variable Products. For all other purposes, Distributor is acting as an independent contractor and not as an agent, employee, partner, joint venturer, affiliate or associate of Insurer, unless Insurer specifically recognizes in writing, Distributor as its agent. Any person, who is an officer, director, employee or agent of both Insurer and Distributor, shall be deemed, when rendering services to Distributor or acting on any business of Distributor, to be rendering such services to or acting solely for Distributor and not as an officer, director, employee or agent or one under the control or direction of Insurer even though paid by Insurer. b. DUTIES. As underwriter, Distributor shall solicit broker-dealers to offer and sell the Sage Variable Products in all jurisdictions in which the Sage Variable Products have been qualified for sale (Selling Brokers). Selling Brokers must be registered with the SEC and be a member in good standing of the NASD All broker-dealers who agree to offer and sell the Sage Variable Products shall be requested to execute a Selling Agreement with Insurer in substantially the form attached hereto as Exhibit A. Such Selling Agreement must provide that in the event any Sage Variable Product sold by the Selling Broker is tendered for redemption within seven days of the date of sale or if it is returned under the free look provisions of any state, all commissions paid to the Selling Broker with respect to that product shall be returned to Insurer. Insurer also authorizes Distributor to offer and sell the Sage Variable Products directly to the public. c. DUTIES OF INSURER. Insurer shall provide to Distributor, from time to time and immediately upon request, a list of the Sage Variable Products that are currently registered with the SEC and qualified for sale to the public, indicating in which states those products have been qualified for sale under both the insurance and securities laws. Insurer shall update such list immediately upon any change in the jurisdictions where the products have been qualified. Insurer agrees to accept all Selling Agreements with Selling Brokers tendered by Distributor to Insurer if such Selling Brokers meet the suitability standards of Insurer and are not disqualified by any regulatory authority. Insurer also agrees to appoint as insurance agents all Registered Representatives of such Selling Brokers who are designated for appointment by the Selling Broker and who needs Insurer's standards. d. COMPLIANCE. All activities engaged in by Distributor and the Selling Brokers with respect to this Agreement shall be in compliance with all applicable federal and state securities laws and regulations and the Compliance Manual. 2. COMPENSATION a. UNDERWRITING SERVICES. Distributor shall receive no direct compensation for providing underwriting services under this Agreement. b. COMMISSIONS ON TRANSACTIONS. Insurer shall pay to Distributor any commissions that become payable to Registered Representatives of Distributor for sales of the Sage Variable Products, including all transaction-based fees payable to Registered Representatives of Distributor for wholesaling and referral activities. Distributor agrees that in the event any Sage Variable Product is tendered for redemption within seven days of the date of sale or if it is returned under the free look provisions of any state, all commissions paid with respect to 2 that product shall be returned to Insurer. It is noted however that actual payment to the Registered Representative may be by Sage Life or an affiliate under a common Paymaster Agreement. c. EXPENSES. Each party shall be responsible for all expenses they incur in carrying out their respective responsibilities under the terms of this Agreement. Insurer shall be responsible for all costs it incurs in registering or qualifying the Variable Products for sale with the SEC and with the various state regulators and for all costs incurred in preparing and printing prospectuses, statements of additional information, marketing materials and such other documents as are required to maintain the registration and qualification of the Variable Products with the SEC and the states. Distributor shall be responsible for all of its costs incurred in marketing the Sage Variable Products, including the costs of printing and distributing any advertising materials or sales literature, all travel expenses or other costs related to selling the Sage Variable Products. 3. REPRESENTATIONS AND WARRANTIES a. DISTRIBUTOR. Distributor hereby represents and warrants to Insurer as follows: (1) DUE INCORPORATION AND ORGANIZATION. Distributor is duly organized and is in good standing under the laws of the State of Delaware and is fully authorized to enter into this Agreement and carry out its duties and obligations hereunder. (2) AUTHORITY AND ENFORCEABILITY. This Agreement when executed will be duly authorized, executed and delivered by Distributor and will be a valid and binding agreement of Distributor, enforceable in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization, or similar laws affecting creditors' rights generally, regardless of whether such enforceability is considered in equity or at law, (ii) general equity principles, and (iii) limitations imposed by federal and state securities laws or the public policy underlying such laws regarding the enforceability of indemnification or contribution provisions. (3) REGISTRATION. Distributor is registered as a broker-dealer with the SEC and with all the states in which its activities require it to be so registered and Distributor shall maintain such registrations in effect at all times during the term of this Agreement. (4) REPRESENTATIVES. All offers and sales shall be made only through registered representatives of Distributor who are licensed under the appropriate state insurance laws and appointed by Insurer to offer the Sage Variable Products (Registered Representatives). Distributor shall immediately notify Insurer in the event any Registered Representative who has been appointed to sell the Variable Products is named by any 3 regulator or in any civil suit or arbitration involving alleged violations of any sales practices in connection with the sale of a security or insurance product. (5) REGULATORY COMPLIANCE. Distributor is in compliance with all of the laws, rules and regulations of SEC, NASD and the state securities regulators of all states in which it conducts operations and that it shall remain in compliance during the term of this Agreement. (6) STATE LAWS. Distributor will offer and sell the Sage Variable Products only in those states in which Insurer has qualified the products for sale as indicated on the most recent list of products provided to Distributor. (7) SOLICITATION OF SALES. Distributor will use only the most recent, currently effective prospectus and Statement of Additional Information in connection with any sales of the Sage Variable Products. If during the term of this Agreement, Insurer determines that the prospectus or Statement of Additional Information should be amended or supplemented, Distributor shall deliver any amendment or supplement prepared by Insurer with the prospectus or Statement of Additional Information as directed by Insurer. (8) APPLICATIONS AND CHECKS. Distributor shall assure that each purchaser of a Sage Variable Product executes an application for the Sage Variable Product, which application shall be delivered together with any check for the payment of sales to Insurer no later than the next business day following the date on which it is accepted by Distributor. (9) SALES PRACTICES. All sales of Sage Variable Products by Distributor directly to the public shall be made in compliance with all applicable regulatory requirements, including, but not limited to those that apply to suitability, switching, churning, break points and other prohibited sales practices. Distributor represents that any Sage Variable Product is suitable and appropriate for the purchaser of the product. (10) BEST EFFORTS. Distributor at all times shall provide its best judgment and effort in carrying out its obligations hereunder and shall act in compliance with all the provisions of the Contracts governing the Variable Products and the most current form of effective registration statement for the variable products. b. REPRESENTATIONS AND WARRANTIES OF INSURER Insurer hereby represents and warrants to Distributor as follows: (1) DUE INCORPORATION AND ORGANIZATION. Insurer has been duly incorporated and is in good standing under the laws of the state of 4 Delaware and is fully authorized to enter into this Agreement and carry out its obligations hereunder. (2) AUTHORITY AND ENFORCEABILITY. This Agreement when executed will be duly authorized, executed and delivered by Insurer and will be a valid and binding agreement of Insurer, enforceable in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization, or similar laws affecting creditors' rights generally, regardless of whether such enforceability is considered in equity or at law, (ii) general equity principles, and (iii) limitations imposed by federal and state securities laws or the public policy underlying such laws regarding the enforceability of indemnification or contribution provisions. (3) SAGE VARIABLE PRODUCTS. The contracts and policies constituting the Sage Variable Products sold to purchasers, when accepted by Insurer, will constitute legal, valid and binding obligations of Insurer, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors' rights; (4) REGISTRATION. The Separate Accounts underlying the Sage Variable Products have been registered as investment companies with the SEC under the 1940 Act and interests in each Separate Account relating to the Sage Variable Products have been registered or qualified for offer and sale to the public under the 1933 Act and under the securities laws of all states where such registration is required. Such registrations or qualifications will be kept in effect during the term of this Agreement. (5) INSURANCE QUALIFICATION. The contracts and policies constituting the variable products have been or will be qualified to be offered and sold under the insurance laws of each state in which such qualification is required and such qualifications will be kept in effect during the term of this Agreement. (6) PROSPECTUSES AND SALES MATERIALS. Insurer agrees to provide to Distributor a sufficient number of current prospectuses and Statements of Additional Information for the Variable Products as Distributor may request from time to time. (7) ANTIFRAUD. The most current registration statements for the Sage Variable Products, including the prospectuses and Statements of Additional Information contained in those registration statements do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and during the term of this Agreement, such documents as they may be 5 amended or supplemented shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Insurer agrees that it will notify Distributor immediately should any prospectus or Statement of Additional Information no longer comply with this provision. 4. COMPLAINTS, INVESTIGATIONS AND PROCEEDINGS a. NOTICE OF CUSTOMER COMPLAINTS, REGULATORY INVESTIGATIONS AND PROCEEDINGS. Distributor and Insurer shall notify each other promptly of any customer complaint or notice of any regulatory investigation or proceeding or judicial proceeding received by either of them with respect to the Contracts or the activities contemplated by this Agreement. b. CUSTOMER COMPLAINTS. In the case of a customer complaint, Distributor and Insurer shall cooperate in investigating such complaint and any response by either party to such complaint. Distributor and Insurer shall each be responsible for compliance with regulatory requirements applicable to each of them with regard to the handling, processing, resolution and reporting of customer complaints. Distributor and Insurer shall cooperate with each other in order to assist the other in complying with requirements under applicable law, rules or regulations governing the handling, processing and resolution of customer complaints. c. INVESTIGATIONS AND PROCEEDINGS. Distributor and Insurer shall cooperate fully in any securities or insurance regulatory investigation or proceeding or judicial proceeding arising in connection with the offering, sale or distribution of the Contracts distributed under this Agreement, and shall make books and records maintained by each of them available for inspection by regulatory authorities to which the other is subject to the extent provided for in this Agreement or required by applicable law, subject to the rights such party may have to the attorney-client privilege or nondisclosure obligations such party may have under applicable confidentiality requirements. d. RIGHT TO INDEMNIFICATION. It is expressly acknowledged and agreed that the parties may seek indemnification from the other for liabilities arising as a result of customer complaints, regulatory investigations or other proceedings, to the extent consistent with the terms and conditions of Section 5 of this Agreement. 5. INDEMNIFICATION Each party shall indemnify and hold harmless the other and each person who controls or is associated with the indemnified party within the meaning of such terms under the federal securities laws, and any officer, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to 6 which the indemnified party and/or any such person may become subject, under any statute or regulation, any NASD rule or interpretation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arising from the acts or omissions of the indemnifying party: 6. TERMINATION This Agreement shall terminate by either party, with or without cause, upon thirty (30) days written notice and immediately, upon notice of a breach of this Agreement. 7. MISCELLANEOUS a. BINDING EFFECT. This Agreement shall be binding on and shall inure to the benefit of the respective successors and assigns of the parties hereto provided that neither party shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party. b. AMENDMENT. Any other change in the terms or provisions of this Agreement shall be by written agreement between Insurer and Distributor. c. RIGHTS, REMEDIES, ETC., ARE CUMULATIVE. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. Failure of either party to insist upon strict compliance with any of the conditions of this Agreement shall not be construed as a waiver of any of the conditions, but the same shall remain in full force and effect. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. d. NOTICES. All notices hereunder are to be made in writing and shall be given: if to Insurer, to: Mr. Robin I. Marsden President and Chief Executive Officer Sage Life Assurance of America, Inc. 300 Atlantic Street, Suite 302 Stamford, CT 06901 if to Distributor, to: Mr. Christopher O'Gorman President Sage Distributors, Inc. 300 Atlantic Street Stamford, CT 06901 7 or such other address as such party may hereafter specify in writing. Each such notice to a party shall be either hand delivered or transmitted by registered or certified United States mail with return receipt requested, or by overnight mail by a nationally recognized courier, and shall be effective upon delivery. e. INTERPRETATION; JURISDICTION. This Agreement constitutes the whole agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior oral or written understandings, agreements or negotiations between the parties with respect to such subject matter. No prior writings by or between the parties with respect to the subject matter hereof shall be used by either party in connection with the interpretation of any provision of this Agreement. This Agreement shall be construed and its provisions interpreted under and in accordance with the internal laws of the state of Connecticut without giving effect to principles of conflict of laws. f. SEVERABILITY. This is a severable Agreement. In the event that any provision of this Agreement would require a party to take action prohibited by applicable federal or state law or prohibit a party from taking action required by applicable federal or state law, then it is the intention of the parties hereto that such provision shall be enforced to the extent permitted under the law, and, in any event, that all other provisions of this Agreement shall remain valid and duly enforceable as if the provision at issue had never been a part hereof. g. SECTION AND OTHER HEADINGS. The headings in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. h. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which taken together shall constitute one and the same instrument. i. REGULATION. This Agreement shall be subject to the provisions of the 1933 Act, 1934 Act and 1940 Act and the Regulations and the rules and regulations of the NASD, from time to time in effect, including such exemptions from the 1940 Act as the SEC may grant, and the terms hereof shall be interpreted and construed in accordance therewith. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by such authorized officers on the date specified below. SAGE LIFE ASSURANCE OF AMERICA, INC. By: /s/ Robin I. Marsden --------------------- Name: Robin I. Marsden Title: President and Chief Executive Officer Date: 7/24/2000 ------------------ 8 SAGE DISTRIBUTORS, INC. By: /s/ Christopher O'Gorman ------------------------ Name: Christopher O'Gorman Title: President Date: 7/24/2000 ------------------------ 9 AMENDMENT NO. 1 TO THE UNDERWRITING AGREEMENT This Amendment No. 1 ("Amendment No. 1") to the Underwriting Agreement by and between Sage Life Assurance Company of America, Inc. ("Insurer") and Sage Distributors, Inc. ("Distributor"), dated as of July 24, 2000 (the "Underwriting Agreement"), is entered into as of October 1, 2002. WHEREAS, Insurer and Distributor previously entered into the Underwriting Agreement pursuant to which Distributor provides certain underwriting services to Insurer; WHEREAS, Insurer and Distributor desire to amend the Underwriting Agreement to provide for the full reimbursement by Insurer of Distributor's costs of performing such underwriting services for Insurer; NOW, THEREFORE, in consideration of the covenants and mutual promises contained in this Amendment No. 1 and other good and valuable consideration, the receipt and legal sufficiency of which are acknowledged, Insurer and Distributor hereby agree as follows: 1. AMENDMENTS TO THE UNDERWRITING AGREEMENT. 1.1 Section 2 of the Underwriting Agreement is hereby amended and restated in its entirety as follows: COMMISSIONS; EXPENSES; BOOKS AND RECORDS; PAYMENTS; INSURER'S EXPENSES; REGULATORY REQUIREMENTS a. COMMISSIONS. Commissions resulting from transactions in the Sage Variable Products through Distributor shall be paid by Insurer to Distributor. Distributor agrees that in the event any Sage Variable Product is tendered for redemption within seven days of the date of the sale or if it is returned under the free look provision of any state, all commissions paid with respect to that product shall be returned to Insurer. Commissions paid to Distributor shall be used by Distributor to pay all commissions or other transaction-based compensation payable in connection with the sales of any Sage Variable Products to any registered person who has earned the commission. It is understood, however, that the laws of many states in which the commissions are earned require that the commissions and any other transaction-based compensation be paid to an insurance agency and through the insurance agency to the individuals entitled to receive the compensation. To comply with those laws, the commissions and other transaction-based compensation may be retained by Insurer for payment directly by insurer to the persons entitled to receive those commissions and transaction-based compensation. It is understood that in connection with those payments, all individuals who receive such compensation must be registered as representatives of Distributor or Selling Brokers under applicable securities laws, licensed as insurance agents under applicable insurance laws and appointed to sell the Sage Variable Products by Insurer. Furthermore, all compensation so paid shall be allocated to Distributor and shown on the books and records of Distributor as if it were paid to Distributor. b. EXPENSES. Insurer hereby agrees that it shall reimburse Distributor for any and all other costs and expenses incurred by Distributor in providing the underwriting services to Insurer pursuant to this Agreement to the extent such costs exceed any income Distributor actually receives in connection with providing such underwriting services. The charge to Insurer for such underwriting services shall be determined by Distributor and shall be equal to the result of (i) plus (ii) minus (iii), where (i) is all direct and directly allocable costs incurred by Distributor reasonably and equitably determined to be attributable to selling the Sage Variable Products, including without limitation, (x) any and all compensation that become payable to those Registered Representatives of Distributor who are employees of Distributor and/or Insurer fully dedicated to the sale of the Sage Variable Products, excluding commissions and transaction-based compensation payable to Registered Representatives of Distributor for wholesaling and referral activities (it being agreed that the actual payment to the Registered Representatives may be by Insurer or an affiliate under a common Paymaster Agreement) and (y) all of Distributor's other costs incurred in marketing the Sage Variable Products, including all travel expenses related thereto and the costs of printing and distributing any advertising materials or sales literature; and (ii) is a reasonable charge for overhead, the amount of such charge for overhead to be agreed upon by the parties hereto from time to time (it being agreed that the overhead charge may be for shared services provided by an affiliate under a cost sharing agreement); and (iii) is any and all income Distributor actually receives in connection with providing the underwriting services to Insurer pursuant to this Agreement. Notwithstanding the foregoing, the maximum amount of net expenses as determined above for which Insurer shall be responsible to Distributor under this subsection b, shall not in any calendar month exceed an amount equal to $800,000, or such other amount as may be agreed to by Insurer and Distributor from time to time. In the event the amount so determined is a negative amount, Distributor shall not be required to reimburse Insurer for the negative amount. Furthermore, it is understood that the amounts so determined shall not be cumulative so that negative amounts shall not be included in determining the reimbursement amount for each succeeding month. It is also agreed that any individual expenditure described in clause (i)(y) in the immediately preceding paragraph in excess of $25,000 shall be approved in advance by Insurer; and any amount of travel or related expenses shall only be reimbursable by Insurer to the extent such expenses are incurred in a manner consistent with Insurer's own internal policies related to the incurrence and documentation of travel or related expenses by Insurer's employees. The bases for the determination of the amount of costs of Distributor to be reimbursed by Insurer shall be established, modified and adjusted by mutual agreement where necessary or appropriate to reflect fairly and equitably the incidence of cost actually incurred by Distributor in connection with providing underwriting services to Insurer. c. BOOKS AND RECORDS. Distributor shall be responsible for maintaining full and accurate books, records and accounts of all underwriting services rendered pursuant to this Agreement in accordance with applicable laws and regulations in such a way as to disclose clearly and accurately the nature and detail thereof, including without limitation, such accounting information as is necessary to support the reasonableness of charges under this Agreement and such additional information as Insurer may reasonably request for purposes of its internal bookkeeping and accounting operations. Distributor shall also reflect on its books and records all commissions and transaction based compensation payable for the sale of Sage Variable Products as if all such commissions and compensation were paid to it and then paid by it to the individuals entitled to receive such compensation. All commissions must be reported on Distributor's FOCUS and NASD Fee Assessment reports as if they had been received directly by Distributor. All records of Insurer and Distributor concerning the sales of the Sage Variable Products and commissions paid in connection with those sales must be available for inspection and audit by the Distributor and its regulators, including the SEC and the NASD. d. PAYMENTS. Distributor shall submit to Insurer within fifteen (15) days after the end of each calendar month a written statement of the amount estimated to be owed by Insurer for underwriting services pursuant to this Agreement in that calendar month, and Insurer shall pay to Distributor within thirty (30) days following receipt of such written statement the amount set forth in the statement, unless Insurer notifies Distributor in writing that such charges are disputed. Unless Distributor and Insurer can reconcile any such dispute, they shall agree to the selection of a firm of independent certified public accountants that shall determine the charges properly allocable to Insurer and shall, within a reasonable time, submit such determination, together with basis therefor, in writing to Distributor and Insurer, whereupon such determination shall be binding. The expenses of such a determination by a firm of independent certified public accountants shall be borne equally by Distributor and Insurer. e. INSURER'S EXPENSES. Insurer shall be responsible for all costs it incurs in registering or qualifying the Sage Variable Products for sale with the SEC and with the various state regulators and for all costs incurred in preparing and printing prospectuses, statements of additional information, marketing materials and such other documents as are required to maintain the registration and qualification of the Sage Variable Products with the SEC and the states. f. REGULATORY REQUIREMENTS. It is understood that nothing in the Underwriting Agreement as amended by this Amendment shall relieve Distributor of its obligations to supervise its Registered Representatives and to comply with all applicable rules and regulations applying to broker-dealers of the SEC, NASD, and state securities regulators. It is further understood and agreed that these regulatory requirements include the obligation of Distributor to have one of its Registered Principals review, approve and, if necessary, file with the NASD, all advertising used in connection with the sale of the Sage Variable Products, before any of such advertising is used. 1.2 Section 7(d) of the Underwriting Agreement is hereby amended by deleting reference to "Mr. Christopher O'Gorman" and inserting in its place "Mr. Robin I. Marsden." 2. EFFECTIVE DATE. The Insurer shall file this Amendment No. 1 with the Insurance Commissioner of the State of Delaware, and this Amendment No. 1 shall be of no force and effect until (i) a thirty-day period, or such shorter period as the Insurance Commissioner of the State of Delaware may permit, has elapsed since the date of such filing and (ii) the Insurance Commissioner of the State of Delaware has not disapproved this Amendment No. 1 during such period. Upon so becoming in force and effect, this Amendment No. 1 shall be effective from and after October 1, 2002. 3. CONFIRMATION OF THE AGREEMENT. Except as amended hereby, the Underwriting Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 1 as of the date first above written. SAGE LIFE ASSURANCE OF AMERICA, INC. By: ____________________________________________ Robin I Marsden President and Chief Executive Officer SAGE DISTRIBUTORS, INC. By: ____________________________________________ Robin I. Marsden President and Chief Executive Officer EX-21 9 y85446exv21.txt SUBSIDIARIES . . . EXHIBIT 21 Sage Life Assurance of America, Inc. Subsidiaries of the Registrant
SUBSIDIARY STATE OF INCORPORATION - -------------------------------------------------------------------------------- Sage Life Assurance Company of New York New York
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