SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT 0F 1934

KEYPORT LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.

Registrant has 2,411,986 shares of common stock, $1.25 par value, outstanding as of May 15, 2003.

2

(in thousands)

3

(in thousands)

Unaudited

4

Unaudited

5

Unaudited

6

(in thousands)

Unaudited

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The accompanying unaudited consolidated financial statements of Keyport Life Insurance Company ("the Company") includes all adjustments, consisting of normal recurring accruals that management considers necessary for a fair presentation of the Company's financial position as of March 31, 2003 and December 31, 2002 and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the three months ended March 31, 2003 and 2002, respectively. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's 2002 Form 10-K. The results of oper ations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.

On December 31, 2002, the Company transferred its ownership interest in Keyport Benefit Life Insurance Company ("KBL") for a 67% interest in Sun Life Insurance and Annuity Company of New York ("SLNY"). SLNY and the Company are under common control. GAAP requires that the financial statements reflect such transaction to the earliest year presented or to the date the entities became under common control (November 1, 2001). Accordingly, the accompanying financial statements of the Company reflect the inclusion of SLNY in a manner similar to a pooling of interest. Minority interest has been established for a portion of the earnings not attributable to Keyport's 67% ownership. Prior year's financial statements have been restated to reflect this transaction.

In November of 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others. Disclosure requirements under FIN No. 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 No. 45. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on the Company.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," to improve financial reporting by enterprises involved with variable interest entities. This interpretation states that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. The Company is in the process of evaluating the provisions of this SOP and its impact to the Company's financial position and results of operations.

In July 2002, the American Institute of Certified Public Accountants ("AICPA") issued a proposed Statement of Position ("SOP"), "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Separate Accounts." This SOP provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. The Company is in the process of evaluating the provisions of this SOP and its impact to the Company's financial position and results of operations.

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On March 14, 2003 the AICPA issued a proposed SOP, "Accounting by Insurance Enterprises for Deferred Acquisition Costs on Internal Replacements other than those specifically described in FASB Statement No. 97". This statement provides guidance on accounting by insurance companies for deferred acquisition cost on internal replacements other than those specifically described in FASB statement No.97. This SOP is effective for fiscal years beginning after December 15, 2003. The Company is in the process of evaluating the provision of this SOP and its impact to the Company's financial Position and results of operations.

All derivatives are recognized on the balance sheet at fair value. Changes in the fair value of derivatives are reported in current period operations as a component of net derivative gains. The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was not justified.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract) and is carried at fair value.

The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contracts to provide returns based upon this index. The call options and futures are carried at fair value. In addition, the Company utilizes total return swap agreements to hedge certain other contract obligations.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes.

The increase in the swap values, net of related effects on the value of business acquired and deferred acquisition costs, resulted in a loss of $12.3 million and $16.3 million of income for the quarters ended March 31, 2003 and 2002, respectively. The change in values of the call options, futures, and the embedded derivative, net of related effects on the value of business acquired, decreased income by $36.4 million and $4.6 million for the quarters ended March 31, 2003 and 2002, respectively.

Private limited partnerships ("partnerships"), which are included in other invested assets, are accounted for on either the cost method or equity method. The equity method of accounting is used for all partnerships in which the Company has an ownership interest in excess of 3%. Partnerships amounted to $245.0 million and $258.0 million at March 31, 2003 and December 31, 2002, respectively.

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The equity income of private limited partnerships is accounted for on the equity method and represented primarily increases or decreases in the fair value of the underlying investments of the private equity limited partnerships for which the Company had ownership interests in excess of 3%. For the three months ended March 31, 2003, the equity loss of partnerships of $12.7 million is recorded net of the related amortization of value of business acquired and deferred acquisition costs of $2.4 million. For the quarter ended March 31, 2002, the equity loss of partnerships of $21.2 million was recorded net of the related amortization of deferred policy acquisition costs of $3.0 million. The financial information for these investments is obtained directly from the partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments.

Effective January 1, 2002, Sun Life Assurance Company of Canada (U.S.) ("SLUS") became the employer of record for most United States affiliates of Sun Life Financial Services of Canada Inc. In accordance with an administrative services agreement between and among SLUS, Sun Life Assurance Company of Canada ("SLOC") and the Company, SLUS allocates operating expenses back to the Company. These expenses include corporate, general, and administrative expenses, corporate overhead, such as executive and legal support, employee benefits, and investment management services.

The Company reimbursed SLUS for expenses incurred on its behalf $9.4 million and $13.3 million for the three-month periods ended March 31, 2003 and 2002, respectively. Management believes inter-company expenses are calculated on a reasonable basis. However, these amounts may not necessarily be indicative of the costs that would be incurred if the Company operated on a stand-alone basis.

On May 29, 2002, the Company purchased a $100,000,000 note issued by Massachusetts Financial Services Company, an affiliate, for $107,000,000 from SLUS, another affiliate. In the first quarter of 2003, the note was sold to an affiliate, Sun Life (Hungary) Group Financing Limited Liability Company ("Sun Life (Hungary)"). The Company realized a gain of $3.3 million on the sale.

On July 25, 2002, the Company issued a $380,000,000 promissory note at 5.76% to an affiliate, Sun Life (Hungary), which matures on June 30, 2012. The Company will pay interest semi-annually beginning December 31, 2002. The proceeds of the note were used to purchase fixed rate corporate and government bonds.

On December 31, 2002, KBL, a wholly owned subsidiary of the Company, merged with and into SLNY, an affiliate. Keyport and its subsidiaries, including KBL, were purchased on October 31, 2001 by Sun Life of Canada (U.S.) Holdings, Inc., an upstream parent of SLNY. On December 31, 2002, prior to the completion of the merger, the Company contributed capital in the amount of $30.15 million to KBL. SLUS, the parent of SLNY, contributed capital totaling $14.85 million to SLNY. These contributions were approved by the respective boards of directors in anticipation of the merger transaction. As a result of the merger, SLUS continued to hold 2,000 shares of SLNY's common stock; however, the par value of the common stock was converted to $350 per share. In exchange for its investment in KBL, SLNY issued the Company 4,001 shares of its common stock valued at $350 per share. As a result of the share issuance and changes in par value, SLUS ownership percentage of SLNY became 33%, with the Company holding the remaining 67%.

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The Company has commitments to fund mortgage loans and private limited partnerships in the future. These outstanding commitments amounted to $87.0 million and $47.5 million on mortgages and private limited partnerships, respectively, at March 31, 2003.

In the normal course of its business, the Company has entered into agreements that include indemnities in favor of the third parties, such as engagement letters with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements. The Company has also agreed to indemnify its directors and certain of its officers and employees in accordance with the Company's by-laws. Due to the nature of these indemnification agreements, it is not possible to estimate the Company's potential liability.

On April 2, 2003, the Company and its affiliate, SLUS, filed a Form D (Prior Notice of a Transaction) with the Division of Insurance, Department of Business Regulation of Rhode Island. On April 3, 2003, the Company and SLUS filed similar documents with the Delaware Department of Insurance. Both filings seek regulatory approval for a contemplated merger of the Company with and into SLUS. The Company and SLUS are both direct wholly-owned subsidiaries of Sun Life of Canada (U.S.) Holdings, Inc. and indirect wholly-owned subsidiaries of Sun Life Financial Services of Canada Inc. ("SLF"). The boards of directors of both the Company and SLUS voted to approve the merger at their meetings on April 24, 2003. Assuming regulatory approval, the current plan calls for the merger to be effective after the close of business on December 31, 2003. Although there can be no assurance of regulatory approval, the management of both companies currently anticipate completing the merger as planned.

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This discussion includes forward-looking statements by Keyport Life Insurance Company ("the Company") under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, volume growth, market share, market risk, interest rates and financial goals. It is important to understand that these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those that the statements anticipate. These risks and uncertainties may concern, among other things:

On December 31, 2002 the Company transferred its ownership interest in Keyport Benefit Life Insurance Company ("KBL") for a 67% interest in Sun Life Insurance and Annuity Company of New York ("SLNY"). SLNY and the Company are under common control. Accounting principles generally accepted in the United States ("GAAP") require that the financial statements reflect such transaction to the earliest year presented or to the date the entities became under common control (November 1, 2001). Accordingly, the accompanying financial statements of the Company reflect the inclusion of SLNY in a manner similar to a pooling of interest. Minority interest has been established for a portion of the earnings not attributable to Keyport's 67% ownership. Prior year's financial statements have been restated to reflect this transaction.

The Company's discussion and analysis of its financial position and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

All derivatives are recognized on the balance sheet at fair value. Changes in the fair value of derivatives are reported in current period operations as a component of net derivative gains (losses). The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was not justified.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract) and is carried at fair value.

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Fair values are based upon either dealer price quotations or are derived from pricing models that consider current market and contractual prices for the underlying financial instrument, as well as time value and yield curve or volatility factors underlying the positions. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized. Changes in the fixed income and equity markets will affect the Company's estimate of fair value in the future, which will affect reported derivative income.

The value of business acquired ("VOBA") represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition. This amount is amortized in proportion to the projected emergence of profits. Interest is accrued on the unamortized balance at the average interest crediting rate.

The value of business acquired is also adjusted for amounts relating to the recognition of unrealized investment gains and losses. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income (loss).

Deferred policy acquisition costs ("DAC") relate to the costs of acquiring new business, which vary with, and are primarily related to, the production of new annuity business. Such acquisition costs include commissions, costs of policy issuance, and underwriting and selling expenses. These costs are deferred and amortized with interest in relation to the present value of estimated gross profits from mortality, investment spread and expense margins. This amortization is reviewed annually and adjusted retrospectively when the Company revises its estimate of current or future gross profits to be realized, including realized and unrealized gains and losses from investments.

DAC is adjusted for amounts relating to unrealized gains and losses on available for sale fixed-maturity securities. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income (loss).

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax asset will not be realized.

The carrying value of the Company's net deferred tax asset assumes that the Company will be able to generate sufficient future taxable income based upon estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record a valuation allowance against its net deferred tax asset resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the recoverability of the deferred tax asset on a quarterly basis.

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The Company routinely reviews its portfolio of investment securities. The Company identifies any investments that require additional monitoring on a monthly basis, and carefully reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other-than-temporary. In making these reviews, the Company principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded investments, management also considers market value quotations, if available.

During the three months ended March 31, 2003, the Company realized losses totaling $9.5 million for other-than-temporary impairments. There were no such losses recorded for the three months ended March 31, 2002. The Company discontinued the accrual of income on several of its holdings for issuers that are in default. Investment income would have been increased by $0.9 million for the three month period ended March 31, 2003, if these holding were performing.

SFAS No. 142, "Goodwill and Other Intangible Assets", requires goodwill to be tested for impairment on an annual basis, or more frequently in certain circumstances. The Company has gathered the necessary information to perform the assessment and will be analyzing the data during the second quarter of 2003. The Company has begun to gather the appropriate information to complete the first portion of the required goodwill impairment test. The impairment test will be completed during the second quarter.

On December 31, 2002, the Company acquired a 67% interest in SLNY, an affiliated company, in exchange for its interest in its wholly owned subsidiary, KBL. SLNY was merged with KBL on December 31, 2002, and SLNY was the surviving entity. SLNY and the Company are under common control and GAAP requires that the financials should be restated to the earliest year presented or to the date the entities became under common control (November 1, 2001). Minority interest has been established for a portion of the earnings not attributable to Keyport's 67% ownership. The financial condition and results of SLNY are included in the financial statements from November 1, 2001.

Net (loss) income was $(19.6) million and $31.7 million for the three months ended March 31, 2003 and 2002, respectively. (Loss) income from operations ((loss) income before income taxes, equity income of private limited partnerships, and net realized investment gains (losses)) was $(25.0) million and $63.2 million for the three months ended March 31, 2003 and 2002, respectively. The decrease in income from operations is primarily attributable to a $60.1 million decrease in net investment spread.

Investment spread is the amount by which investment income earned on the Company's investments exceeds interest credited to policyholder balances. Investment spread was $8.1 million and $68.2 million for the three months ended March 31, 2003 and 2002, respectively. The amount by which the average yield on investments exceeds the average interest credited rate on policyholder balances is the investment spread percentage. The investment spread percentage was 0.40 % and 1.30% for the three months ended March 31, 2003 and 2002, respectively. The decline in the spread is primarily a result of the decline in interest rates throughout 2002, the compression of spread as interest rates credited to the policyholder contracts reached guaranteed minimums, and a reserve adjustment of approximately $30.0 million (pre-tax) which was recorded as a component of interest credited to policyholders. (Interest credited to policyholders was accurately recorded at the policy level at all times). In a ddition, the quality of the investment portfolio has improved, which resulted in a lower investment yield. In recognition of interest spread compression experienced, the Company has reduced commission rates on certain deferred annuities by 2% effective April 1, 2003. This action will reduce future DAC amortization relating to new annuity contracts.

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Interest credited to policyholders was $187.4 million and $143.7 million for the three months ended March 31, 2003 and 2002, respectively. The increase of $43.7 million in 2003 compared to 2002 is the result of a lower average interest credited rate ($1.1 million) offset by an increase in average policyholder balances ($14.8 million) and a reserve adjustment of $30.0 million. Policyholder balances (excluding institutional account balances and policyholder balances of SLNY) averaged $12.8 billion in the first quarter of 2003 ($11.6 billion of fixed products, consisting of fixed annuities and the closed block of single premium whole life insurance, and $1.2 billion of equity-indexed annuities) as compared to $12.2 billion ($10.4 billion of fixed products and $1.8 billion of equity-indexed annuities) for three months ended March 31, 2002.

The average interest credited rate was 4.66% and 4.69% for the three months ended March 31, 2003 and 2002, respectively. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 120%) of the change in value of the S&P 500 Index. The Company's equity-indexed annuities also provide full guarantee of principal if held to term, plus interest at 0.85% annually. Under SFAS No. 133, the index annuities are deemed to contain an embedded derivative (the change in value attributable to the change in the S&P 500 index) and a host contract. The host contract's interest rate is derived at the inception of the contract and an effective interest rate is utilized that will result in a liability equal to the guaranteed minimum account value at the end of the term. The embedded derivative is carried at fair value and the changes in fair value are reported as a component of derivative income (loss).

Net derivative (losses) gains of $24.1 million and $9.9 million for the three months ended March 31, 2003 and 2002, respectively, represent fair value changes, net of related effects on DAC and VOBA.

All derivatives are recognized on the balance sheet at fair value. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative (losses) gains. The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was not justified.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract) and is carried at fair value. The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are derivatives. In addition, the Company utilizes total return swap agreements, which are considered derivatives.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty, interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes.

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The increase in the swap values, net of related effects on the value of business acquired and deferred acquisition costs, resulted in a loss of $12.3 million and $16.3 million of income for the quarters ended March 31, 2003 and 2002, respectively. The change in values of the call options, futures, and the embedded derivative, net of related effects on the value of business acquired, decreased income by $36.4 million and $4.6 million for the quarters ended March 31, 2003 and 2002, respectively.

Equity loss of private limited partnerships primarily represents increases (decreases) in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. Private equity limited partnerships ("partnerships"), which are included in other invested assets, are accounted for on either the cost method or equity method. The equity method of accounting is used for all partnerships in which the Company has an ownership interest in excess of 3%. Partnerships amounted to $245.0 million and $258.0 million at March 31, 2003 and December 31, 2002, respectively.

For the three months ended March 31, 2003, the equity loss of partnerships of $12.7 million is recorded net of the related amortization of VOBA and DAC of $2.4 million. For the quarter ended March 31, 2002, the equity loss of partnerships of $21.2 million is recorded net of the related amortization of deferred policy acquisition costs of $3.0 million. The financial information for these investments is obtained directly from the partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments.

Premiums are SLNY's premiums for life insurance contracts. Premiums were $6.4 million and $5.7 million for the three months ended March 31, 2003 and 2002, respectively.

Surrender charges are revenues earned on the early withdrawal of fixed, equity-indexed and variable annuity policyholder balances. Surrender charges on fixed, equity-indexed and variable annuity withdrawals generally are assessed at declining rates applied to policyholder withdrawals during the first five to seven years of the contract. Total surrender charges were $6.7 million and $5.4 million for the three months ended March 31, 2003 and 2002, respectively.

On an annualized basis, total annuity withdrawals represented 11.09% and 16.20% of the total average annuity policyholder and separate account balances for the three months ended March 31, 2003 and 2002, respectively. The decline in surrenders are primarily due to a declining interest rate environment.

Separate account income is primarily mortality and expense charges earned on variable annuity and variable life policyholder balances. These charges, which are based on the market values of the assets in the separate accounts supporting the contracts, were $5.8 million and $10.0 million for the three months ended March 31, 2003 and 2002, respectively. Variable product fees represented 1.0% and 1.4% of the average variable annuity and variable life separate account balances for the three months ended March 31, 2003 and 2002. The decrease in separate account income was due to a decrease in average separate account assets. Average separate account assets were $2.3 billion and $3.0 billion for the three months ended March 31, 2003 and 2002, respectively.

Management fees are primarily investment advisory fees related to the separate account assets. The fees are based on the level of assets under management, which are affected by product sales, redemptions and changes in the fair values of the investments managed. Management fees were $1.6 million for the three months ended March 31, 2003 and 2002.

Policy Benefits are primarily death and disability benefits related to traditional insurance products issued by SLNY, as well as death benefits related to annuity products and the closed block of Single Premium Whole Life in which the death benefit exceeds the account value. Policy benefits were $7.4 million and $6.7 million for the three months ended March 31, 2003 and 2002, respectively.

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Operating expenses primarily represent compensation, general and administrative expenses. Effective January 1, 2002, Sun Life Assurance Company of Canada (U.S.) ("SLUS") became the employer of record for most United States affiliates of Sun Life Financial Services of Canada Inc. In accordance with an administrative services agreement between and among SLUS, Sun Life Assurance Company of Canada ("SLOC") and the Company, SLUS allocates operating expenses back to the Company. These expenses include corporate, general, and administrative expenses, corporate overhead, such as executive and legal support, employee benefits, and investment management services. Management believes inter-company expenses are calculated on a reasonable basis. However, these amounts may not necessarily be indicative of the costs that would be incurred if the Company operated on a stand-alone basis.

Operating expenses were $23.1 million and $19.8 million for the three months ended March 31, 2003 and 2002, respectively. The primary increase in operating expenses for the three month period ended March 31, 2003 compared to the same period in the prior year is attributed to the interest expense of $5.5 million relating to the $380 million promissory note issued to Sun Life (Hungary) Group Financing Limited Liability Company.

Amortization of deferred policy acquisition costs relates to the costs of acquiring new business, which vary with, and are primarily related to, the production of new annuity business. Such acquisition costs included commissions, costs of policy issuance, underwriting and selling expenses. Deferred policy acquisition costs, net of amortization and adjustment for amounts relating to unrealized gains and losses on available for sale fixed-maturity securities, amounted to $253.3 million and $209.8 million at March 31, 2003 and December 31, 2002, respectively. This amount represents the cost of acquiring new business since November 1, 2001. Amortization was $0.3 million and $3.1 million for the three months ended March 31, 2003 and 2002, respectively.

Amortization of value of business acquired relates to the actuarial-determined present value of projected future gross profits from policies in force at the date of the Company's acquisition (November 1, 2001). This amount is amortized in proportion to the projected emergence of profits over the estimated lives of the contracts. Interest is accrued on the unamortized balance at the contract rate of 5% for the three months ended March 31, 2003. Value of business acquired, net of amortization and adjustment for amounts relating to unrealized gains and losses on available for sale fixed-maturity securities, amounted to $57.0 million and $57.7 million at March 31, 2003 and December 31, 2002, respectively. Amortization was $(1.3) million and $7.9 million for the three months ended March 31, 2003 and 2002, respectively.

Federal income tax (benefit) expense was $(10.1) million or 35.0 % and $17.3 million or 35.0 % of pretax income for the three months ended March 31, 2003 and 2002, respectively.

Minority Interest relates to SLUS's 33% ownership interest in SLNY. On December 31, 2002, the Company acquired a 67% interest in SLNY, an affiliated company, in exchange for its interest in its wholly owned subsidiary, KBL. SLNY was merged with KBL on December 31, 2002 and SLNY was the surviving entity. The Company's net income is adjusted to record SLUS's 33% minority interest share of $0.8 million and $0.4 million for the three months ended March 31, 2003 and 2002, respectively.

Stockholder's equity was $1.978 billion as of March 31, 2003, compared to $1.954 billion as of December 31, 2002.

The Company's primary investment objective is to maximize after-tax returns on the products issued within acceptable risk parameters. The Company is exposed to two primary types of investment risk:

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For a more detailed discussion of the Company's interest rate risk management policies, practices and procedures, please see the Interest Rate Risk Management section in the Quantitative and Qualitative Disclosures about Market Risk section of this document.

The Company manages exposure to credit risk through internal analyses of a given investment. The Company's corporate bond staff applies a wide range of qualitative input and quantitative tools in assessing an issuer's credit risk. The credit analysts apply industry and financial knowledge to assess an issuer's ability to succeed within a broader economic framework. The Company's analysts work with legal staff and portfolio management to assess transaction structure and risks to promote appropriate covenant protection as well as investment diversification and asset allocation. The Company relies on its credit team's ability to analyze a wide range of public and private bond issues and structures and to acquire the investments needed to profitably fund the Company's liability requirements.

The Company regularly reviews its bond portfolios relative to any change in specific issuer performance, external and internal ratings, industry conditions, financial ratios, and changes in investment value. Such analysis is undertaken to determine that the integrity of the Company's investments remains sound and to review for other-than-temporary impairments.

Within the pricing of the Company's products, it has included provisions for expected default losses over the long term. This expectation is reassessed on a regular basis to determine the adequacy of the estimate. However, actual losses may prove to be above or below the expected loss rate. The overall economic environment will also impact the market value of the portfolio through both interest rate changes and the response of credit spreads to changes in the business cycle. The Company's credit function and capital base generally permit it to pursue a buy and hold strategy which balances assets and liabilities with the intent of withstanding near-term swings in the broader economy.

The composition of the investments in the Company's general account portfolio is as follows at March 31, 2003 and December 31, 2002 (in thousands):