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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

For the transition period from ................ to ...................

Commission File Number 0-5486

PRESIDENTIAL LIFE CORPORATION (Exact name of registrant as specified in its charter)

Delaware 13-2652144 State or other jurisdiction of (I.R.S. Employer Identification No.)

incorporation or organization)

69 Lydecker Street, Nyack, New York 10960 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (845) 358-2300

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

Title of Class

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. YES X NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in

Part III of this Form 10-K405 or any amendment to this Form 10-K405. [ X ]

The aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 28, 2003 was approximately $183,635,022 based upon the average bid and asked prices of such stock on that date.

The number of shares outstanding of the Registrant's common stock as of

March 28, 2003 was 29,334,668.

DOCUMENTS INCORPORATED BY REFERENCE

Selected designated portions of the definitive proxy statement to be used in connection with the registrant's 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K405. Other documents incorporated by reference into this Form 10-K405 are listed in the Exhibit

Index.

PART I

Item 1. Business

General

Presidential Life Corporation (the "Company") is an insurance holding company that, through its wholly-owned subsidiary Presidential Life Insurance Company (the "Insurance Company"), operates principally in a single business segment with two primary lines of business-individual annuities and individual life insurance. Unless the context otherwise requires, the "Company" shall be deemed to include Presidential Life Corporation and its subsidiaries. The Company was founded in 1969 and, through the Insurance Company, is licensed to market its products in 49 states and the District of Columbia. Approximately 41.3% of the Company's fiscal 2002 annuity and life insurance products were sold to individuals residing in the State of New York.

Products

The Company currently emphasizes the sale of a variety of single premium and flexible premium annuity products (including those written in connection with funding agreements for certain state lotteries, group annuities and other structured settlements) as well as annual and single premium life insurance products. Each of these products is designed to meet the needs of increasingly sophisticated consumers for supplemental retirement income, estate planning and protection from unexpected death.

Annuity Business

Industry-wide sales of annuity products have experienced strong growth in recent years. Annuities currently enjoy an advantage over certain other savings mechanisms because the annuitant receives a tax-deferred accrual of interest on his or her investment.

Single Premium Annuity products require a one-time lump sum premium payment. During the accumulation period, the accrual of interest is on a tax-deferred basis to the annuitant.

Single Premium Deferred Annuities ("SPDAs") provide for a single premium payment at the time of issue, an accumulation period and an annuity payout period at some future date. During the accumulation period, the Company credits the account value of the annuitant with interest earnings at a current interest rate that is guaranteed for periods ranging from one to five years, at the annuitant's option, and that, thereafter, is subject to change based on market and other conditions. Each contract also has a minimum guaranteed rate. This accrual of interest during the accumulation period is on a tax-deferred basis to the annuitant. After the number of years specified in the annuity contract, the annuitant may elect to take the proceeds of the annuity as a single payment, a specified income for life or a specified income for a fixed number of years. The annuitant is permitted at any time during the accumulation period to withdraw all or part of the single premium paid plus the amount credited to his or her account. Any such withdrawal, however, typically is subject to a surrender charge during the early years of the annuity contract.

2.

Single Premium Immediate Annuity Products ("SPIAs") guarantee a stream of payments, which begin immediately and continue for the life of the annuitant. The payment may be guaranteed for a period of time (typically five to 20 years) (the "Guarantee Period"). If the annuitant dies during the Guarantee Period, payments will continue to be made to the annuitant's beneficiary for the balance of the Guarantee Period. SPIAs differ from deferred annuities in that generally they provide for payments to begin immediately and are not subject to surrender or loan. The implicit interest rate on SPIAs is based on market conditions, which existed at the time that the annuity was issued and is guaranteed for the term of the annuity.

Single Premium Immediate Income Products ("SPIIs") are similar to SPIAs in that they guarantee a stream of payments. Unlike SPIAs, SPII payments always are guaranteed for a specified period of time, not for the life of the annuitant. Payments are made to the payee or beneficiary even if the annuitant dies during the payout period.

Single Premium Immediate Structured Settlement Annuities provide an alternative to a lump-sum payment or settlement in the case of a lottery or a personal injury case, as the case may be, and generally are purchased by state lottery agencies for the benefit of a lottery winner or by property and casualty insurance companies for the benefit of an injured claimant, as the case may be, with benefits scheduled over a fixed period or, over a fixed period and for the life of the annuitant thereafter. Structured settlements offer tax advantaged long-range financial security to the annuitant and facilitate the operations of state lottery agencies and the ability of casualty insurance carriers to effect claim settlements. Structured settlement annuities are long-term in nature, guarantee a fixed benefit stream and cannot be surrendered or borrowed against.

Flexible Premium Annuity products provide similar benefits to those provided by the Company's single premium deferred annuity products, but instead permit periodic premium payments in such amounts as the holder deems appropriate. As a result, the benefits attributable to such products will fluctuate according to the level of such payments.

Group Terminal Funding Annuity products provide benefits similar to single premium immediate annuities. Benefits are provided to employees when a company's pension plan is terminated or when the employer wants to transfer liability for making payments. Group terminal funding annuities cannot be surrendered or borrowed against.

All of the Company's deferred annuity products provide minimum interest rate guarantees. The minimum guaranteed rates on the Company's deferred annuity products currently range from 3.0% to 5 1/2% annually and the contracts (except for SPIAs) are designed to permit the Company to change the crediting rates annually subject to the minimum guaranteed rate. The Company takes into account the profitability of its annuity business and its relative competitive position in determining the frequency and extent of changes to the interest crediting rates.

The Company's deferred annuity products are designed to encourage persistency (see "Pricing" below for a definition of the term "persistency") by incorporating surrender charges that exceed the cost of issuing the annuity. An annuitant may not terminate or withdraw substantial funds for periods generally ranging from one to seven years without incurring significant penalties in the form of surrender charges. Notwithstanding the foregoing, approximately 24.9% of the Company's deferred annuity contracts in force (measured by reserves) as of December 31, 2002 are surrenderable without charge.

3.

The following table presents annuity products in force measured by reserves, as well as certain statistical data for each of the years in the five fiscal year period ended December 31, 2002, in each case, as determined in accordance with accounting principles generally accepted in the United States of America ("GAAP").

4.

Annuity Considerations and Premiums - The following table sets forth certain information with respect to the Insurance Company's annuity considerations and premium revenues for each of the five fiscal years ended December 31, 2002, as determined in accordance with statutory accounting principles. Premiums shown on the Company's consolidated financial statements in accordance with GAAP consist of premiums received for whole or term life insurance products, as well as that portion of the Company's single premium immediate annuities, which have life contingencies. With respect to that portion of single premium annuity contracts without life contingencies, as well as deferred annuities and universal life insurance products, premiums collected by the Company are not reported as premium revenues, but rather are reported as additions to policyholder account balances on the Company's consolidated balance sheet.

Distribution of Products - By Gross Premiums and Other Considerations

5.

Life Insurance Business

Universal Life policies are interest-sensitive products which typically provide the insured with "nonparticipating" (i.e. non-dividend paying) life insurance with a cash value. Current interest is credited to the policy's cash value based upon interest rates that periodically are revised by the Company to reflect current economic conditions (primarily interest rates). In no event, however, will the interest rate credited on the policy's cash value be less than the guaranteed rate specified in the policy. The Company offers both flexible premium and single premium universal life insurance products. The Company's flexible premium and single premium universal life insurance products differ based on policy provisions affecting the amount and timing of premium payments.

Whole Life policies are products which provide the insured with life insurance with a guaranteed cash value. Typically, a fixed premium, which costs more than comparable term coverage when the policyholder is younger, but less than comparable term coverage as the policyholder grows older, is paid over a period of years. Whole life insurance products combine insurance protection with a savings plan that gradually increases in amount over time. With respect to the Company's whole life insurance products, the policyholder may borrow against the policy's accumulated cash value. However, the death benefit is decreased by the amount of the outstanding loan. In addition, the policyholder may choose to surrender the policy and receive the accumulated cash value rather than continuing the insurance protection.

Term Life policies are products which provide insurance protection if the insured dies during the time period specified in the policy. No cash value is built up. These products provide the maximum benefit for the lowest initial premium outlay. The Company's term life insurance products include annually renewable, convertible and decreasing term insurance.

Graded Benefit Life policies are products designed for the upper age (i.e. ages 40 to 80), sub-standard applicant. Depending upon age, these products provide for a limited death benefit of either the return of premium plus 5% interest for three years, or the return of premium plus 5% interest for two years. Thereafter, the death benefit is limited to the face amount of the policy. This product typically is offered with a maximum face value of $25,000.

Increasing Premium Whole Life policies are products which have characteristics of both whole life and term life products. Initial premiums are comparatively low and generally increase each year until the twentieth policy year when the premium becomes fixed. No cash values are built up in the early years of the policy, but cash values do begin to accumulate in the later (typically around the fifteenth policy year) years of the policy.

6.

Insurance Policies in Force - The following table provides a reconciliation of beginning and ending universal, whole and term life insurance policies, in force, as well as certain statistical data for each of the years in the five fiscal year period ended December 31, 2002.

<F1> Includes graded benefit life insurance products.

7.

Marketing and Distribution

The Company, through the Insurance Company, is licensed to market its products in 49 states and in the District of Columbia. The Company sells its individual annuity and life insurance products through 1,077 independent general agents (314 of which are located in the State of New York), who are independent contractors. These independent general agents market the Company's products through 20,326 licensed insurance agents or brokers, most of whom also write products similar to those sold by the Company for other companies. Management believes that the Company offers competitive commission rates and seeks to provide innovative products and quality service to its independent general agents. Compensation of agents is strictly regulated by the New York State Department of Insurance (the "NYSID").

The independent general agency system has been the Insurance Company's primary distribution system since the Insurance Company was founded. Management believes that the Company's consistent focus on the independent general agent distribution system provides a cost advantage, since the Company incurs no fixed costs associated with recruiting, training and maintaining employee agents. Accordingly, a substantial portion of the costs associated with generating new business for the Company are not fixed costs but vary directly with the level of business produced.

Since the Company utilizes independent general agents to market its products, it is not dependent on any one agency for any substantial amount of its business. On the other hand, the independent agents are not captive to the Company, and most write products similar to those sold by the Company for other companies. This can result in significant sales declines if for any reason the Company is relatively less competitive or if there is cause for general concern.

Among other things, crediting rates, commissions, the perceived quality of the issuer, product features and services generally are significant factors that management believes influence an agent's willingness and ability to sell particular annuity products. The Company generally issues annuity contracts, together with the agent's commission check, within two business days of receiving the application and premium. The Company also seeks to provide ongoing service to the agent. Towards that end, the Company provides agents with access to the Company's senior executives. In addition, agents and contract owners can access information about their contracts via a toll-free telephone number.

The Company's top ten general agents accounted for approximately 23.8% of the Company's combined individual life insurance policies and annuity contracts sold, (measured by the combined premiums and considerations), during fiscal 2002. Of the Company's combined annuity contracts and individual life insurance policies sold, no single agent accounted for more than 1.01% and no single general agency accounted for more than 5.1% during 2002. The loss of any single sales source would not have a material adverse effect on the Company, but the loss of several could cause a decline in sales until they are replaced by the appointment of other general agents. The Company's agency department actively recruits new general agents on a continuous basis.

Pricing

Management believes that the Company is able to offer its products at competitive prices to its targeted markets as a result of: (i) maintaining relatively low issuance costs by selling through the independent general agency system; (ii) minimizing home office administrative costs; and (iii) utilizing appropriate underwriting guidelines.

8.

The long-term profitability of sales of life and most annuity products depends on the degree of margin of the actuarial assumptions that underlie the pricing of such products. Actuarial calculations for such products, and the ultimate profitability of sales of such products, are based on four major factors: (i) persistency; (ii) rate of return on cash invested during the life of the policy or contract; (iii) expenses of acquiring and administering the policy or contract; and (iv) mortality.

Persistency is the rate at which insurance policies remain in force, expressed as a percentage of the number of policies remaining in force over the previous year. Policyholders sometimes do not pay premiums, thus, causing their policies to lapse.

The assumed rate of return on invested cash and desired spreads during the period that insurance policies or annuity contracts are in force also affects pricing of products and currently includes an assumption by the Company of a specified rate of return and/or spread on its investments for each year that such insurance or annuity product is in force.

Another major factor affecting profitability is the level of expenses. Management believes that one of the Company's strengths is its concentration on minimizing expenses through periodic review and adjustment of general and administrative costs.

Mortality is the rate of death experienced by life insurance policyholders and certain annuitants taken as a group. For calculating premiums, the Company uses actuarial assumptions with margins added to allow for adverse statistical variations. Actual mortality experience in a particular period may be different than actuarially expected mortality experience and, consequently, may adversely affect the Company's operating results for such period.

Underwriting Procedures

Premiums charged on insurance products are based, in part, on assumptions about the expected mortality experience. In that regard, the Company has adopted and follows detailed, uniform underwriting procedures designed to assess and quantify insurance risks before issuing life insurance policies to individuals. To implement these procedures, the Company employs an experienced professional underwriting staff. The underwriting practice of the Company is to require attending physicians' statements and medical examinations for each applicant over age 55 or for policies in excess of certain prescribed policy amounts, ranging from $25,000 and up. These requirements are graduated according to the applicant's age and the face amount of the policy. The Company also carefully reviews medical records and each applicant's written application for insurance, which generally is prepared under the supervision of one of the Company's independent general agents. The factors considered in evaluating an application for individual life insurance coverage include the applicant's age, occupation, avocations, driving record, finances, aviation activities, smoking habits, alcohol usage and general health and medical history. These factors are discovered through the application, attending physicians' statements, consumer investigation reports from investigative agencies, direct contact, motor vehicle reports and the Medical Information Bureau, an insurance industry information service. In accordance with industry practice, material misrepresentations on a policy application can result in the cancellation by the company of the policy under the two year incontestability clause in the general provisions of the policy.

9.

To the extent that an applicant does not meet the Company's underwriting standards for issuance of a policy at the standard risk classifications, the Company may offer to issue a classified, sub-standard or impaired risk policy for a risk adjusted premium amount rather than declining the application. The amount of the Company's impaired risk insurance in force in proportion to the total amount of the Company's individual life insurance in force was approximately 5.8% at December 31, 2002.

Acquired Immune Deficiency Syndrome ("AIDS"), which has received wide publicity because of its serious public health implications, presents special concerns to the life insurance industry. Mortality risks are accepted by insurers based on methods of classification designed to appropriately relate premiums charged to such risks and, in this connection, steps have been taken toward strengthening the Company's underwriting and selection process. The Company considers AIDS information in underwriting and pricing decisions in accordance with applicable laws. A prospective policyholder must submit to a blood or urine test, which includes AIDS antibody screening, if the amount of coverage applied for equals or exceeds $100,000. The Company's own mortality experience reflects no significant adverse impact as a result of any acceleration of AIDS-related claims. The Company is continuing to monitor developments in this area but is necessarily unable to predict the long term impact of this problem on the life insurance industry, in general, or on the Company, in particular.

Life Insurance and Annuity Reserves

In accordance with applicable insurance regulations, the Company has established and carries as liabilities in its statutory financial statements actuarially determined reserves that are calculated to satisfy its policy and contract obligations. Reserves, together with premiums to be received on outstanding policies and contracts and interest thereon at certain assumed rates, are calculated to be sufficient to satisfy policy and contract obligations. The actuarial factors used in determining such reserves are based on statutorily prescribed mortality and morbidity tables and interest rates. Reserves maintained also include unearned premiums, premium deposits, reserves for claims that have been reported but are not yet paid, reserves for claims that have been incurred but have not yet been reported and claims in the process of settlement. Generally, the Company maintains reserves on assumed reinsurance, but does not continue accumulating reserves with respect to that portion of policies or contracts that are reinsured with, or ceded to, other insurance companies. Reserves for assumed reinsurance are computed on bases essentially comparable to direct insurance reserves.

The reserves reflected in the Company's consolidated financial statements included herein are calculated based on GAAP and differ from those specified by the laws of the various states in which the Insurance Company does business and those reflected in the Insurance Company's statutory financial statements. These differences arise from the use of different mortality and morbidity tables and interest rate assumptions, the introduction of lapse assumptions into the reserve calculation and the use of the net level premium reserve method on all insurance business. See "Notes 1G, 1H and 8 to the Notes to the Consolidated Financial Statements."

The reserves reflected in the Company's consolidated financial statements are based upon the Company's best estimates of mortality, persistency, expenses and investment income, with appropriate provisions for adverse statistical deviation and the use of the net level premium method for all non-interest-sensitive products. For all interest-sensitive products the policy account value is equal to the accumulation of gross premiums plus interest credited less mortality and expense charges and withdrawals. In determining reserves for its insurance and annuity products, the

Company performs periodic studies to compare current experience for mortality, interest and lapse rates with expected experience in the reserve assumptions.

Differences are reflected currently in earnings for each period. The Company historically has not experienced significant adverse deviations from its assumptions.

10.

Claims Paying and Other Ratings

Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. There can be no assurance that the Company’s ratings will continue for any given period of time or that they will not be changed. In the event the Company’s ratings are downgraded, the level of revenues or the persistency of the Company’s business may be adversely impacted.

During 2002, the Insurance Company's rating was lowered to "B+ ² (Very Good)" from an "A-" (Excellent) by A.M. Best Company ("A.M. Best"). Publications of A.M. Best indicate that the "B+" rating is assigned to those companies that, in A.M. Best's opinion, have achieved a very good overall performance when compared to the norms of the insurance industry and that generally have demonstrated a good ability to meet their respective policyholder and other contractual obligations over a long period of time.

In evaluating a company's statutory financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves and the experience and competency of its management.

A.M. Best's rating is based on factors which primarily are relevant to policyholders, agents and intermediaries and is not directed towards the protection of investors, nor is it intended to allow investors to rely on such a rating in evaluating the financial condition of the Insurance Company. Moody's Investor Services ("Moody's") lowered the Insurance Company's insurance financial strength rating from Baa1 to Ba1 ("Questionable financial security"). Standard & Poor's Corporation ("Standard & Poor's") lowered the Insurance Company's insurance financial strength from A- to BB+ and is defined as "Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions". The credit rating of the Company's Senior Notes, due February 15, 2009 (the "Senior Notes"), was lowered to a B+ (More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial requirements) from a BBB- by Standard & Poor's and to a B1 ("Poor financial security") from Ba1 by Moody's.

Policy Claims

Claims are received and reviewed by claims examiners at the Company's home office. The initial review of claims includes verification that coverage is in force and that the claim is not subject to an exclusion under the policy. Birth and death certificates are basic requirements. Medical records and investigative reports are ordered for contestable claims.

Reinsurance

The Company follows the usual industry practice of reinsuring ("ceding") portions of its life insurance and accident and health, including medical stop loss, risks with other companies, a practice which permits the Company to write policies in amounts larger than the risk it is willing to retain on any one life or group of lives, and also to continue writing a larger volume of new business. The Company also reinsures a portion of its life insurance business and accident and health business in order to obtain commissions on the insurance ceded and thereby reduce its net commission expense. The maximum amount of individual life insurance normally retained by the Company on any one life is $50,000 per policy and $100,000 per life. The maximum retention with respect to impaired risk policies typically is the same. The Company cedes insurance primarily on an "automatic" basis, under which risks are ceded to a reinsurer on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a "facultative" basis, under which the

11.

reinsurer's prior approval is required on each risk reinsured. The maximum retention of the group medical stop loss business varies, but typically the Company cedes eighty five percent on a quota share basis. In 2003, the Company learned that one of its independent stop loss underwriter issued certain stop loss policies in the Company¢ s name without authorization and without applicable reinsurance in place.

The Company believes that its exposure for claims under those policies will be approximately $1.5 million. The Company is pursuing collection of such amounts from the underwriter, based upon breach of contract and other claims.

Reinsurance assumed consists entirely of the Company's participation in Servicemen's Group Life Insurance and a quota share agreement with Transamerica Occidental Life Insurance Company.

Use of reinsurance does not discharge a insurer from liability on the insurance ceded. An insurer is required to pay the full amount of its insurance obligations regardless of whether it is entitled or able to receive payments from its reinsurer. No reinsurer of business ceded by the Company has failed to pay any policy claims with respect to such ceded business. At December 31, 2002, of the approximately $1,153 million of the Company's individual life insurance in force, the Company had ceded to reinsurers approximately $707 million of such insurance in force. The principal reinsuring companies of individual life policies with whom the Company does business at December 31, 2002 (and their corresponding A.M. Best ratings) were Life Reassurance Corporation of America ("A+ (Superior) ") and Swiss Re Life & Health America ("A+ (Superior)"). In 2002, one of the reinsurers for the Company¢ s stop loss medical insurance business, Folksham International, filed for

bankruptcy protection. The Company anticipates that it will have approximately $260,000 in unpaid reinsurance claims against Folksham. It is not clear how much, if any of such amount, the Company will collect in the bankruptcy proceeding.

Competition

The Company operates in a highly competitive environment. There are numerous insurance companies, banks, securities brokerage firms and other financial intermediaries marketing insurance products, annuities, and other investments that compete with the Company, many of which have substantially greater resources than the Company.

The Company believes that the principal competitive factors in the sale of annuity and life insurance products are product features, commission structure, perceived stability of the insurer, claims paying ratings, name recognition, crediting rates, and service. Many other insurance and other companies are capable of competing for sales in the Company's target markets.

Management believes that the Company's ability to compete is dependent upon, among other things, its ability to retain and attract independent general agents to market its products, its ability to develop competitive products that also are profitable and its ability to provide quality service. Management believes that the Company has good relationships with its agents, has an adequate variety of products approved for issuance and generally is competitive within the industry.

Investments and Investment Policy

The Company derives a substantial portion of its total revenues from investment income. The Company manages most of its investments internally. All investments made on behalf of the Company are governed by the general requirements and guidelines established and approved by the Company's investment committee (the "Investment Committee") and by qualitative and quantitative limits prescribed by applicable insurance laws and regulations. The Investment Committee meets regularly to set and review investment policy and to approve current investment plans. The actions of the Investment Committee are subject to review and approval by the Board of Directors of the Insurance Company. The Company's investment policy must comply with NYSID regulations and the regulations of other applicable regulatory bodies.

12.

The Company's investment philosophy generally focuses on purchasing investment grade securities with the intention of holding such securities to maturity. The Company's investment philosophy is focused on the intermediate to longer-term horizon and is not oriented towards trading. However, as market opportunities, liquidity or

regulatory considerations may dictate, securities may be sold prior to maturity. The Company has categorized all fixed maturity securities as available for sale and carries such investments at market value.

The Company manages its investment portfolio to meet the diversification, yield and liquidity requirements of its insurance policy and annuity contract obligations. The Company's liquidity requirements are monitored regularly so that cash flow needs are sufficiently satisfied. Adjustments periodically are made to the Company's investment policies to reflect changes in the Company's short-and long-term cash needs, as well as changing business and economic conditions.

As of December 31, 2002, approximately 7.8% of the Company's investment portfolio was invested in mortgage-backed related securities most of which are U.S. government and agency mortgage-backed securities, and other mortgage-backed obligations, most of which are collateralized mortgage obligations ("CMOs") backed by residential mortgages. Most of the Company's CMOs represent beneficial ownership interests in mortgage-backed securities of the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), the Government National Mortgage Association ("GNMA"), the Resolution Trust Corporation ("RTC") or other asset backed securities. Mortgage-backed securities are subject to significant prepayment risk due to the fact that, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive prepayments on their investments, which cannot be reinvested at an interest rate comparable to the rate on the prepaid mortgages. Notwithstanding the foregoing, because the Company historically has purchased CMOs in the secondary market at prices which typically are below their par or maturity value, the Company's portfolio has not been materially impacted as a result of such prepayments. The Company does not invest in interest only or principal only CMOs.

As of December 31, 2002, approximately 80.8% of the Company¢ s investment portfolio consisted of corporate public bonds. These bonds include investments in public utilities, special revenue and special assessment obligations, political subdivisions of states, territories and possessions and corporate industrial and miscellaneous bonds. As of December 31, 2002, approximately 1.1% of the Company's investment portfolio consisted of bonds acquired in private placements. While private placement bonds are not usually registered with the Securities and Exchange Commission (the "SEC" or "Commission"), management believes that these bonds are marketable to other institutional investors. Approximately 79.9% of the investments acquired by the Company in private placements have been assigned a National Association Insurance Commissioners ("NAIC") designation corresponding to one of the two highest quality rating categories. NAIC designations corresponding to the entire Investment Portfolio can be found on page 18.

As of December 31, 2002, approximately 6.0% of the Company's investment portfolio consisted of interests in over fifty limited partnerships which are engaged in a variety of investment strategies, principally including merchant banking, real estate, debt restructurings and international opportunities. In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated by the ability of the Company to take annual distributions of partnership earnings.

The limited partnerships that are involved in merchant banking activities generally seek to achieve significant rates of return (including capital gains) through a wide variety of investment strategies, including leveraged acquisitions, bridge financing and other private equity investments in existing businesses.

13.

The limited partnerships that are involved in real estate activities generally invest in real estate assets, real estate joint ventures and real estate operating companies. These partnerships seek to achieve significant rates of return by targeting investments that provide a strategic or competitive advantage and are priced at levels that the general partner believes to be attractive.

The limited partnerships that are involved in debt restructuring activities take positions in debt and equity securities, loans originated by banks and other liabilities of financially troubled companies. Investments in companies undergoing debt restructurings, which by their nature have a high degree of financial uncertainty, may be senior, unsecured or subordinated indebtedness and carry a high degree of risk of loss upon default by the borrower. The high level of indebtedness characteristic of merchant banking and debt restructuring transactions makes such underlying investments particularly sensitive to interest rate increases, which could affect the ability of the borrower to generate sufficient cash flow to meet its fixed charges.

The limited partnerships that are involved in international investments generally purchase sovereign debt, corporate debt and/or equity in governments or foreign companies that are developing a greater worldwide presence. Such limited partnerships are operated by a general partner who has a demonstrated expertise in this area and the particular country involved. Such investments involve risks related to the particular country including political instability, currency fluctuations, and repatriation restrictions.

The Company has been investing in limited partnerships for over thirteen years. During this time, the Company has had an opportunity to consider and evaluate a substantial number of limited partnerships and their managers. The Company makes limited partnership investments based on a number of considerations, including the reputation, investment philosophy (particularly with respect to risk), performance history and investment strategy of the manager of the limited partnership. Managers of the limited partnerships in which the Company is invested include, among others, Blackstone Investment Management, Omega Institutional Partners, Goldman Sachs Partners, Trust Company of the West Asset Management, Clayton Dubilier & Rice Partners, Apollo Real Estate and DLJ Real Estate Capital.

Limited partnership investments are selected through a careful, two-stage review process. The Investment Analyst staff reviews the offering documents and performance history of each investment manager. Separately, the Investment Committee (which is comprised of investment professionals who, collectively have more than 90 years experience in analyzing investments) interviews the manager to determine whether the investment philosophy (particularly with respect to risk) and strategies of the limited partnership are in the best interests of the Company. Only after both the Investment Analyst Staff and the Investment Committee make a positive recommendation does the Company invest in a limited partnership. In addition, the actions of the Investment Committee are subject to review and approval by the Board of Directors of the Company or the Insurance Company, as the case may be. To evaluate both the carrying value and the continuing appropriateness of the Company's investment in any limited partnership, management maintains ongoing discussions with the investment manager and considers the limited partnership's operations, its current and near term projected financial condition, earnings capacity and distributions received by the Company during the year.

Pursuant to the terms of certain limited partnership agreements to which the Company is a party, the Company is committed to contribute, if called upon, an aggregate of approximately $122.4 million of additional capital to certain of these limited partnerships. $7.7 million in commitments will expire in 2003, $30.4 million in 2004, $28.1 million in 2005, $21.4 million in 2006 and $34.7 in 2007.

The book value of the Company's investments in limited partnerships as of December 31, 2002, 2001 and 2000 was approximately $254.7 million, $240.1 million and $259.7 million respectively. Net investment income derived from the Company's interests in limited partnership investments aggregated approximately $21.9 million, $40.3 million and $36.8 million in fiscal 2002, 2001 and 2000, respectively.

14.

Management anticipates that in the future it will continue to make selective investments in limited partnerships as opportunities arise, subject to the approval of the Chief Investment Officer and the Investment Committee and the review and approval by the Board of Directors of the Company or the Insurance Company, as the case may be. There can be no assurance that the Company will continue to achieve the same level of returns on its investments in limited partnerships that it has received during the foregoing periods or that it will achieve any returns on such investments at all. In addition, there can be no assurance that the Company will receive a return of all or any portion of its current or future capital investments in limited partnerships. The failure of the Company to receive the return of a material portion of its capital investments in limited partnerships, or to achieve historic levels of returns on such investments, could have a material adverse effect on the Company's financial condition and results of operations.

As of December 31, 2002 the Company's investment portfolio also consisted of approximately .09% invested in convertible debt securities, approximately 4.3% invested in preferred stock, approximately 0.2% invested in mortgage loans, and approximately 0.4% invested in common stock. The Company's mortgage loan is collateralized by retail properties located in Pennsylvania. The Company's only direct real estate investments are two buildings that are used as the current home office of the Insurance Company and two acres of undeveloped land in Nyack, New York.

In order to enhance investment income, the Company participates in "dollar roll" repurchase agreement transactions. Such transactions involve the sale of a mortgage-backed security to a holding institution and a simultaneous agreement to purchase a substantially similar security (with the same coupon rate as the security sold) for forward settlement (typically, around 60 days) at a lower dollar price.

The proceeds are invested in short-term investment grade commercial paper or loan participations at a positive spread until the settlement date of the similar security. In connection with its "dollar roll" transactions, the Company does not engage in yield maintenance transactions. The purchase and maturity dates of all short-term investments are matched exactly to the sale and purchase dates of the underlying collateral, with a 90-day maximum for any one transaction. During this period, the holding institution receives all income and prepayments for the security. To reduce the risk that a party will default on its obligations under the repurchase agreement, the Company only enters into "dollar roll" transactions with major securities dealers such as Morgan Stanley Dean Witter & Co. Incorporated, Bank of America, Merrill Lynch & Co., Salomon Smith Barney Inc., Bear, Stearns & Co. Inc., CS First Boston and Sandler, O'Neill L.P. Additionally, if the counterparty to the "dollar roll" agreement defaults under the terms of such agreement, the Company is not obligated to repurchase the underlying securities to the transaction. Under GAAP, during the period between the sale by the Company of a mortgage-backed security to the institution party to the "dollar roll" transaction and the Company's repurchase of a substantially similar mortgage-backed security from the holding institution, the Company's consolidated balance sheet will reflect both the mortgage-backed security sold to the holding institution and the cash received for such security as assets, and the Company's repurchase obligation as a liability. In fiscal 2002 and 2001, dollar roll transactions generated approximately $1.6 million and $1.7 million, respectively, of net investment income for the Company. Amounts outstanding to repurchase securities under dollar roll repurchase agreements were approximately $262.5 million and $260.6 million as of December 31, 2002 and December 31, 2001, respectively.

15.

The following table summarizes the Company's investment portfolio at

December 31, 2002.