| Tue 3 Sep 2002, 0:00 | | Sage Group Limited - Sage response to media report |
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Sage`s Chairman, Mr Louis Shill has responded to recent media reports dealing
predominantly with Sage`s international activities which were seriously flawed
from a factual perspective and unverified in important respects
The media reports resulted predominantly from the disclosure of a quarterly
regulatory return in the US ("the 10 Q") which has been referred to extensively,
but out of context relative to South African practice. In the US, regulation
requires that all caveats and potential outcomes be dealt with even if they are
unlikely to occur.
At issue is Sage Life`s access to capital to meet US regulatory requirements,
and the conclusion that Sage Life Assurance of America was operating below its
regulatory capital requirement and could consequently face "a takeover" from
minority shareholder Swiss Re.
Sage Life of America`s statutory capital, does not relate to the minimum
regulatory requirement and is so described purely in terms of the US statutory
basis of accounting on which the company frames its financial statements.
The US company has considerable capital strength. For the record, the current
Fitch ("A" Strong) rating of Sage Life of America states the following. "Fitch
believes Sage Life of America has extremely strong capital on a risk adjusted
basis. Sage Life of America`s NAIC (National Association of Insurance
Commissioners) risk based capital ratio was 2627% at year end 2001. This
compares to life industry norms of 250% - 350%." The company`s current ("A"
Excellent) rating from AM Best reflects similar risk based capital strength.
The future new business financing costs of the international operations are also
exceptionally well provided for in terms of seven year co-insurance agreements
with Swiss Re who have extended facilities projected to be in excess of $500
million. This is quite apart from the additional development capital required
to expand the company`s distribution, support and operating infrastructure which
Sage is presently busy raising.
Wrong conclusions have been drawn about the insurance regulator in the State of
Michigan who has not applied any restriction on the company`s licence and it
continues doing business in that State with the regulator`s approval. The
regulator has indicated that it merely wishes to monitor the situation during
any period when statutory capital is below $25 million and has asked to be kept
abreast of developments.
The issue in the US is not one of regulatory requirements, where Sage Life of
America remains a highly capitalised company. However, the company has
temporarily fallen marginally below the level of statutory capital of $25
million agreed between the company and Swiss Re in their founding partnership
arrangements due to the allocation of existing resources between the US and
Bermuda businesses. In terms of those arrangements, should the company not
cure the shortfall within 60 days, Swiss Re has the right, but not the
obligation, to achieve a controlling vote until such time as the shortfall has
been cured, which can occur at any time. It is the company`s intention to
reinstate the $25 million statutory capital by 30 September 2002.
Sage`s 2002 annual report reflected Sage Life Holdings USA as a 100% interest in
its schedule of subsidiaries. Although Swiss Re holds 9,9% of the ordinary
shares, they do not participate in ordinary dividends and Sage has a right of
repurchase at any time at the original issue price. Consequently, this minority
interest is treated as part of the preference shareholding as it does not
participate in equity growth.
The presumption that Sage was unable to meet preference share dividend payments
to Swiss Re in 2000 is incorrect. The conversion of a portion of the preference
shares to ordinaries was by agreement with Swiss Re to align with rating
requirements.
The US situation is quite straightforward and is as follows:
The company is currently exceptionally strongly capitalised by any regulatory or
other standards and continues, despite a difficult financial environment, to
expand rapidly in the United States.
Internationally, from its Bermuda base, Sage is also making significant
progress, expanding its distribution network via leading global financial
services groups such as First Union, JP Morgan Chase and HSBC, and achieving
sustained new business growth.
As previously indicated by Sage, the level of expansion in the United States and
internationally does require additional development capital of some $150
million over the next five years to sustain the pace of the current expansion.
This is not unexpected and is typical of a growing life company where
development expenses should not be equated with trading losses. It is however
unfortunate to be undertaking a capital raising exercise at a time of upheaval
in global financial and life assurance markets. However, as stated to
shareholders, a variety of foreign funding proposals are currently actively
being pursued to provide the required capital. The capital raising exercise has
not been unsuccessful but merely more time consuming because of the current
market turmoil. Shareholders and the investing community will be fully informed
as and when the process is concluded. In the meanwhile, the US management team
and the chairman remain confident that this will be successfully achieved on
reasonable terms by the end of the current year, as previously anticipated.
There is no need to conclude financial arrangements by the end of October.
Sage Group as a whole continues to make satisfactory operating progress on all
fronts and in South Africa is showing ongoing competitive performance relative
to peer companies. The interim financial results of the Group for the 3 months
to June 2002 clearly reflected this.
A suggestion that Sage has failed to disclose its US problems which could also
land it in hot water with local financial regulators is incorrect. As is the
case for all financial institutions, Sage is required to make extensive filings
to various regulators in South Africa, the United States and Bermuda. Much of
this information is made available to the public in these countries. It is not
required, nor would it be practically possible for Sage or any other regulated
financial services group in South Africa or abroad to provide such full
information directly and continuously to shareholders. By way of example, the
annual LT 2000 return by South African life assurers to the Financial Services
Board (FSB) itself runs into over 150 pages of detail. The FSB is regularly
updated on all aspects of the Group`s international activities.
On the subject of disclosure, Sage has created a new precedent by making the
comprehensive independent actuarial report on its international activities
available to investors and any interested parties.
It is anticipated that new solvency rules for life assurers may be introduced in
South Africa. If and when this occurs, the new requirements are expected to be
phased in over a reasonable period. Like its peers, Sage will deal with new
requirements either by raising capital, through securitisation or through
reinsurance, along the lines of that utilised in the US. In the meanwhile, Sage
has taken the precautionary step, as announced in the interim report of
reverting to capitalisation dividend issues to achieve a progressively stronger
capital while maintaining a reasonable dividend policy.
In Sage`s interim report some ten days ago, disclosure was made of the most
important feature of the US quarterly return. It was clearly stated that the
foreign capital raising exercise was being delayed and that should the delays be
prolonged, "the Group may consider the sale of part or all of these successfully
trading operations". Preference is being given to a strategic/financing
partnership and a sale would only be contemplated if negotiations proved to be
unduly protracted judged against the relative ease of a disposal.
The portfolio investment in Worldcom`s formerly highly rated investment grade
bonds was not referred to in the interim report as it was not considered a
material matter and had already been fully written down by the end of June.
As regards risks to Sage Life of America as a result of rating downgradings, it
should be noted that the current rating environment in the United States and
elsewhere is volatile and Fitch for example, is reviewing all life company
ratings and expects to downgrade up to one third of all US life companies in
view of what it describes as a "negative outlook" for the entire industry.
Throughout the world, rating agencies and regulators are closely scrutinising
the impact of poor investment markets on even the leading international
insurance groups. Under the circumstances, Sage Life of America remains
strongly rated by both AM Best and Fitch and its operations have not been
significantly affected by present financial conditions.
There is speculation that Swiss Re could gain control of the US operation, and
may well file for liquidation of Sage Holdings US. This is without foundation.
There is no reason to suggest that such a strategy is contemplated or likely or
that it would be in any of the parties` interests, given the progress that has
been made in a relatively short time in developing a successful and valuable
business franchise. The Group`s 30 year relationship with Swiss Re continues to
be sound and co-operative and, in any event, the agreements with Swiss Re have
many features which ensure that the ultimate say in the future development of
the US life company will not be removed from Sage.
The Bermuda activities are not subsidiaries of the US company, and they are not
subject to the capital covenants with Swiss Re.
The nature and impact of Sage Life of America`s premiums and its financial
reinsurance and profit sharing agreements with Swiss Re have been misconstrued.
These agreements provide a highly effective means of financing selling expenses
through modified co-insurance as an alternative to borrowings. Financial
reinsurance is utilised by many other life companies in the US and elsewhere,
including South Africa. This agreement was not "modified" but merely extended
to include an additional block of business reinsured. The US company`s future
projections which show sustained growth in net premiums, are incorporated into
the independent actuarial valuation of the company, and deal only with Sage`s
share of the business after all co-insurance and reinsurance arrangements.
It is not possible to allocate values attributable to the United States and
Bermuda activities, without substantial actuarial input based on the full
reinsurance agreements.
The inference that the entire value in the United States could be lost is
ridiculous, even under a most extreme scenario and ignores the substantial net
assets and goodwill value of the international interests. The $65 million
Equity Linked Notes issued by the Group last year, do not impact on the value of
the US business and full provision, including foreign exchange translation
differences, has been made in the Group balance sheet as a deduction in arriving
at the Group NAV and Embedded Value of 1297c per share. The carrying value of
the international businesses is, inter alia supported by the reports of
independent US actuaries and investment bankers.
In fact, the stability of the Group is evident after taking into account all
liabilities and even incorrectly attributing no value to the US. Furthermore,
policyholder assets in the US and Bermuda are held in regulated separate
accounts for the sole benefit of policyholders. In South Africa, Sage Life is
strongly capitalised, and business is predominantly linked, with policyholder`s
liabilities directly matched to relevant assets.
Sage`s capital adequacy has been questioned. However, recent results clearly
demonstrate continuing financial strength:
In the case of Sage Life, total capital is R1,85 billion, giving a capital
adequacy multiple of 3,9 times relative to the statutory capital requirement.
Together with the present value of future profits totalling R798,5 million, Sage
Life`s total embedded value is R2,6 billion. On an embedded value basis, Sage
Life`s capital would be covered 5,6 times.
At Sage Group level, capital of R1,15 billion together with the present value of
future business of R798,5 million give a total embedded value of R1,95 billion -
this is after taking into account all liabilties of the international
activities, including the equity linked notes. This does not include any
goodwill attaching to Sage Life South Africa, which has an appraisal value well
in excess of its embedded value.
The Group for decades has successfully managed its excess capital structure by
predominantly investing in operating subsidiaries and strategic investments
while maintaining adequate liquidity to meet any contingencies.
As regards the implications for Sage as a result of the Universa unbundling, the
Group`s decision to withdraw from the Universa consortium was dictated by the
primary objective of achieving this full required liquidity and flexibility in
relation to the large Absa shareholding held for more than a decade. The
withdrawal from the Universa consortium is not expected to have any negative
implications in terms of Sage`s ongoing business co-operation with Absa.
While some analysts are currently negative about Sage, there is significant
trading in Sage shares which points to certain investors of substance again
recognising the underlying value and prospects offered by the company and the
fact that inter alia the current market price quite illogically attributes no
value at all to the valuable international activities.
It is possible that investors have become nervous about the downgraded insurance
sector ever since the debacles at companies such as Norwich and Fedsure. They
should not however liken those unfortunate developments to the strong
fundamentals of Sage Group with its 37 year stable and reliable history.
Date: 03/09/2002 05:39:00 PM Produced by the JSE SENS Department
