PRESIDENTIAL LIFE CORP - 10-K Annual Report

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, 2003, in each case, as determined in accordance with accounting principles generally accepted in the United States of America ("GAAP").

ANNUITIES IN FORCE

Year Ended December 31,
	2003	2002	2001	2000	1999
(Dollars in thousands
Single premium immediate
Annuities	$ 700,727	$ 701,024	$ 605,214	$ 464,794	$ 384,194
Single premium immediate
Structured settlement annuities	163,003	167,466	167,766	169,927	168,087

Total immediate annuities	863,730	868,490	772,980	634,721	552,281
Single premium deferred
Annuities	2,423,796	2,256,448	1,592,890	1,095,860	914,460
Flexible premium annuities	168,496	157,035	146,805	143,809	153,460
Group terminal funding
annuities	103,224	104,727	106,014	103,881	104,142

Total annuities	$ 3,559,246	$ 3,386,700	$ 2,618,689	$ 1,978,271	$ 1,724,343

For the year ended December 31,

	2003	2002	2001	2000	1999

Number of annuity
contracts in
force	75,217	72,089	56,104	45,056	43,337

Average size of annuity contract
in force	47,320	$46,979	$46,676	$43,907	$39,789

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, 2003, 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

For the fiscal year ended December 31,
	2003	2002	2001	2000	1999
(dollars in thousands)
Annuity
Considerations	$ 214,133	$ 738,467	$ 615,736	$ 356,144	$ 191,815

Whole Life and
Term Life	13,068	13,911	12,100	8,626	8,589

Universal Life	16,819	24,385	9,939	7,363	5,550

Accident & Health	6,217	10,894	3,987	9,907	1,158

Total Premiums and
Considerations	$ 250,237	$ 787,657	$ 641,762	$ 382,040	$ 207,112

Number of life insurance policies
in force	21,717	20,626	19,200	18,896	18,605

Average size of life insurance
policy in force	$ 61,810	$ 55,833	$ 48,879	$ 44,170	$ 40,441

Life Insurance Business

Universal Lifepolicies 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 Lifepolicies 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 Lifepolicies 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 Lifepolicies 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 Lifepolicies 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.

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, 2003.

LIFE INSURANCE IN FORCE

	2003	2002	2001	2000	1999
(dollars in thousands)

In force beginning of year
Universal	444,200	$ 385,857	$ 370,393	$ 368,424	$ 377,470
Whole<F1>	146,359	151,596	167,214	192,803	218,461
Term	562,363	402,443	297,037	191,185	176,875

Total	1,152,922	939,896	834,644	752,412	772,806

Sales and additions:
Universal	54,665	26,718	33,878	30,119	24,435
Whole<F1>	25,803	72,217	20,784	22,102	41,612
Term	233,362	216,116	150,869	139,920	49,887

Total	313,830	315,051	205,531	192,141	115,934

Terminations:
Death	10,401	8,289	7,467	8,129	7,233
Surrenders and
conversions	32,196	16,898	19,299	28,159	30,525
Lapses	75,039	73,237	70,192	68,237	98,541
Other	5,605	3,601	3,321	5,384	30

Total	123,241	102,025	100,279	109,909	136,329
In force end of year:
Universal	474,888	444,200	385,857	370,393	368,424
Whole<F1>	136,744	146,359	151,596	167,214	192,803
Term	731,879	562,363	402,443	297,037	191,185

Total	$1,343,511	$ 1,152,922	$ 939,896	$ 834,644	$ 752,412

Total reinsurance
ceded	$ 859,249	$ 706,667	$ 550,194	$ 478,976	$ 410,955

Total insurance in
Force at end of year
Net of reinsurance	$ 484,262	$ 446,255	$ 389,702	$ 355,668	$ 341,457

<F1> Includes graded benefit life insurance products.

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 1,062 independent general agents (321 of which are located in the State of New York), who are independent contractors. These independent general agents market the Company's products through 24,862 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.

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 23.4% of the Company's combined individual life insurance policies and annuity contracts sold, (measured by the combined premiums and considerations), during fiscal 2003. Of the Company's combined annuity contracts and individual life insurance policies sold, no single agent accounted for more than 1.58% and no single general agency accounted for more than 3.7% during 2003. 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 unless they are replaced by the appointment of other general agents. The Company's agency department actively recruits new general agents on a continuous basis.

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.

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 6.3% at December 31, 2003.

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.

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

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 underwriters issued certain stop loss policies in the Company¢s name without authorization and without applicable reinsurance in place. The Company’s exposure for claims under those policies was paid during 2003 and totaled approximately $2.2 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, 2003, of the approximately $1,344 million of the Company's individual life insurance in force, the Company had ceded to reinsurers approximately $859 million of such insurance in force. The principal reinsuring companies of individual life policies with whom the Company does business at December 31, 2003 (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. As of December 31, 2003, 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 are more highly rated and 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

As of December 31, 2003, approximately 85.9% 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, 2003, approximately 1.2% 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 83.5% 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 15.

10.

Included in the corporate bond porfolio at December 31, 2003 are non-performing assets total $10.4 million, or .2% of total invested assets. There are, however, an additional $209.6 million, or 4.9% of total invested assets of principal protected notes, which are currently not producing interest income. These investments contain cash flow notes (collateralized by high yield loans and bonds) and U.S. Treasury strips in an amount sufficient to defease the principal at maturity (“Defeasance Securities”). The underlying cash flow notes are variable rate instruments, which provide for the payment of interest only to the extent the underlying collateral generates sufficient monies for that purpose. While these notes have previously made interest payments, it is probable that no further interest payments will be made prior to maturity. The Defeasance Securities insure that these principal protected notes will be paid par at maturity. The Company has the ability and intent to hold these securities to maturity, consequently, book value has not been adjusted to reflect any impairment.

As of December 31, 2003, approximately 7.5% of the Company's investment portfolio was invested in mortgage-backed related securities most of which are commercial mortgage-backed obligations (“CMBS”). Mortgage‑backed securities are generally subject to 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, the Company’s investment portfolio has not been materially impacted as a result of such prepayments because the Company has invested primarily in mezzanine level CMBS which generally have limited prepayment risk. These securities are collateralized by commercial mortgages which have provisions which limit the ability of loan prepayments and a security structure which further directs principal payments to the senior most outstanding security before they make such distributions to the mezzanine debt owned by the Company.

As of December 31, 2003, approximately 7.5% of the Company's investment portfolio consisted of interests in over sixty limited partnerships, which are engaged in a variety of investment strategies, including real estate, debt restructurings, international opportunities and merchant banking. 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 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 foreign companies that are developing a greater worldwide presence. A general partner who has demonstrated expertise in this area and the particular country involved operates such limited partnerships. Such investments involve risks related to the particular country including political instability, currency fluctuations, and repatriation restrictions. 11.

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.

The Company has been investing in limited partnerships for over fourteen 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, Starwood Capital, Goldman Sachs Partners, Trust Company of the West Asset Management, Clayton Dubilier & Rice Partners, Apollo Real Estate and Fortress Investment Group.

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 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 $90.0 million of additional capital to certain of these limited partnerships. $14.2 million in commitments will expire in 2004, $20.3 million in 2005, $24.4 million in 2006 and $30.8 in 2007.

The book value of the Company's investments in limited partnerships as of December 31, 2003, 2002 and 2001 was approximately $323.1 million, $254.7 million and $240.1 million respectively. Net investment income derived from the Company's interests in limited partnership investments aggregated approximately $30.2 million, $21.9 million and $40.3 million in fiscal 2003, 2002 and 2001, respectively.

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 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.

12.

As of December 31, 2003 the Company's investment portfolio also consisted of approximately 3.2% invested in preferred stock, approximately 0.2% invested in mortgage loans, and approximately 0.9% 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.

As of May 2003, the Company no longer participates in "dollar roll" repurchase agreement transactions. Dollar roll transactions involve the sale of certain mortgage-backed securities to a holding institution and a simultaneous agreement to purchase substantially similar securities for forward settlement at a lower dollar price. The proceeds are invested in short‑term securities at a positive spread until the settlement date of the similar securities. During this period, the holding institution receives all income and prepayments for the security. Dollar roll repurchase agreement transactions are treated as financing transactions for financial reporting purposes.

In fiscal 2003 and 2002, dollar roll transactions generated approximately $.6 million and $1.6 million, respectively, of net investment income for the Company. Amounts outstanding to repurchase securities under dollar roll repurchase agreements were approximately $0.00 and $262.5 million as of December 31, 2003 and December 31, 2002, respectively

The following table sets forth the scheduled maturities for the Company's investments in bonds and notes as of December 31, 2003.

Scheduled Maturities
		Percent of Total
	Estimated	Estimated
Maturity<F1>	Fair Value <F2>	Fair Value <F2>
	(Dollars in thousands)
Due in one year or less	$ 24,016	.64%
Due after one year through five years	40,837	1.09%
Due after five years through 10 years	499,880	13.33%
Due after 10 years through 20 years	2,864,773	76.38%
Total	3,429,506	91.44%
Mortgage-backed bonds (Various Maturities)	321,316	8.56%
Total bonds and notes	$3,750,822	100.00%

__________________________________________________________________________________________________

<F1> This table is based upon stated maturity dates and does not reflect the effect of prepayments, which would shorten the average life of these securities. All securities are classified as available for sale; accordingly total carrying value equals estimated fair value.

<F2> Independent pricing services provide market prices for most publicly traded securities. Where prices are unavailable from pricing services, prices are obtained from securities dealers and valuation methodologies.

13.

The following table sets forth the composition of the Company's bond and notes portfolio by rating as of December 31, 2003.

		Percent
		of Total
	Estimated	Estimated
	Fair	Fair
Rating<F1>	Value<F2>	Value<F2>
	(Dollars in thousands)

Aaa.........................	$ 738,265	19.7%
Aa .........................	192,845	5.1
A .........................	991,861	26.4
Baa.........................	1,499,058	40.0
Total investment grade<F3>.	3,422,029	91.2
Ba .........................	193,272	5.2
B .........................	92,376	2.5
C .........................	43,145	1.1
Total non-investment grade.	<F4> 328,793	8.8
Total......................	$3,750,822	100.0%

<F1> Ratings are those assigned primarily by Moody's when available, with remaining ratings as assigned by Standard & Poor's and converted to a generally comparable Moody's rating. Bonds not rated by any such organization (e.g., private placement securities) are included based on the rating prescribed by the Securities Valuation Office of the NAIC. NAIC class 1 is considered equivalent to an A or higher rating; class 2, Baa; class 3, Ba; and classes 4-6, B and below. All securities are classified as available for sale; accordingly total carrying value equals estimated fair value.

<F3> Approximately .04% consists of U.S. government and agency bonds.

<F4> Approximately 68% of the non-investment grade bonds represents bonds which, experienced credit migration from investment grade status.

The NAIC assigns securities quality ratings and uniform prices called “NAIC Designations”, which are used by insurers when preparing their statutory annual statements. The NAIC annually assigns designations at December 31 to publicly traded as well as privately placed securities. These designations range from class 1 to class 6, with a designation in class 1 being of the highest quality. Of the bonds and notes in the Company's investment portfolio, approximately 90.9% were in one of the highest two NAIC Designations at December 31, 2003.

14.

The following table sets forth the carrying value and estimated fair value of these securities according to NAIC Designations at December 31, 2003.

				Percent
				of Total
NAIC Designations	Estimated			Estimated
(generally comparable to	Fair			Fair
Moody's ratings)<F1>	Value <F2>			Value<F2>
	(Dollars in thousands)

1 (Aaa, Aa, A) .............	$1,700,589			45.4
2 (Baa) ....................	1,705,792			45.5
3 (Ba) .....................	188,139			5.0
4 (B) ......................	101,690			2.7
5 (Caa, Ca) ................	44,028			1.2
6 (C) ......................		10,584	.2
		$3,750,822			100.0%

<F1> Comparison between NAIC Designations and Moody's rating is as published by the NAIC. NAIC class 1 is considered equivalent to an A or higher rating by Moody's; class 2, Baa; class 3, Ba; class 4, B; class 5, Caa and Ca; and class 6, C. All securities are classified as available for sale; accordingly total carrying value equals estimated fair value.

<F2> Independent pricing services provide market prices for most publicly‑traded securities. Where prices are unavailable from pricing services, prices are obtained from securities dealers and valuation methodologies.

The Insurance Company is subject to Regulation 130 adopted and promulgated by the NYSID. Under this Regulation, the Insurance Company's ownership of below investment grade debt securities is limited to 20% of total admitted assets, as calculated under statutory accounting. As of December 31, 2003, approximately 7.0% of the Insurance Company's total admitted assets were invested in below investment grade debt securities. In addition, as of that date, there were eight bond holdings in the Insurance Company's investment portfolio, which were in default with an estimated fair value totaling $7.6 million. For a detailed discussion concerning below investment grade debt securities, including the risks inherent in such investments, see “Item 7 ‑ Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” Also see “Note 2 to the Notes to Consolidated Financial Statements” for certain other information concerning the Company's investment portfolio.

Insurance Regulation

General Regulation

As an insurance holding company, the Company is subject to regulation by the State of New York, where the Insurance Company is domiciled, as well as all states in which the Insurance Company transacts business. Most states have enacted legislation that requires each insurance company in a holding company system to register with the insurance regulatory authority of its state of domicile and furnish to it financial and other information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. The Company has registered as a holding company system in New York.

15.

The laws and regulations of New York applicable to insurance holding companies require, among other things, that all transactions within a holding company system be fair and equitable and that charges for services be reasonable. In addition, many transactions require either prior notification to or approval of the Superintendent of Insurance of the State of New York (the “Superintendent”). Prior written approval of the Superintendent is required for the direct or indirect acquisition of 10% or more of the insurance companies' voting securities. Applicable state insurance laws, rather than