FORM 10‑Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

     OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

         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_________

                                                                               

(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.    YES    X        NO       

There were 29,357,368 shares of common stock, par value $.01 per share of the issuer's common stock outstanding as of the close of business on November 9, 2004.

      INDEX

Part I ‑ Financial Information                                  Page No.

Item 1.  Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

  September 30, 2004 and December 31, 2003  ...................            3

      Condensed Consolidated Statements of Income (Unaudited)

      For the Nine Months Ended September 30, 2004 and 2003.........     4

     

Condensed Consolidated Statements of Income (Unaudited) - For

      the Three Months Ended September 30, 2004 and 2003............    5

     

Condensed Consolidated Statements of Shareholders'

Equity (Unaudited) ‑ For the Nine Months Ended

September 30, 2004 and 2003.....................................       6

Condensed Consolidated Statements of Cash Flows (Unaudited) ‑

For the Nine Months Ended September 30, 2004 and 2003..........          7

      Notes to Condensed Consolidated Financial Statements (Unaudited)              8‑17

Report of Independent Registered Public Accounting Firm.........            18

Item 2.  Management's Discussion and Analysis of

Financial Condition and Results of Operations.........            19-33

Part II ‑ Other Information........................................            33

Item 1.  Legal Proceedings

Item 2.  Changes in Securities

Item 3.  Defaults Upon Senior Securities

Item 4.  Submission of Matters to a Vote of Security Holders

Item 5.  Other Information

Item 6.  Exhibits and Reports on Form 8‑K

Signatures..........................................................      34

Certification of Chief Executive Officer ...........................     35

Certification of Principal Accounting Officer ......................      36

          

2.

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2004 (Unaudited)		December 31, 2003
ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of
$3,935,330 and $3,745,304,respectively)	$  4,135,596		$3,890,407
Common stocks (Cost of $28,338 and
$31,271, respectively)	36,002		39,652
Mortgage loans	0		9,142
Real estate	415		415
Policy loans	18,004		18,262
Short-term investments	23,875		23,664
Other invested assets	338,734		323,139
Total Investments	4,552,626		4,304,681
Cash and cash equivalents	10,728		12,907
Accrued investment income	58,872		50,956
Amounts due from security transactions	628		1,196
Federal income tax recoverable	0		27,137
Deferred policy acquisition costs	97,563		108,713
Furniture and equipment, (net of accumulated depreciation of $1,433 and $1,389, respectively)	223		200
Amounts due from reinsurers	16,245		15,688
Other assets	4,780		5,094
Assets held in separate account	1,729		2,450
TOTAL ASSETS	$  4,743,394		$ 4,529,022
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances	$  3,202,609		$ 3,092,872
Future policy benefits:
Annuity	649,965		646,958
Life and accident and Health	65,973		65,425
Other policy liabilities	6,059		6,193
Total Policy Liabilities	3,924,606		3,811,448
Short-term note payable	50,000		50,000
Notes Payable	100,000		100,000
Federal income tax payable	3,737		0
Deferred federal income taxes	54,461		38,127
Deposits on policies to be issued	9,612		11,795
General expenses and taxes accrued	4,546		7,610
Other liabilities	24,619		18,827
Liabilities related to separate account	1,729		2,450
Total Liabilities	4,173,310		4,040,257
Commitments and Contingencies
Shareholders' Equity:
Capital stock ($.01 par value; authorized
100,000,000 shares; issued and outstanding,
29,357,368 shares in 2004 and 29,334,668
shares in 2003	294		293
Accumulated other comprehensive gain	132,749		88,343
Retained earnings	437,041		400,129
Total Shareholders' Equity	570,084		488,765
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY	$ 4,743,394		$ 4,529,022
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

          

3.

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

	NINE MONTHS ENDED     SEPTEMBER 30     (UNAUDITED)
REVENUES:	2004				2003
Insurance Revenues:
Premiums	$	8,401			$	7,232
Annuity considerations	21,494				24,849
Universal life and investment type policy
fee income	2,290				2,283
Net investment income	251,628				207,383
Realized investment gains	13,160				6,329
Other income	506				1,234
TOTAL REVENUES	297,479				249,310
BENEFITS AND EXPENSES:
Death and other life insurance benefits	9,691				12,711
Annuity benefits	54,954				53,633
Interest credited to policyholders' account
balances	122,753				120,400
Interest expense on notes payable	7,265				7,248
Other interest and other charges	631				541
Increase in liability for future policy benefits	2,422				8,485
Commissions to agents, net	8,392				9,760
General expenses and taxes	13,320				10,339
Change in deferred policy acquisition costs	8,541				(5,985)
TOTAL BENEFIT AND EXPENSES	227,969				217,132
Income before income taxes	69,510				32,178
Provision (benefit) for income taxes
Current	31,356				8,148
Deferred	(7,305)				1,582
	24,051				9,730
NET INCOME	$		45,459		$	22,448
Earnings per common share, basic and diluted	$      1.55				$         .77
Weighted average number of shares outstanding
During the period, basic	29,344,209				29,334,668
Weighted average number of shares outstanding
During the period, diluted	29,444,050				29,351,331
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

          

4.

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

	THREE MONTHS ENDED     SEPTEMBER 30     (UNAUDITED)
REVENUES:	2004					2003
Insurance Revenues:
Premiums	$			3,533		$	2,698
Annuity considerations	3,796					6,339
Universal life and investment type policy
fee income	707					914
Net investment income	85,563					71,734
Realized investment gains	458					(2,194)
Other income	(58)					(46)
TOTAL REVENUES	93,999					79,445
BENEFITS AND EXPENSES:
Death and other life insurance benefits	3,672					2,946
Annuity benefits	18,257					18,049
Interest credited to policyholders' account
balances	41,270					40,736
Interest expense on notes payable	2,425					2,376
Other interest and other charges	210					329
Increase in liability for future policy benefits	(3,503)					217
Commissions to agents, net	2,690					2,163
General expenses and taxes	3,459					3,834
Change in deferred policy acquisition costs	2,667					(611)
TOTAL BENEFIT AND EXPENSES	71,147					70,039
Income before income taxes	22,852					9,406
Provision (benefit) for income taxes
Current	10,769					(1,028)
Deferred	(2,862)					3,879
	7,907					2,851
NET INCOME	$		14,945			$	6,555
Earnings per common share, basic and diluted	.51					.22
Weighted average number of shares outstanding
During the period, basic	29,357,368					29,334,668
Weighted average number of shares outstanding
During the period, diluted	29,501,438					29,418,466
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

5.

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

                         (in thousands except shared data)

                                    (unaudited)

	Capital Stock		Additional Paid-in- Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balance at January 1, 2003	$  293		$  0		$380,577		$  17,820		$398,691
Comprehensive Income:
Net Income					22,448				22,448
Transition Adjustment							(3,639)		(3,639)
Net Unrealized
Investment Gains							72,094		72,094
Comprehensive Income									90,903
Dividends Paid to Shareholders ($.10 per share)					(8,799)				(8,799)
Balance at   September 30, 2003	$ 293		$ 0		$394,226		$86,275		$480,794
Balance at January 1, 2004	$   293		$ 0		$ 400,129		$  88,343		$488,765
Comprehensive Income:
Net Income					45,459				45,459
Transition Adjustment							(2,967)		(2,967)
Net Unrealized Investment Gains							47,373		47,373
Comprehensive Income									89,865
Issuance of Shares Under stock option plan	1				247				248
Dividends paid to Shareholders ($.10 per share)					(8,794)				(8,794)
Balance at September 30, 2004	$   294		$ 0		$ 437,041		$  132,749		$ 570,084

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

                                   

6.

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

NINE MONTHS ENDED                                                                   SEPTEMBER 30, 2004                                                                      (UNAUDITED)
		2004				2003
OPERATING ACTIVITIES:
Net Income		$	45,459			$	22,448
Adjustments to reconcile net income to net cash         provided by operating activities:
Benefit for deferred income taxes		(7,305)				1,582
Depreciation and amortization		745				604
Net accrual of discount on fixed maturities		(19,819)				(19,575)
Realized investment (gains) losses		(13,159)				(6,329)
Changes in:
Accrued investment income		(7,916)				(5,919)
Deferred policy acquisition cost		8,541				(5,985)
Federal income tax recoverable		27,137				7,790
Liability for future policy benefits		3,555				5,205
Other items		422				1,239
Net Cash Provided By Operating Activities		37,660				1,060
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions		(452,860)				(990,288)
Maturities, calls and repayments		268,968				499,939
Sales		20,844				406,919
Common Stocks:
Acquisitions		(17,934)				(25,548)
Sales		24,161				13,502
Increase (decrease) in short-term investments         and policy loans		47				279,929
Other Invested Assets:
Additions to other invested assets		(56,988)				(121,352)
Distributions from other invested assets		57,689				54,572
Mortgage loan on real estate		11,080				128
Amount due to security transactions, net		12,950				7,243
Net Cash (Used In)/Provided By In                  Investing Activities		(132,043)				125,044
FINANCING ACTIVITIES:
Proceeds from dollar repurchase agreements		0				1,057,901
Repayment of dollar repurchase agreements		0				(1,320,419)
Increase in policyholders' account balances		109,737				158,322
Bank overdrafts		(6,805)				0
Deposits on policies to be issued		(2,183)				(71)
Issuance of common stock		247				(4,160)
Dividends paid to shareholders		(8,792)				(8,799)
Net Cash Provided By/(Used In) Financing           Activities		92,204				(117,226)
(Decrease)/Increase in Cash and Cash Equivalents		(2,179)				8,878
Cash and Cash Equivalents at Beginning of Year		12,907				13,101
Cash and Cash Equivalents at End of Period		$		10,728		$	21,979
										$   (2,512)
Supplemental Cash Flow Disclosure:
Income Taxes Paid		$		16,563		$	359
Interest Paid		$		8,369		$	8,664

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

    

7.

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

  CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.   Business

Presidential Life Corporation ("the Company"), through its wholly‑owned subsidiary, Presidential Life Insurance Company ("Insurance Company"), is engaged in the sale of life insurance and annuities.

B. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to stock life insurance companies for interim financial statements and with the requirements of Form 10‑Q.  Accordingly, they do not include all of the information and footnotes required by GAAP applicable to stock life insurance companies for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Interim results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Management believes that, although the disclosures are adequate to make the information presented not misleading, these condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2003. 

   We manage and report our business as a single segment in accordance with the provisions of FAS 131, which views certain qualitative and quantitative criteria for determining whether different lines of business should be aggregated for financial reporting purposes.  Our insurance subsidiary, PLIC, has historically generated in excess of 95% of our consolidated revenues and our reported profit or loss.  In addition, PLIC is our only subsidiary which has assets in excess of 10% of the consolidated assets of the Company.  Therefore, only PLIC meets the quantitative thresholds of a reportable segment.  Although PLIC writes life and annuity business, the nature of these products are sufficiently similar to permit their aggregation.  More than 80% of our life insurance products are single premium universal life policies, which bear substantially all the attributes of our single premium deferred annuity products.  Both are marketed and distributed by the same independent agents.  The products are administered and managed within the same administrative facility, with overlapping administrative functions.  The products are also directed at a similar market, namely mature consumers seeking financial protection for secure future cash streams for themselves and their heirs and associated tax benefits.  The regulatory frameworks for the products are also substantially the same, as both PLIC and its independent agents sell these products under single licenses issued by various state insurance departments.  Under these circumstances, the applicable provisions of FAS 131 permit aggregation as a single operating segment.

C.   Investments

Fixed maturity investments available for sale represent investments, which may be sold in response to changes in various economic conditions.  These investments are carried at fair value and net unrealized gains (losses), net of the effects of amortization of deferred policy acquisition costs and deferred federal income taxes are credited or charged directly to shareholders' equity, unless a decline in market value is considered to be other than temporary in which case the investment is reduced to its fair value and the loss is recorded in the income statement.  Equity securities include common stocks and non-redeemable preferred stocks and are carried at market value, with the related unrealized gains and losses, net of deferred federal income tax effect, if any, charged or credited directly to shareholders' equity, unless a decline in market value is deemed to be other than temporary in which case the investment is reduced to its fair value and the loss is recorded in the income statement.

    

8.

Other invested assets which are recorded using the equity method, represents interests in limited partnerships, which principally are engaged in real estate, international opportunities, acquisitions of private growth companies, debt restructuring 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.  To evaluate the appropriateness of the carrying value of a limited partnership interest, management maintains ongoing discussions with the investment manager and considers the limited partnership's operation, its current and near term projected financial condition, earnings capacity, and distributions received by the Company during the year.  Because it is not practicable to obtain an independent valuation for each

limited partnership interest, for purposes of disclosure the market value of a limited partnership interest is estimated at book value. Management believes that the net realizable value of such limited partnership interests, in the aggregate, exceeds their related carrying value as of September 30, 2004.  As of September 30, 2004, the Company was committed to contribute, if called upon, an aggregate of approximately $101.6 million of additional capital to certain of these limited partnerships.  However, management does not expect the entire amount to be drawn down as certain of these limited partnerships are nearing the end of the period during which investors are required to make contributions.

In evaluating whether an investment security or other investment has suffered an impairment in value which is deemed to be other than temporary, management considers all available evidence.  When a decline in the value of an investment security or other investment is considered to be other than temporary, the investment is reduced to its net realizable or fair value, as applicable (which contemplates the price that can be obtained from the sale of such asset in the ordinary course of business) which becomes the new cost basis.  The amount of reduction is recorded in the income statement as a realized loss. A recovery from the adjusted cost basis is recognized as a realized gain only at sale.

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.

Realized gains and losses on disposal of investments are determined for fixed maturities and equity securities by the specific‑identification method.

Investments in short‑term securities, which consist primarily of United States Treasury Notes and corporate debt issues maturing in less than one year, are recorded at amortized cost, which approximates market.  Mortgage loans are stated at their amortized indebtedness.  Policy loans are stated at their unpaid principal balance.

The Company's investments in real estate include two buildings in Nyack, New York, which are occupied entirely by the Company.  The investments are carried at cost less accumulated depreciation.  Accumulated depreciation amounted to $206,800 and $206,800 at September 30, 2004 and 2003, respectively, and both buildings are fully depreciated and have no depreciation expense.

Deferred Policy Acquisition Costs

The costs of acquiring new business (principally commissions, certain underwriting, agency and policy issue expenses), all of which vary with the production of new business, have been deferred.  When a policy is surrendered, the remaining unamortized cost is written off.  Deferred policy acquisition costs are subject to recoverability testing at time of policy issue and loss recognition testing at the end of each year.

9.

For immediate annuities with life contingencies, deferred policy acquisition costs are amortized over the life of the contract, in proportion to expected future benefit payments.

For traditional life policies, deferred policy acquisition costs are amortized over the premium paying periods of the related policies using assumptions that are consistent with those used in computing the liability for future policy benefits.  Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts.  For these contracts the amortization periods generally are for the scheduled life of the policy, not to exceed 30 years.

Deferred policy acquisition costs are amortized over periods ranging from 15 to 25 years for universal life products and investment‑type products as a constant percentage of estimated gross profits arising principally from surrender charges and interest and mortality margins based on historical and anticipated future experience,

updated regularly.  The effects of revisions to reflect actual experience on previous amortization of deferred policy acquisition costs, subject to the limitation that the accrued interest on the deferred acquisition costs balance may not exceed the amount of amortization for the year, are reflected in earnings in the period estimated gross profits are revised.  For that portion of the business where acquisition costs are not deferred, (i.e, medical stop loss business) management believes the expensing of policy acquisition costs is immaterial.

E.    Future Policy Benefits

Future policy benefits for traditional life insurance policies are computed using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue.  Assumptions established at policy issue as to mortality and persistency are based on anticipated experience, which, together with interest and expense assumptions, provide a margin for adverse deviation.  Benefit liabilities for deferred annuities during the accumulation period are equal to accumulated contract holders' fund balances and after annuitization are equal to the present value of expected future payments. 

F.      Policyholders' Account Balances

Policyholders' account balances for universal life and investment‑type contracts are equal to the policy account values.  The policy account values represent an accumulation of gross premium payments plus credited interest less mortality and expense charges and withdrawals.

G.      Federal Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. The asset and liability method in recording income taxes on all transactions that have been recognized in the financial statements is used. SFAS 109 provides that deferred income taxes are adjusted to reflect tax rates at which future tax liabilities or assets are expected to be settled or realized.

H.      Earnings Per Common Share  “EPS”

Basic EPS is computed based upon the weighted average number of common shares outstanding during the quarter.  Diluted EPS is computed based upon the weighted average number of common shares including contingently issuable shares and other dilutive items.  The weighted average number of common shares used to compute diluted EPS for the nine months ended September 30, 2004 and 2003 was 29,444,050 and 29,351,331, respectively.  The dilution from the potential exercise of stock options outstanding did not change basic EPS.             

I.    New Accounting Pronouncements

In December 2003, the FASB issued Statement of Financial Accounting Standards ("SOFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits". This standard requires additional detailed disclosures regarding pension plan assets, benefit obligations, cash flows, benefit costs and related information. With the exception of disclosures related to foreign plans, the new disclosures are required to be provided in annual statements of public entities with fiscal years ending after December 15, 2003. The Company adopted the new disclosure requirements for all plans as of December 31, 2003.

10.

In March 2004, the Emerging Issues Task Force ("EITF") reached further
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides
accounting guidance regarding the determination of when an impairment of debt
and marketable equity securities and investments accounted for under the cost
method should be considered other-than-temporary and recognized in income. An
EITF 03-1 consensus reached in November 2003 also requires certain quantitative
and qualitative disclosures for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, that are impaired at the
balance sheet date but for which an other-than-temporary impairment has not been
recognized. The Company has complied with the disclosure requirements of EITF
03-1 which were effective December 31, 2003. The accounting guidance of EITF
03-1 relating to the recognition of investment impairment, which was to be
effective in the third quarter of 2004 has been delayed pending the development
of additional guidance. The Company is actively monitoring the deliberations
relating to this issue at the Financial Accounting Standards Board ("FASB") and
currently is unable to determine the impact of EITF 03-1 on its unaudited
interim condensed consolidated financial statements.

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AcSEC") issued Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities " (SOP 03-3).  SOP 03-3 addresses the accounting for differences between contractual and expected cash flows to be collected from an investment in loans or fixed maturity securities (collectively hereafter referred to as "loan(s)") acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 limits the yield that may be accreted to the excess of the estimated undiscounted expected principal, interest and other cash flows over the initial investment in the loan. SOP 03-3 also requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual or valuation allowance. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. For loans acquired in fiscal years beginning on or before December 15, 2004 and within the scope of Practice Bulletin 6 "Amortization of Discounts on Certain Acquired Loans", SOP 03-3, as it pertains to decreases in cash flows expected to be collected, should be applied prospectively for fiscal years beginning after December 15, 2004. Management is in the process of assessing the impact of adopting SOP 03-3.

In July 2003, AcSEC issued a final Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP"). The major provisions of the SOP require: recognizing expenses for a variety of contracts and contract features, including guaranteed minimum death benefits ("GMDB"), certain death benefits on universal-life type contracts and annuitization options, on an accrual basis versus the previous method of recognition upon payment; reporting and measuring assets and liabilities of certain separate account products as general account assets and liabilities when specified criteria are not met; reporting and measuring the Company's interest in its separate accounts as general account assets based on the insurer's proportionate beneficial interest in the separate account's underlying assets; and  Capitalizing sales inducements that meet specified criteria and amortizing such amounts over the life of the contracts using the same methodology as used for amortizing deferred acquisition costs ("DAC"). The SOP is effective for financial statements for fiscal years beginning after December 15, 2003. The adoption of SOP 03-1 had no impact on the Company’s consolidated financial statements. 

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Statement No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In addition, the Statement requires an issuer to classify certain instruments with specific characteristics described in it as liabilities. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of Statement No. 150 did not have an impact on the Company's consolidated financial statements.

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  Statement No. 149 amends Statement 133 for decisions made (1) as part of the Derivatives Implementation Group process that

11.

effectively required amendments to Statement 133, (2) in connection with other Board projects dealing with financial instruments, and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative.  The Statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative discussed in paragraph 6(b) of Statement 133, clarifies when a derivative contains a financing component, amends the definition of an underlying derivative to conform it to language used in FASB Interpretation No.45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including indirect Guarantees of Indebtedness of Others, and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. The adoption of Statement No. 149 had no impact on the Company's consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (²FIN 46²). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities entered into prior to February 1, 2003, FIN 46 is effective for the first interim or annual period beginning after June 15, 2003. In October 2003, the FASB issued FASB Staff Position (FSP) FIN 46-6, Effective Date of FASB Interpretation, No. 46 Consolidation of Variable Interest Entities. This FSP provides a deferral of interests held by public entities in a variable interest entity or potential variable interest entity until the end of the first interim or annual period after December 15, 2003, if (a) the variable interest entity was created before February 1, 2003 and (b) the public entity has not issued financial statements reporting the variable interest entity that was created before February 1, 2003, in accordance with FIN 46, other than in the disclosure required by FIN 46. The FSP was effective for financial statements issued after October 9, 2003. The adoption of FIN 46 for variable entities created after February 1, 2003 did not have an impact on the consolidated financial statement of the company as of December 31, 2003. The adoption of the provision of FSP FIN 46-6, which is effective for the Company on March 31, 2004, had no impact on the Company’s consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others (²FIN 45²).  FIN 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others.   Disclosure requirements under FIN 45 are effective for financial statements of annual periods ending after December 15, 2002 and are applicable to all guarantees issued by the guarantor subject to the provisions of FIN 45.  The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The adoption of FIN 45 had no impact on the Company’s consolidated financial statements.

     In October 2002, the FASB issued SFAS No.147, Acquisitions of Certain Financial Institutions (²SFAS 147²).  This statement, which provides guidance on the accounting for the acquisition of a financial institution, applies to all acquisitions except those between two or more mutual enterprises. The standard is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The adoption of SFAS 147 did not have an impact on the Company¢s consolidated financial statements.

     

In August 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities (²SFAS 146²).  The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  Previous accounting guidance was provided by EITF 94-3, ²Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)². SFAS 146 replaces EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002.  The adoption of SFAS 146 did not have an impact on the Company¢s consolidated financial statements.

12.

In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144").  SFAS 144 provides a single model for accounting for long-lived assets to be disposed of, by superceding SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the accounting and reporting provisions of Accounting

Principles Board Opinion No.30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently occurring Events and Transactions ("APB 30").  Under SFAS 144, discontinued operations are measured at the lower of carrying value or fair value less cost to sell rather than on a net realizable value basis.  Future operating losses relating to discontinued operations are also no longer recognized before they occur.  SFAS 144 broadens the definition of a discontinued operation to include a component of an entity (rather than a segment of a business.)  SFAS 144 also requires long-lived assets to be disposed of other than by sale to be considered held and used until disposed.  SFAS 144 retains the basic provisions of (i) APB 30 regarding the presentation of discontinued operations in the income statement, (ii) SFAS 121 relating to recognition and measurement of impaired long-lived assets classified as held for sale.  SFAS 144 was effective beginning January 1, 2002.  The adoption of SFAS 144 by the Company did not have an impact on the Company's consolidated financial statements.

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and identifiable intangible assets other than goodwill be amortized over their useful lives.  SFAS No. 141 is effective for acquisitions made after June 30, 2001.  The provisions of SFAS No. 142 were effective for fiscal years beginning after December 15, 2001.  Adoption of SFAS 141 and SFAS 142 did not have an impact on the Company's consolidated financial statements.

2.    INVESTMENTS

     There were no investments in any one issuer that aggregate 10% or more of Shareholder's Equity as of September 30, 2004.

The following information summarizes the components of net investment income:

		September 30, 2004 (in thousands)			September 30,2003 (in thousands)
Fixed maturities		$	205,511		$	193,717
Common stocks		541			285
Short‑term investments		206			1,776
Other investment income		50,063			16,643
		256,321			212,421
Less investment expenses		4,693			5,038
Net investment income		$	251,628		$	207,383

13.

As of September 30, 2004 and 2003 there were thirty-two fixed maturity investments with an aggregate carrying value of $223.3 million and forth-four fixed maturity investments with an aggregate carrying value of $227.1 million respectively, in the accompanying balance sheet which were non-income producing.  Eighteen of these fixed maturity investments in 2004 and eighteen in 2003 with an aggregate carrying value of $217.6, and $214.1 respectively, are defeased with U.S Treasuries in an amount sufficient to insure full payment of principal.

The following table presents the amortized cost and gross unrealized losses for securities where the estimated fair value had declined and remained below amortized cost at September 30, 2004:

	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of Securities					(in thousands)
US Treasury obligations and direct obligations of US Government Agencies	119,221		1,754		192,992		11,546		312,213		13,300
Corporate Bonds	242,673		11,150		566,005		86,111		808,678		97,261
Preferred Stocks	25,751		472		11,684		646		37,435		1,118
Subtotal Fixed Maturities	387,645		13,376		770,681		98,303		1,158,326		111,679
Common Stock	16,273		478		0		0		16,273		478
Total Temporarily Impaired Securities	403,918		13,854		770,681		98,303		1,174,599		112,157

The following table presents the total gross unrealized losses for fixed maturities where the estimated fair value had declined and remained below amortized cost by September 30, 2004.

		Gross Unrealized Losses		% Of Total		Gross Unrealized Losses For Principal Protected Notes		% of Total		Gross Unrealized Losses Net of Principal Protected Notes		% of Total
		(in thousands)
Less than twelve months		13,376		11.98		0		0		13,376		27.42
Twelve months or more		98,303		88.02		62,886		100.00		35,417		72.58
Total		111,679		100.00		62,886		100.00		48,793		100.00

The principal protected notes described in this Note to the condensed consolidated financial ftatements consist of a variable rate coupon bond secured by AAA-rated zero coupon bonds.  The bond collateral is deposited into a trust account (trustees includes The Bank of New York, JP Morgan, U.S. Trust Company and State Street Bank).  The bond collateral accretes to par value at maturity of the principal protected notes, thus defeasing the notes and insulating the Company from any negative credit events that might interfere with the repayment of principal. 

 

       The contractual right of the variable rate subordinated notes to interest payments is determined by the availability of cash flow from investments, either high-yield bonds or bank loans, held in certain collateralized bond or collateralized debt structures.  The right to receive payments of interest and the level of those payments is totally dependent upon the performance of the investment.  The failure of the investment to produce cash flow sufficient to pay interest on any payment date does not constitute an event of default.  The temporary, or eventually permanent, failure to receive interest payments will not interfere with the availability of the matured proceeds of the defeasance collateral to pay the par amount of the principal protected notes at maturity.

       The fair value of the Notes shown in this section represents the fair value of the defeasance collateral.  Currently, no value is attributed to the variable coupon subordinated notes also included in the assets of the trust.   The determination of the value to attribute to the variable coupon subordinated notes is determined quarterly based on estimated future cash flows from such notes at the time.

14.

       The Company’s investments are primarily concentrated in a variety of fixed income securities that are exposed to a combination of credit risk and interest rate risk, each of which can impact fluctuations in overall market valuation.  During the third quarter of 2004, the portfolio experienced an increase in market value caused by a significant decline in interest rates, as the 10-year Treasury yield rose from 4.58% on June 30, 2004 to 4.12% on September 30, 2004.  This represented an increase in the

market value of the benchmark 10-year Treasury of approximately 3 5/8 points or 3.6% of total value.  The 30-year Treasury yield increased from 5.29% to 4.89% during the same period, representing an increase in market value of approximately 5 7/8 points or 5.81% of total value.  Given the strength of the overall economic recovery and the announced policies of the U.S. Federal Reserve, the Company anticipates a gradual rise in interest rates over the coming quarters of 2004 and 2005.  Federal Reserve policies will tend to have a greater impact on the short-end of the Treasury yield curve, and, as a result, we anticipate that the Treasury yield curve will flatten over time.  This rise in overall interest rates may have a negative impact on the market valuation of the fixed income portfolio of the Insurance Company.  The Company’s book value will generally increase when interest rates decrease and decrease when interest rates increase.  The book value per share at September 30, 2004 and December 31, 2003 was $19.42 and $16.66, respectively, reflecting the change in interest rates.

      The determination by the Company of which impairments of fixed maturity investments are other than temporary is governed by the Company’s Investment Policy.  Under the policy, the Company’s Investment Department has established a continuing procedure of regular review of the investment portfolio.  Whenever the market value of an investment declines below 80% of its cost basis or a perceived material event has occurred in the investment or the underlying issuer, that investment is added to an Initial Watch List.  Credit files are then created for that investment and one of the Company’s investment analysts prepares a research/credit report for the Investment Committee.  The Investment Committee then determines whether the condition of the investment merits placement of the investment on the Watch List.  Generally, investments are added to the Watch List, subject to the approval of the Investment Committee, upon the occurrence of one or more of the following events:  (i) a downgrade to either B1 by Moody’s or B+ by Standard and Poors; (ii) a downgrade to 5 or 6 by NAIC; or (iii) a decline in the equity market capitalization of an issuer by more than 30% of book value.  Each quarter, the Investment Committee reviews the Watch List to determine if an “other than temporary” write down in carrying value is warranted.  In making this determination, we consider numerous factors, including our intent to hold the investment to maturity, the severity and nature of the impairment, review of events that gave rise to the impairment, review of credit ratings, credit performance and business prospects of the issuer, any potential adverse changes in the regulatory environment, business climate or liquidity of the issuer and compliance by the issuer with statutory or debt covenants

        The primary source of the Company’s current unrealized loss positions is the principal protected notes described above.  The determination was based on the failure of the issuers to pay interest under the variable rate coupons, despite the possession of AAA-rated collateral, which secures payment of the principal of those notes.  The remaining unrealized loss positions relate to the fluctuation of bond values based on temporary interest rate changes and falling equity market capitalization for corporate bond issuers, especially during 2001 and 2002. 

3.   NOTES PAYABLE

Notes payable at September 30, 2004 and 2003 consist of $100 million, 7 7/8% Senior Notes (Senior Notes) due February 15, 2009.  Interest is payable February 15 and August 15.  Debt issue costs are being amortized on the effective interest method over the term of the notes.  As of September 30, 2004, unamortized costs were $1.0 million.  The total principal is due on February 15, 2009.  In addition, the Company had deferred losses of approximately $3.0 million recorded in accumulated other comprehensive income as of September 30, 2004, related to an interest rate lock agreement used to hedge the issuance of the Senior Notes.  The Company reclassifies the deferred loss from a liability to accumulated other comprehensive income over the term of the notes.  The Company expects to reclassify approximately $672,000 into earnings for the year 2004.

15.

The indenture governing the Senior Notes contains covenants relating to limitations on liens and sale or issuance of capital stock of the Insurance Company.  In the event the Company violates such covenants as defined in the indenture, the Company may be obligated to offer to repurchase the entire outstanding principal amount of such notes. As of September 30, 2004, the Company believes that it is in compliance with all of the covenants.

The short-term note payable relates to a bank line of credit in the amount of $50,000,000 and provides for interest on borrowings based on market indices.  At September 30, 2004 and 2003 the Company had $50,000,000 and $50,000,000 outstanding, respectively. The line of credit was renewed on April 22, 2004 for a period of one year with The Bank of New York.       

4.   SHAREHOLDERS' EQUITY

     During 2004, the Company's Board of Directors maintained the quarterly dividend rate of $.10 per share.  The Company is authorized pursuant to a resolution of the Board of Directors to purchase 385,000 shares of common stock.

NET UNREALIZED INVESMENT GAINS

For the Nine Months ended September 30, 2004:	Pre Tax Amount		Tax (Expense)/   Benefit (in       thousands)		After-Tax Amount
Net unrealized gains on investment securities:
Net unrealized holding gains arising during year	82,781		28,559		54,222
Less: reclassification adjustment for gains
realized in net income	(13,160)		(4,541)		(8,619)
Change related to deferred acquisition costs	2,703		933		1,770
Net unrealized investment gains	72,324		24,951		47,373