10-Q 1 y91816e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ------------------ Commission file numbers--333-77441, 333-77437, 333-78583, 333-87172, 333-87174, 333-87178, and 333-87950 SAGE LIFE ASSURANCE OF AMERICA, INC. (Exact name of registrant as specified in its charter) Delaware 51-0258372 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 969 High Ridge Road, Suite 200, 06905 Stamford, Connecticut (Address of principal executive offices) (Zip Code) (203) 321-8999 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]Yes [ ]No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). [ ]Yes [X]No As of November 14, 2003 there were 1,000 shares of outstanding common stock, par value $2,500 per share, of the registrant. All outstanding shares were owned by Sage Life Holdings of America, Inc. SAGE LIFE ASSURANCE OF AMERICA, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTS ----------------- PART I -- FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 1 Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2003 and 2002 2 Consolidated Statements of Cash Flows for the Nine-Month 3 Periods Ended September 30, 2003 and 2002 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures PART II -- OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to Vote of Security Holders Not Applicable Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Part I - Financial Information Item 1. Financial Statements Sage Life Assurance of America, Inc. Consolidated Balance Sheets September 30, December 31, 2003 2002 (Unaudited) ------------- ------------ Assets Investments: Fixed maturity securities available for sale $ 12,536,729 $ 13,135,718 Equity securities available for sale -- 759,000 --------------------------- Total Investments 12,536,729 13,894,718 Cash and cash equivalents 2,691,784 9,281,625 Accrued investment income 263,299 202,979 Receivable from affiliates 15,158 -- Deferred acquisition costs 2,430,506 3,063,793 Intangible assets 4,348,765 4,348,765 Other assets 895,961 929,220 Separate account assets 121,274,754 134,284,573 --------------------------- Total Assets $144,456,956 $166,005,673 =========================== Liabilities and Stockholder's Equity Liabilities: Deferred gain from modified coinsurance agreement $ 1,903,484 $ 2,301,897 Payable to affiliate -- 429,954 Reinsurance payables 746,188 851,368 Unearned revenue 18,676 23,951 Deferred federal income taxes 401,829 346,007 Accrued expenses and other liabilities 3,311,145 5,877,338 Separate account liabilities 121,274,754 134,284,573 --------------------------- Total Liabilities 127,656,076 144,115,088 Stockholder's Equity: Common stock, $2,500 par value, 1,000 shares authorized, issued and outstanding 2,500,000 2,500,000 Additional paid-in capital 56,337,754 56,337,754 Deficit (42,770,513) (37,618,830) Accumulated other comprehensive gain 733,639 671,661 ----------------------------- Total Stockholder's Equity 16,800,880 21,890,585 ----------------------------- Total Liabilities and Stockholder's Equity $144,456,956 $ 166,005,673 ============================= See accompanying notes to consolidated financial statements. Sage Life Assurance of America, Inc. Consolidated Statements of Operations (Unaudited)

~~PART~~Three IMonths --Ended ~~FINANCIAL~~Nine ~~INFORMATION~~Months ~~Page~~Ended ~~Item~~September 1.30 ~~Financial~~September ~~Statements (Unaudited) Consolidated Balance Sheets as of June~~ 30, ~~2003 and December 31, 2002. 1 Consolidated Statements of Operations for the Three and Six~~-~~Month~~--------------------------------------------------------------------------- ~~Periods Ended June 30,~~ 2003 ~~2 and~~ 2002 ~~Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30,~~ 2003 ~~and~~ 2002. 3---------------------------------------------------------------------------- ~~Notes~~Revenues: toNet ~~Consolidated~~investment ~~Financial~~income ~~Statements~~$ 4351,180 ~~Item~~$ 2.372,462 ~~Management's~~$ ~~Discussion~~983,064 ~~and~~$ ~~Analysis~~1,154,646 ofRealized ~~Financial~~capital ~~Condition~~(losses) ~~and~~gains ~~Results~~853 of262 ~~Operations.~~99,132 7(910,578) ~~Item~~Administrative 3.service ~~Quantitative~~fees ~~and~~13,283 ~~Qualitative~~14,497 ~~Disclosures~~45,508 ~~About~~31,737 ~~Market~~Contract ~~Risk~~charges ~~12 Item 4. Controls~~ and ~~Procedures~~fees 1221,288 ~~PART~~153,992 II612,901 381,981 ---------------------------------------------------------------------------- ~~OTHER~~Total ~~INFORMATION~~Revenues ~~Item~~386,604 541,213 1.,740,605 ~~Legal~~657,786 ~~Proceedings~~Benefits ~~13 Item 2. Changes in Securities~~ and ~~Use~~Expenses: ofContract ~~Proceeds~~owner ~~Not~~benefits ~~Applicable~~297,333 ~~Item~~321,518 3.919,415 ~~Defaults~~986,661 ~~Upon~~Acquisition ~~Senior~~expenses ~~Securities~~138,017 ~~Not~~60,191 ~~Applicable~~516,710 ~~Item~~520,749 4.General ~~Submission~~& ofadministrative ~~Matters~~expenses to1,071,327 ~~Vote~~1,617,041 of5,456,163 ~~Security~~6,216,735 ~~Holders~~---------------------------------------------------------------------------- ~~Not~~Total ~~Applicable~~Benefits ~~Item~~and 5.Expenses ~~Other~~1,506,677 ~~Information~~1,998,750 ~~Not Applicable Item~~ 6.,892,288 ~~Exhibits~~7,724,145 ~~and~~---------------------------------------------------------------------------- ~~Reports~~Net onLoss ~~Form~~$(1,120,073) ~~8-K~~$(1,457,537) ~~Not~~$(5,151,683) ~~Applicable~~$(7,066,359) ~~Signatures 14~~============================================================================

See accompanying notes to consolidated financial statements. Sage Life Assurance of America, Inc. Consolidated Statements of Cash Flows (Unaudited)

~~JUNE~~Nine ~~30,~~Months ~~DECEMBER~~Ended ~~31,~~September ~~2003~~30 ~~2002 (UNAUDITED)~~ ------------- -------------------- ~~ASSETS~~2003 ~~Investments:~~2002 ~~Fixed maturity securities available for sale $ 12,348,434 $ 13,135,718 Equity securities available for sale~~ -- ~~759,000~~ ------------- ------------------ ~~Total~~Cash ~~Investments~~Flows 12from Operating Activities Net loss $ (5,~~348~~151,~~434~~683) 13$ (7,~~894~~066,~~718~~359) ~~Cash~~Adjustments ~~and~~to reconcile net loss to net cash ~~equivalents~~used 6in operating activities: Amortization of acquisition costs 516,~~968~~710 520,~~262~~749 9Amortization of bond discount/premium 87,~~281~~366 85,~~625~~487 Realized capital (gains)/losses (63,476) 24,402 Changes in: Accrued investment income ~~201~~(60,~~514~~320) ~~202~~7,~~979~~366 ~~Deferred~~Net ~~acquisition~~payable/receivable ~~costs~~to affiliates (445,112) 2,~~451~~334,~~062~~403 3Unearned revenue (5,~~063~~275) 20,~~793~~067 ~~Intangible~~Reinsurance ~~assets~~payables 4(105,~~348~~180) 1,~~765~~659,600 4Acquisition costs deferred 70,~~348~~195 (962,~~765~~565) ~~Other~~Deferred ~~assets~~gain ~~992~~from modified coinsurance agreement (398,~~428~~413) ~~929~~942,~~220~~009 ~~Separate~~Accrued ~~account~~expenses ~~assets~~and ~~126~~other liabilities (2,~~605~~449,~~886~~975) ~~134~~459,~~284~~338 Other assets 33,~~573~~259 (227,439) ------------- -------------------- ~~Total~~Net ~~Assets~~Cash $Used ~~153~~In Operating Activities (7,~~916~~971,~~351~~904) ~~$ 166~~(2,~~005~~202,~~673~~942) ~~=============~~Cash ~~=============~~Flows ~~LIABILITIES~~From ~~AND~~Investing ~~STOCKHOLDER'S~~Activities ~~EQUITY~~Purchases ~~Liabilities:~~of ~~Deferred~~fixed ~~gain~~maturity ~~from~~securities ~~modified~~(338,098) ~~coinsurance~~- ~~agreement~~Proceeds $from ~~2,018,936~~maturities $and ~~2,301,897~~repayment ~~Payable~~of tofixed ~~affiliate~~maturity ~~53,798~~securities ~~429~~900,~~954~~000 ~~Reinsurance payables 1~~883,~~633,778~~680 ~~851,368~~Proceeds ~~Unearned~~from ~~revenue~~sale ~~17,012~~of ~~23,951~~other ~~Deferred~~invested ~~federal~~assets ~~income~~- ~~taxes 535~~123,~~380~~194 ~~346,007~~Proceeds ~~Accrued~~from ~~expenses~~sale ~~and~~of ~~other~~equity ~~liabilities~~securities 4820,~~992,455~~161 ~~5,877,338~~- ~~Separate account liabilities 126,605,886 134,284,573~~ ------------- -------------------- ~~Total~~Net ~~Liabilities~~Cash ~~135,857,245~~Provided ~~144,115,088~~By ~~Stockholder's~~Investing ~~Equity:~~Activities ~~Common stock~~1, $2382,~~500~~063 ~~par value,~~ 1,~~000~~006,874 ~~shares~~Cash ~~authorized,~~Flows ~~issued~~From ~~and~~Financing ~~outstanding~~Activities ~~2,500,000~~Capital ~~2,500,000~~contributions ~~Additional~~from ~~paid~~parent -in ~~capital 56~~5,~~337~~400,~~754~~000 ~~56,337,754~~--------------------------------- ~~Deficit~~Net ~~(41,650,440)~~Cash ~~(37,618,830)~~Provided ~~Accumulated~~By ~~other~~Financing ~~comprehensive~~Activities ~~gain~~- ~~871~~5,~~792 671~~400,~~661~~000 ------------- -------------------- ~~Total~~(Decrease)/Increase ~~Stockholder's~~in ~~Equity~~Cash 18and Cash Equivalents (6,~~059~~589,~~106~~841) 214,~~890~~203,~~585~~932 Cash and Cash Equivalents at Beginning of Period 9,281,625 9,383,386 ------------- -------------------- ~~Total~~Cash ~~Liabilities~~ and ~~Stockholder's~~Cash ~~Equity~~Equivalents at End of Period $ ~~153~~2,~~916~~691,~~351~~784 $ ~~166~~13,~~005~~587,~~673~~318 ============= ====================

See accompanying notes to consolidated financial statements. Sage Life Assurance of America, Inc. Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Sage Life Assurance of America, Inc. ("Sage Life" or the "Company" or "We") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements. These unaudited financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, reference should be made to the consolidated financial statements and footnotes thereto included in Sage Life's annual report on Form 10-K for the year ended December 31, 2002. Certain prior period amounts have been reclassified to correspond to current period presentation. 2. New Accounting Standards Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). With the adoption of SFAS No. 142, goodwill is no longer subject to periodic amortization over its estimated useful life, but rather will be subject to at least an annual assessment for impairment by applying a fair-value based test. Acquired intangible assets must be recognized and amortized over their useful lives. Acquired intangible assets with indefinite lives are not subject to periodic amortization under the new rules but would be subject to periodic assessment for impairment. At adoption, the Company performed an impairment test for its carrying value of goodwill. Utilizing sales forecasts to project future distributable earnings, the Company computed an embedded value that supported the carrying value of goodwill. However, concurrent with the Company's decision to discontinue new business, the Company concluded that its goodwill was impaired. Therefore, the Company wrote off the goodwill balance of $1,428,000 at December 31, 2002. The remaining balance included in identified intangibles represents state insurance licenses acquired in the acquisition of Fidelity Standard Life Insurance Company. Those identified intangibles are not subject to amortization under SFAS No. 142 because of their indefinite lives. The Company reviews those identified intangibles at least annually for impairment based on fair value of the insurance licenses. On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," ("SFAS No. 146"). SFAS No. 146 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. Adoption of SFAS No. 146 did not have and is not expected to have a material impact on the Company's financial condition or results of operations. 4 In April 2003, the Derivatives Implementation Group released Statement 133 Implementation Issue No. B36 "Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments" (Issue B36). Issue B36 affects modified coinsurance arrangements between reinsurers and ceding insurance companies and similar arrangements, which typically include an arrangement for passing a return that is linked to the performance of investments held by the ceding company to the reinsurer. Issue B36 requires bifurcation and fair value accounting and reporting of instruments that expose a creditor/lender to credit or default risk of a company other than the debtor/issuer, even if the debtor/issuer owns as investment assets the third-party securities to which the creditor/lender is exposed. The Company is reviewing its reinsurance contracts to determine the impact of this implementation guidance, which is effective October 1, 2003. 3. Comprehensive Loss The components of comprehensive loss, net of deferred federal income taxes, for the three and nine months ended September 30, 2003 and 2002 were as follows:

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~SIX~~Nine ~~MONTHS~~Months ~~ENDED~~Ended ~~JUNE~~September 30 ~~JUNE~~September 30 2003 2002 2003 2002 ---------------------------- ---------------------------- ~~2003 2002 2003 2002~~ ----------- ----------- -~~----------~~ ~~----------- REVENUES:~~ Net ~~investment~~loss ~~income~~ $ ~~236~~(1,~~246 $ 401~~120,~~483~~073) $ ~~631,883 $ 782,184 Realized capital~~ (~~losses) gains 98~~1,~~279 (898~~457,~~244~~537) ~~98,279~~$ (~~910~~5,~~840) Administrative service fees 17~~151,~~778 (1,797~~683) ~~32,224~~$ ~~17,240 Contract charges and fees 461,265 105,368 764,192 264,827 ----------- ----------- ----------- ----------- Total Revenues 813,568~~ (~~393~~7,~~190~~066,359) ~~1,526,578~~Change ~~153,411~~in ~~BENEFITS~~net ~~AND~~unrealized ~~EXPENSES:~~investment ~~Contract~~gains ~~owner~~and ~~benefits~~losses ~~286,899 394,836 794,660 701,982 Acquisition expenses 164,773~~ (37138,~~793~~153) ~~378~~270,~~693~~547 ~~460~~61,~~558~~978 ~~General & administrative expenses 1~~206,~~231,949~~925 ~~2,535,307 4,384,835 4,599,693~~ ----------- ----------- ----------- ----------- ~~Total Benefits and Expenses 1,683,621 2,892,350 5,558,188 5,762,233~~ ----------- ----------- ----------- --~~---------~~ ~~Net~~Comprehensive ~~Loss~~loss $ (~~870~~1,~~053~~258,226) $ (31,~~285~~186,~~540~~990) $ (45,~~031~~089,~~610~~705) $ (56,~~608~~859,~~822~~434) =========== =========== =========== ==============================================

Accumulated other comprehensive gain at September 30, 2003 and December 31, 2002, consist entirely of unrealized gains (losses) on investments, net of related deferred federal income taxes. 4. Reinsurance Issuance of the Company's variable insurance products (the "Contracts") has resulted historically in a net cash outflow in that 100% of Contract owner premiums received by the Company are invested in separate accounts supporting the Contracts, leaving a cash strain caused by the payment of commissions and other policy acquisition expenses. In 2000, the Company entered into a multi-year quota share modified coinsurance agreement (the "Modco Agreement") with Swiss Re Life & Health America Inc. ("Swiss Re", formerly Life Reassurance Corporation of America) under which the Company ceded a significant portion of its variable insurance business to Swiss Re. Depending on the product, the Company has ceded to Swiss Re between 65% to 81% of Contract revenues and related expenses in return for an expense allowance from Swiss Re that substantially covered commission and other contract acquisition costs. The Modco Agreement provided the Company with additional capacity by funding cash flow strain from new business. During the first quarter of 2002, the Company amended the Modco Agreement to include certain variable annuity products introduced during the fourth quarter of 2001. The amendment resulted in reductions of written premium, Contract charges and Contract owner benefits of $9,312,250, $8,000, and $5,000, respectively, relating to the prior year. Excluding the aforementioned retroactive effects of the amendment, premiums, Contract charges and Contract owner benefits ceded to Swiss Re were $727,000, $1,540,000 and $281,000, respectively, for the period ended September 30, 2003, compared with $52,407,000, $708,000 and $36,000 for the period ended September 30, 2002. In addition, the Company has reinsured the risks associated with the guaranteed minimum death benefit feature of the Contracts, as well as other Contract guarantees. Reinsurance does not relieve the Company from its 5 obligations to Contract owners. The Company remains primarily liable to the Contract owners to the extent that any reinsurer does not meet its obligations under the reinsurance agreements. 5. Segment Reporting The Company operates in one business segment, the variable insurance products market. Products we offered before the general business retrenchment discussed in Item 2 included combination fixed and variable deferred annuities and combination fixed and variable life insurance products. 6. Significant Accounting Policies Deferred Acquisition Costs, Deferred Gain and Unearned Revenue We amortize deferred acquisition costs ("DAC"), deferred gain on modified coinsurance, and unearned revenue over the life of our Contracts in relation to estimated gross profits ("EGPs"). Both the deferred amounts and the EGPs are net of reinsurance. EGPs are based on assumptions about future Contract experience, including persistency, growth rate of elected investment options, and the level of expenses required to maintain the Contracts. At each balance sheet date, EGPs are replaced with actual gross profits. Future EGPs are also recast taking into account the volume and mix of the Contracts actually in force and warranted changes in assumptions about future experience. Finally, amortization is derived based on the combination of actual gross profits to date and the recast EGPs. At September 30, 2003 and December 31, 2002, we replaced EGPs with actual gross profits and EGPs have been recast taking into consideration the volume and mix of Contracts in force. The Company revised its assumptions about future surrender experience at December 31, 2002 to reflect the anticipated Contract owner behavior resulting from the Company's decision to discontinue new business activities and place itself in run-off. This revision in future assumptions had an immaterial effect on DAC at December 31, 2002. The Company further revised its assumptions of future surrender and withdrawal experience and the level of future administrative service fees at June 30, 2003. These revisions had an immaterial effect on DAC at June 30, 2003. Restructuring Costs In accordance with the provisions of Emerging Issues Task Force 94-3, "Liability Recognition for Certain Employee Termination and Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," the Company maintained provisions of $2,775,000 and $5,404,000, respectively, at September 30, 2003 and December 31, 2002 for involuntary termination benefits, contract termination and other exit costs resulting from its decision to cease new business activities. Other Accounting Policies For more complete information on the Company's significant accounting policies, reference should be made to the consolidated financial statements and footnotes thereto included in Sage Life's annual report on Form 10-K for the year ended December 31, 2002. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward Looking Statements - Cautionary Language The discussion below reviews the results of operations of Sage Life and its consolidated financial condition including liquidity and capital resources. Where appropriate, factors that may affect future financial performance are identified and discussed. Certain statements made in this report are "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 that provides a "safe-harbor" for forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and include words like "believe", "expect", "anticipate", "project", "will", "shall" and other words or phrases with similar meaning which speak only as of their dates. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are not historical facts. Although such forward-looking statements reflect the current views of the Company and management with respect to future events and financial performance, there are known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated or indicated by such forward-looking statements. These include, but are not limited to, risks and uncertainties inherent in or relating to: (i) the ability of the Company and certain of its affiliates to obtain access to capital for the funding of their future cash needs; (ii) the Company's future financial ratings; (iii) general economic conditions, including interest rate movements, equity market performance, inflation and cyclical industry conditions; (iv) governmental and regulatory policies, as well as the judicial environment; (v) increasing competition in the markets in which the Company operates; (vi) changes in generally accepted accounting principles; and (vii) the risks and uncertainties included in the Company's United States Securities and Exchange Commission ("SEC") filings. The discussion of risks contained herein is not exhaustive. The Company operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the impact of all risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ from those contained in any forward-looking statements. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in the Quarterly Report. In addition, neither the Company nor its management undertakes any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Business Overview Sage Life is a stock life insurance company incorporated in Delaware in 1981 with its principal offices in Stamford, Connecticut. We have licenses to conduct an insurance business in 49 states and the District of Columbia. Subject to the matters noted below, the Company is authorized to write variable annuity contracts in all jurisdictions in which it is licensed, and is authorized to write variable life insurance in all but three states. In December 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 has adopted and implemented a plan intended to ensure that the facilities necessary to administer its in-force business and meet its ongoing contract owner obligations are in place. These developments will be alluded to throughout this report, and may sometimes be referred to as a "general business retrenchment." The Company's business model had been to outsource certain significant functions, including Contract administration, to third-party administrators. As part of the general business retrenchment, the Company also now outsources Contract owner servicing. Management expects that such outsourcing 7 will continue. One of the consequences of the general business retrenchment is that in March 2003, the Company was notified by the Insurance Department of the State of North Carolina that its license would be restricted in that state to prohibit any new product sales. 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 general business retrenchment, the Company and Sage New York withdrew that application and began the process of dissolving Sage New York. On September 29, the Supreme Court of the State of New York granted an order 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"). As of September 30, 2003, Sage Insurance Group Inc. ("SIGI") owned 90.1% and Swiss Re owned the remaining 9.9% of the common stock of 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. Swiss Re's ultimate parent is Swiss Reinsurance Company, Switzerland. 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. Additional information regarding Swiss Re's investment in Sage Life Holdings is provided below in the "Liquidity and Capital Resources" section. Effective October 1, 2003, Swiss Re acquired from SIGI the remaining outstanding shares of common stock of Sage Life Holdings. This transaction is described in a report filed by the Company on Form 8-K, dated October 10, 2003. In connection with the acquisition, the Company is required under Michigan law to re-qualify for its license. Michigan law states the license of a non-Michigan company experiencing a change of control not subject to the Michigan insurance commissioner's approval is automatically revoked 90 days after the change of control unless the company re-qualifies for a license. The Company intends to seek re-qualification for its license. Effective December 31, 1996, SIGI purchased all of the outstanding stock of Sage Life, then named Fidelity Standard Life Insurance Company ("Fidelity Standard"), from Security First Life Insurance Company ("SFLIC"). Prior to the purchase and effective October 31, 1996, Fidelity Standard entered into a modified coinsurance arrangement to cede all of its separate account liabilities to its then parent, SFLIC. Assets equal to the total reserves and related liabilities were transferred to SFLIC. The remaining general account liabilities were ceded under a 100% coinsurance arrangement with SFLIC. In connection with the purchase of Fidelity Standard, the Company entered into a service agreement with SFLIC to provide all necessary administrative services for all ceded business. Effective September 30, 1998, all of the in-force business of the Company was novated to SFLIC. Products and Distribution Before the general business retrenchment, the Company's business strategy had been to focus on the development, underwriting, and marketing of variable annuity and variable life insurance products (the "Contracts," sometimes referred to as our "products"). Our obligations under these Contracts are supported by (i) variable accounts--determined by the value of investments held in separate accounts, and (ii) fixed accounts--backed by investments held in separate accounts. The assets in these separate accounts supporting the Contracts to which they relate are not chargeable with liabilities arising out of any other business we may conduct. Our initial marketing focus was to distribute our products through banks and financial planning companies and regional broker-dealers, and then, over the long-term, we intended to expand our distribution channels to include wirehouses. As mentioned above, the Company is no longer marketing or distributing its products. Since it began marketing its products, Sage Distributors Inc. ("Sage Distributors") has acted as the principal securities underwriter of the Contracts issued by the Company and of shares of the Company's separate accounts. Effective July 24, 2000, the Company entered into a new distribution agreement with Sage Distributors (the "Underwriting Agreement") whereby Sage Distributors was permitted to enter into selling agreements with unaffiliated broker-dealers whose registered representatives sold Sage Life products to the public. The Underwriting Agreement provides that Sage Distributors receives no compensation for providing underwriting services to Sage Life and that Sage Distributors is responsible for all of its costs in marketing Sage Life products, except for any commissions payable to registered representatives of Sage Distributors. Since Sage Distributors had inadequate revenues with which to fund these marketing and distribution costs, SIGI historically funded these expenses under the terms of an Expense Reimbursement Agreement between SIGI and Sage Distributors. The Company, Sage Distributors and SIGI agreed to 8 amend the Underwriting Agreement and Expense Reimbursement Agreement so that Sage Life would bear, subject to certain limitations, the full costs of Sage Distributors' marketing, distribution and overhead costs effective October 1, 2002. This amendment expired on December 31, 2002. Nonetheless, Sage Distributors' ongoing operating costs were largely eliminated with the termination of its wholesaling and marketing staff and the cessation of new business activities as a result of the general business retrenchment. On June 16, the Company contributed $10,000 in capital to form SL Distributors, Inc. ("SL Distributors") as its subsidiary broker-dealer to replace Sage Distributors as the principal securities underwriter of the Contracts and of shares of the Company's separate accounts. The Company took this action due to concerns that Sage Distributors might be unable to satisfy the net capital requirements of a limited purpose broker-dealer as prescribed by the rules of the SEC and the National Association of Securities Dealers ("NASD"). The Company will maintain capital in SL Distributors of at least a level satisfying the net capital requirements, currently $6,000, for a limited purpose broker-dealer. SL Distributors has applied to the NASD for membership and expects a decision on the application during the fourth quarter of 2003. The Company's products formerly included as investment options four series funds of Sage Life Investment Trust (the "Trust"), a registered management investment company sponsored by the Company. The Trust was managed by Sage Advisors, Inc. ("Sage Advisors"), an SEC-registered investment adviser and a subsidiary of SIGI. SIGI determined that it was unable to fund the continuing operating losses that Sage Advisors incurred in connection with its management agreement with the Trust. Accordingly, Sage Life obtained approval from the SEC for an Order of Substitution allowing it to substitute shares of other unaffiliated registered management investment companies for the shares of the Trust in its products. The substitution of shares occurred at the close of business on May 30, 2003, thereby removing all assets of the Trust and substituting for the benefit of affected Contract owners shares of unaffiliated registered management investment companies. This in turn permitted the termination of Sage Advisors' agreement with the Trust. In connection with the closure of the Trust, the Company obtained approval from the Delaware Insurance Department to settle certain business obligations of Sage Advisors and the Trust that Sage Advisors was unable to satisfy. These obligations related to services provided to the Trust for the month of May 2003 by third party service providers and certain legal costs incurred in closing the Trust. The amount borne by the Company was $74,000. Results of Operations Contract owners pay us Contract charges and fees, while the managers of the funds available as investment options in our Contracts (the "Fund Managers") pay us administrative fees. These administrative fees, and most of the charges received from Contract owners, are based on underlying variable and fixed account values. Therefore, these fees and charges vary with the amount of premiums we have received and investment performance of the funds. Annual Contract charges we receive from Contract owners are flat fees assessed on each Contract's anniversary date. Consequently, the aggregate amount of these fees received by the Company also varies according to the number of Contracts in force during the course of the year. Although our 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 to cover our on-going administration and new business costs based on variable and fixed account assets. Accordingly, net investment income represented a significant portion of the Company's revenues during 2002. Net investment income includes interest earned on the Company's general account assets and assets in the fixed sub-accounts of the separate account. The majority of the increased levels of Contract charges and fees in 2003 have been driven by significantly higher surrender charges resulting from increased Contract owner surrender activity. Surrender charges, net of reinsurance, were $180,000 and $51,000 for the nine month periods ended September 30, 2003 and 2002, respectively. On December 17, 2002, the Board of Directors approved plans to suspend all sales, marketing and distribution activities, the closure of the Trust, and the termination of all staff not required to administer Sage Life's in-force Contracts. Effective January 1, 2003, the Company suspended all marketing and underwriting activities and ceased all new sales. As a result, the Company's entire internal and external wholesaling and marketing staff were terminated in 9 mid-January 2003 and further staff retrenchments were effected in subsequent months during the year. The Company has retained a core group of employees to effect the phased implementation of business discontinuance activities over the remainder of 2003 and early 2004. Management believes that the current staffing level is appropriate for the efficient administration of the run-off of the in-force business. General and administrative expenses for the third quarter include regular operating expenses that are expected to decline from their current levels over the course of 2003. We do not currently reflect the benefits of deferred federal income taxes in our results. Liquidity and Capital Resources Funding of Cash Needs From the beginning of 1997 until the general business retrenchment, the Company's primary cash needs were for the funding of the distribution of its insurance products and the establishment and maintenance of its operating infrastructure. These cash needs were met primarily through capital contributions from Sage Group, the funding of commission and acquisition expenses through a modified coinsurance arrangement with Swiss Re, issuance of preferred and common stock in Sage Life Holdings to Swiss Re, and through interest income on the invested assets of the Company's general account. During the second quarter of 2001, management determined that the cash needs of the Company and the maintenance of its capital commitments to Swiss Re and the Michigan Insurance Department (discussed in more detail in the next section) could not be met solely by the methods mentioned above. Sage Group has been prohibited under South African currency control regulations from utilizing funds raised in South Africa for the Company's cash needs, other than with funds raised through capital issues denominated in currencies other than the South African rand. Furthermore, Sage Group's ability to issue stock outside of South Africa had been hindered by a severe devaluation of the South African rand relative to the United States dollar and a decrease in its stock price reflective of a general decline of financial services stocks in South Africa and elsewhere. Consequently, Sage Group did not issue 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 U.S. interests in the face of continued currency and equity market weakness and appointed a regional investment bank to assist with the process. This capital raising effort was accompanied by expense containment programs that were initiated during the first quarter of 2002 to conserve working capital within Sage Life. Sage Group accelerated its capital-raising efforts in August 2002 by appointing Merrill Lynch to explore transactions involving a number of alternative strategic approaches, including financing of cash needs through a strategic partnership or the outright sale of Sage Group's interests. Although a number of interested parties were identified, Sage Group was unable to secure the necessary capital to sustain the Company's new business activities due, in part, to prolonged weak global capital markets and the negative sentiment that has severely impacted the life insurance sector. Accordingly, on December 17, 2002, the Boards of Directors of Sage Group, SIGI and Sage Life approved the general business retrenchment plans. Thereafter, on January 1, 2003, the Company suspended all marketing and underwriting activities and ceased all new sales of the insurance products. Capital Commitments In 1997, pursuant to a commitment to the Michigan Insurance Department in connection with the Company's application to renew its insurance license in that state, the statutory capital and surplus of the Company was increased to $25 million by a capital contribution from Sage Group. In 1998, Sage Life Holdings further committed to maintaining this $25 million level of capital and surplus pursuant to the terms of a Preferred Stock Purchase Agreement ("Preferred Stock Agreement") with Swiss Re. Initial projections management had developed indicated that the Company would require additional capital during the first quarter of 2003 to enable it to maintain its $25 million commitments to Michigan and Swiss Re. Based on these projections, Sage Group began the capital raising exercise discussed in more detail in the prior section. However, events in the six months ended June 30, 2002 (including the diminution in the value of the Company's holdings in two 10 formerly highly-rated debt securities, lower than projected levels of asset based fees due to depressed equity markets, lower than projected sales levels, and a slower reduction in expenses than anticipated) contributed to higher than expected net cash outflows and a faster than projected reduction in capital levels. As a result, the Company's statutory capital and surplus fell below $25 million during the third quarter of 2002. Under the terms of the original Preferred Stock Agreement with Swiss Re, if the Company's statutory-basis capital and surplus fell below $25 million and remained uncured for 60 days then, subject to obtaining regulatory approval, each share of Swiss Re preferred stock would be entitled to a number of votes sufficient to provide preferred shareholders a majority of the voting interest in Sage Life Holdings, the Company's direct parent. In response to the developments noted above, Sage Group conferred with Swiss Re and on September 30, 2002 reached an agreement to amend certain terms of the Preferred Stock Agreement. The required minimum level for the Company's statutory capital and surplus was reduced from $25 to $20 million, subject to the elimination of any cure rights with respect to the new minimum capital level. In addition, Swiss Re and Sage Group also agreed to defer the December 31, 2002 dividends payable by Sage Life Holdings and that Swiss Re would remain actively involved in Sage Group's capital raising activities and be consulted on material decisions affecting the Company's business. At December 31, 2002, the Company's statutory capital and surplus had declined to approximately $8.6 million, after making provision of approximately $12.7 million for certain non-recurring charges arising from the Company's decision to discontinue new business activities. These non-recurring reserves were established in accordance with statutory accounting principles prescribed by the Insurance Department of the State of Delaware (the "Delaware Insurance Department") and comprised $7.7 million for asset adequacy analysis liabilities related primarily to anticipated future run-off expenses projected to be incurred by the Company over the next twenty years (referred to as the "statutory run-off reserve") and $5.0 million for involuntary termination benefits and other exit-related costs. By letter dated March 18, 2003, the Delaware Insurance Department approved the statutory run-off reserve. The Company intends to perform a detailed review of the statutory run-off reserve annually as part of its cash flow testing. Given this decline in the Company's statutory-basis capital and surplus, Swiss Re indicated to Sage Group its intent to exercise its rights under the Preferred Stock Agreement and assume control of the Company subject to obtaining the required regulatory approvals. Swiss Re filed an application with the Delaware Insurance Department on June 20, 2003, in order to obtain the necessary regulatory approval. The Insurance Department approved this application on September 3, 2003. On October 1, 2003, Swiss Re acquired from SIGI all of the common stock of the Company's immediate parent, Sage Life Holdings, that it did not already own. Contract Obligations and Customer Service Following termination of the Company's new business operations and the acquisition by Swiss Re of the remaining equity of Sage Life Holdings, the Company and Swiss Re are now evaluating the level of resources required (in terms of overall staffing, expenses, and required capital) for the orderly administration of the Company's in-force business. Management now believes the adequacy of the Company's capital resources is contingent upon implementation of additional expense management and/or other financial measures. Contract owner investments are fully funded and held in separate accounts that are protected from the general creditors of the Company. The death benefit and certain other guaranteed rider features in the Company's products have been reinsured. 11 Rating Agencies Rating agencies are independent organizations that may be retained by an insurer to issue a report with a numerical or alphabetical rating reflecting the rating agency's opinion of the relative financial strength of the Company and its ability to meet its contractual obligations to its contract owners. These reports are based on the rating agency's review of the insurer's business and financial statements, the competitive environment in which the insurer operates, and the insurance industry as a whole in light of current economic conditions. Rating agencies periodically review the ratings they issue for any required changes. Many financial institutions and broker-dealers focus on these ratings in determining whether to market an insurer's variable products. The Company's financial ratings are important in its ability to accumulate and retain assets. As of September 30, 2003, the Company was rated "B++" (Very Good) by A.M. Best Co., and the rating remained under review with "negative implications." As of September 30, 2003, the Company was rated "BBB" (Good) by Fitch Ratings, and the rating was described as "evolving." These ratings have the following meanings: o "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." o "BBB" (Good) per Fitch Ratings: "Insurers are viewed as possessing good capacity to meet policyholder and contract obligations. Risk factors are somewhat high, and the impact of any adverse business and economic factors is expected to be material, yet manageable." Each of the foregoing agencies downgraded the Company's ratings on April 9 and April 23, 2003, respectively. These rating declines are related to matters disclosed above, including uncertainty about the future ownership of the Company. There can be no assurances that the rating agencies will not lower the Company's ratings further. On October 14, 2003, Fitch Ratings revised its rating watch on the Company from "evolving" to "positive." On October 27, 2003, we notified Fitch Ratings that we would not be renewing their rating services since we are in run-off; therefore, Fitch will no longer issue financial strength ratings pertaining to the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's market risk during the nine months ended September 30, 2003. The Company has provided a discussion of its market risks in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of Part II of Sage Life's annual report on Form 10-K for the year ended December 31, 2002. Item 4. Controls and Procedures (1) Disclosure Controls and Procedures: As of the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of disclosure controls and procedures. The Company conducted this evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. a) Definition of Disclosure Controls and Procedures: Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our periodic reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As defined by the SEC, such disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in such a manner as to allow timely disclosure decisions. b) Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Control over Financial Reporting: The Company recognizes that a system of disclosure controls and procedures as well as a system of internal control over financial reporting, no matter how well conceived and operated, cannot provide absolute 12 assurance that the objectives of the system are met. Further, the design of such a system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented in a number of ways. Because of the inherent limitations in a cost-effective control system, system failures may occur and not be detected. c) Conclusions with Respect to Our Evaluation of Disclosure Controls and Procedures: Subject to the limitations described above, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective, providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis. (2) Changes in Internal Control: As part of the general business retrenchment, the Company has reduced the number of permanent employees to a core group of ten key individuals that the Company believes is adequate to meet the current needs of the business. This new management structure places greater reliance on certain key personnel and third party service providers. Subject to the foregoing, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of our evaluation. As of the date hereof, there were no significant deficiencies or material weaknesses in the Company's internal controls. Part II. Other Information Item 1. Legal Proceedings As of the date of this filing, the Company is not involved in any lawsuits. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders None Item 5. Other Information Effective July 15, 2003, Mr. Robin I. Marsden, resigned as Director, President, and Chief Executive Officer of the Company. Effective July 16, 2003, Mr. Mark Sarlitto, Executive Vice President and General Counsel of Swiss Re, was appointed to the Company's Board of Directors, and Mr. Mitchell R. Katcher was appointed President and Chief Executive Officer. Mr. Katcher is also a Director. Effective October 1, 2003, Mr. Raymond A. Eckert, Chief Financial Officer of Swiss Re, was appointed to the Company's Board of Directors. Mr. H. Louis Shill resigned as Chairman of the Board of Directors effective May 15, 2003, in connection with his retirement from the Sage Group. 13 Items 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ---------- ----------- 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended September 30, 2003. 14 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/ Mitchell R. Katcher President & Chief Executive Officer /s/ Gregory S. Gannon Gregory S. Gannon Vice President & Chief Financial Officer Date: November 14, 2003 15

SIX MONTHS ENDED JUNE 30 ----------------------------- 2003 2002 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(4,031,610) $ (5,608,822) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of acquisition costs 378,693 460,558 Amortization of bond discount/premium 56,786 150,854 Realized capital (gains)/losses (61,566) 24,403 Changes in: Accrued investment income 1,465 21,426 Payable to affiliates (376,156) 1,080,464 Unearned revenue (6,939) 17,888 Reinsurance payables 782,410 (721,611) Acquisition costs deferred 66,563 (626,335) Deferred gain from modified coinsurance agreement (282,961) 702,851 Accrued expenses and other liabilities (497,001) 824,606 Other assets (63,208) 4,076 ----------- ------------ Net Cash Used In Operating Activities (4,033,152) (3,669,642) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and repayment of fixed maturity securities 900,000 883,680 Proceeds from sale of equity securities 820,161 -- ----------- ------------ Net Cash Provided By Investing Activities 1,720,161 883,680 CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions from parent -- 3,740,773 ----------- ------------ Net Cash Provided By Financing Activities 3,740,773 ----------- ------------ (Decrease)/Increase in Cash and Cash Equivalents (2,313,363) 954,811 Cash and Cash Equivalents at Beginning of Period 9,281,625 9,383,386 ----------- ------------ Cash and Cash Equivalents at End of Period $ 6,968,262 $ 10,338,197 =========== ============

THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- ----------------------------- 2003 2002 2003 2002 ---------- ------------ ------------ ------------ Net loss $(870,053) $(3,285,540) $(4,031,610) $(5,608,822) Change in net unrealized investment gains and losses 329,679 236,293 200,131 (64,439) --------- ----------- ----------- ----------- Comprehensive loss $(540,374) $(3,049,247) $(3,831,479) $(5,673,261) ========= =========== =========== ===========

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