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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934


OR

o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2003

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

Incorporated in Arizona
    
    86-0198983
IRS Employer
Identification No.


1 SunAmerica Center, Los Angeles, California 90067-6022
Registrants telephone number, including area code: (310) 772-6000

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 o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934). Yes o No x

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON
NOVEMBER 14, 2003 WAS AS FOLLOWS:

Common Stock (par value $1,000 per share)
    
    3,511 shares outstanding


THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT





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TABLE OF CONTENTS



|                  |                                                                                       |  |  |  |  |  |  | 
|----------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                  | BALANCE SHEET                                                                        
|                  | STATEMENT OF INCOME AND COMPREHENSIVE INCOME                                         
|                  | STATEMENT OF CASH FLOWS                                                              
|                  | NOTES TO FINANCIAL STATEMENTS                                                        
|                  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                  | CONTROLS & PROCEDURES                                                                
|OTHER INFORMATION
|SIGNATURES       
|Exhibit Index    
|EXHIBIT 31.1     
|EXHIBIT 31.2     
|EXHIBIT 32       



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AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

PageNumber(s)Part I   Financial InformationBalance Sheet (Unaudited)  September 30, 2003
and December 31, 2002
    
    
    3-4Statement of Income and Comprehensive Income
(Unaudited)  Three Months and Nine Months
Ended September 30, 2003 and 2002
    
    
    5-6Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2003 and 2002
    
    
    7-8Notes to Financial Statements (Unaudited)
    
    
    9-10Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11-33Quantitative and Qualitative Disclosures About
Market Risk
    
    
    34Controls and Procedures
    
    
    35Part II   Other Information
    
    
    36Exhibits and Reports on Form 8-K
    
    
    38-41






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AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET
(Unaudited)

September 30,
    
    December 31,2003
    
    2002(in thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    303,510
    
    
    $
    65,872Bonds, notes and redeemable
preferred stocks available for sale, at
fair value (amortized cost: September 30,
2003, $5,547,707; December 31, 2002,
$5,492,677)
    
    
    5,714,691
    
    
    
    5,528,569Mortgage loans
    
    
    747,274
    
    
    
    738,601Policy loans
    
    
    202,894
    
    
    
    215,846Separate account seed money
    
    
    23,583
    
    
    
    25,366Common stocks available for sale, at
fair value (cost: September 30, 2003 and
December 31, 2002, $4,111)
    
    
    4,410
    
    
    
    2,609Real estate
    
    
    22,091
    
    
    
    22,315Securities lending collateral
    
    
    254,653
    
    
    
    585,760Other invested assets
    
    
    10,722
    
    
    
    8,766Total investments and cash
    
    
    7,283,828
    
    
    
    7,193,704Variable annuity assets held in separate
accounts
    
    
    17,136,593
    
    
    
    14,758,642Accrued investment income
    
    
    82,764
    
    
    
    75,326Deferred acquisition costs
    
    
    1,391,790
    
    
    
    1,364,748Income taxes currently receivable from Parent
    
    
    67,379
    
    
    
    100,123Due from affiliates
    
    
    
    
    
    
    26,304Goodwill
    
    
    4,603
    
    
    
    4,603Other assets
    
    
    23,081
    
    
    
    15,382TOTAL ASSETS
    
    $
    25,990,038
    
    
    $
    23,538,832


See accompanying notes to financial statements

3



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET (Continued)
(Unaudited)

September 30,
    
    December 31,2003
    
    2002(in thousands)LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity contracts
    
    $
    4,437,537
    
    
    $
    4,285,098Reserves for universal life insurance
contracts
    
    
    1,623,191
    
    
    
    1,676,073Reserves for guaranteed investment
contracts
    
    
    357,676
    
    
    
    359,561Securities lending payable
    
    
    254,653
    
    
    
    585,760Modified coinsurance deposit liability
    
    
    12,434
    
    
    
    31,393Due to affiliates
    
    
    13,418
    
    
    
    Payable to brokers
    
    
    227,862
    
    
    
    8,529Other liabilities
    
    
    157,855
    
    
    
    160,265Total reserves, payables and accrued
liabilities
    
    
    7,084,626
    
    
    
    7,106,679Variable annuity liabilities related to
separate accounts
    
    
    17,136,593
    
    
    
    14,758,642Deferred income taxes
    
    
    338,358
    
    
    
    351,872Total liabilities
    
    
    24,559,577
    
    
    
    22,217,193Shareholders equity:Common stock
    
    
    3,511
    
    
    
    3,511Additional paid-in capital
    
    
    1,125,753
    
    
    
    1,125,753Retained earnings
    
    
    222,363
    
    
    
    175,871Accumulated other comprehensive income
    
    
    78,834
    
    
    
    16,504Total shareholders equity
    
    
    1,430,461
    
    
    
    1,321,639TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    25,990,038
    
    
    $
    23,538,832


See accompanying notes to financial statements

4



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and nine months ended September 30, 2003 and 2002
(Unaudited)

Three Months
    
    Nine Months2003
    
    2002
    
    2003
    
    2002(In thousands)REVENUESFee income:Variable annuity policy fees
    
    $
    74,490
    
    
    $
    67,999
    
    
    $
    207,516
    
    
    $
    229,758Universal life insurance policy fees
    
    
    8,192
    
    
    
    8,544
    
    
    
    26,540
    
    
    
    26,799Surrender charges
    
    
    6,895
    
    
    
    9,143
    
    
    
    21,249
    
    
    
    24,001Other fees
    
    
    
    
    
    
    932
    
    
    
    
    
    
    
    2,964Total fee income
    
    
    89,577
    
    
    
    86,618
    
    
    
    255,305
    
    
    
    283,522Investment income
    
    
    99,845
    
    
    
    98,633
    
    
    
    300,116
    
    
    
    289,853Net realized investment losses
    
    
    (17,940
    )
    
    
    (17,478
    )
    
    
    (26,570
    )
    
    
    (31,192
    )Total revenues
    
    
    171,482
    
    
    
    167,773
    
    
    
    528,851
    
    
    
    542,183BENEFITS AND EXPENSESInterest expense:Fixed annuity contracts
    
    
    38,482
    
    
    
    36,689
    
    
    
    116,575
    
    
    
    104,524Universal life insurance contracts
    
    
    19,303
    
    
    
    20,658
    
    
    
    57,142
    
    
    
    60,292Guaranteed investment contracts
    
    
    2,042
    
    
    
    2,679
    
    
    
    6,089
    
    
    
    8,776Securities lending agreements
    
    
    722
    
    
    
    3,653
    
    
    
    4,168
    
    
    
    9,688Total interest expense
    
    
    60,549
    
    
    
    63,679
    
    
    
    183,974
    
    
    
    183,280General and administrative expenses
    
    
    18,992
    
    
    
    12,818
    
    
    
    59,281
    
    
    
    51,200Amortization of deferred acquisition
costs
    
    
    44,400
    
    
    
    50,701
    
    
    
    123,477
    
    
    
    158,058Annual commissions
    
    
    11,422
    
    
    
    13,607
    
    
    
    41,595
    
    
    
    45,227Claims on universal life contracts,
net of reinsurance recoveries
    
    
    4,022
    
    
    
    4,621
    
    
    
    15,255
    
    
    
    12,530Guaranteed minimum death benefits,
net of reinsurance recoveries
    
    
    14,723
    
    
    
    30,935
    
    
    
    51,182
    
    
    
    48,687Total benefits and expenses
    
    
    154,108
    
    
    
    176,361
    
    
    
    474,764
    
    
    
    498,982PRETAX INCOME (LOSS)
    
    
    17,374
    
    
    
    (8,588
    )
    
    
    54,087
    
    
    
    43,201Income tax expense (benefit)
    
    
    4,215
    
    
    
    (2,544
    )
    
    
    7,595
    
    
    
    5,225NET INCOME (LOSS)
    
    $
    13,159
    
    
    $
    (6,044
    )
    
    $
    46,492
    
    
    $
    37,976


See accompanying notes to financial statements

5



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)
For the three months and nine months ended September 30, 2003 and 2002
(Unaudited)

Three Months
    
    Nine Months2003
    
    2002
    
    2003
    
    2002(In thousands)OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:Net unrealized (losses) gains on
debt and equity securities
available for sale identified in
the current period
    
    $
    (17,432
    )
    
    $
    50,111
    
    
    $
    79,494
    
    
    $
    70,898Less reclassification adjustment
for net realized losses included
in net income
    
    
    11,645
    
    
    
    12,631
    
    
    
    16,400
    
    
    
    23,462Change related to cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,218
    )Income tax benefit (expense)
    
    
    2,025
    
    
    
    (21,960
    )
    
    
    (33,564
    )
    
    
    (32,250
    )OTHER COMPREHENSIVE (LOSS) INCOME
    
    
    (3,762
    )
    
    
    40,782
    
    
    
    62,330
    
    
    
    59,892COMPREHENSIVE INCOME
    
    $
    9,397
    
    
    $
    34,738
    
    
    $
    108,822
    
    
    $
    97,868


See accompanying notes to financial statements

6



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2003 and 2002
(Unaudited)

2003
    
    2002(In thousands)CASH FLOW FROM OPERATING ACTIVITIES:Net income
    
    $
    46,492
    
    
    $
    37,976Adjustments to reconcile net income to
net cash provided by operating activities:Interest credited to:Fixed annuity contracts
    
    
    116,575
    
    
    
    104,524Universal life insurance contracts
    
    
    57,142
    
    
    
    60,292Guaranteed investment contracts
    
    
    6,089
    
    
    
    8,776Net realized investment losses
    
    
    26,570
    
    
    
    31,192Amortization of net premiums
on investments
    
    
    5,079
    
    
    
    185Amortization of deferred acquisition costs
    
    
    123,477
    
    
    
    158,058Acquisition costs deferred
    
    
    (187,519
    )
    
    
    (187,626
    )Provision for deferred income taxes
    
    
    (47,077
    )
    
    
    113,116Change in:Accrued investment income
    
    
    (7,438
    )
    
    
    (10,822
    )Other assets
    
    
    (7,699
    )
    
    
    51Income taxes currently receivable from Parent
    
    
    32,744
    
    
    
    (53,341
    )Due from/to affiliates
    
    
    (10,278
    )
    
    
    (11,542
    )Other liabilities
    
    
    6,680
    
    
    
    13,293Other, net
    
    
    13,276
    
    
    
    15,841NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    174,113
    
    
    
    279,973CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds, notes and redeemable preferred stocks
    
    
    (1,431,013
    )
    
    
    (1,679,989
    )Mortgage loans
    
    
    (42,859
    )
    
    
    (94,360
    )Other investments, excluding short-term investments
    
    
    (14,970
    )
    
    
    (12,741
    )Sales of:Bonds, notes and redeemable preferred stocks
    
    
    803,180
    
    
    
    684,746Other investments, excluding short-term investments
    
    
    269
    
    
    
    609Redemptions and maturities of:Bonds, notes and redeemable preferred stocks
    
    
    767,055
    
    
    
    418,899Mortgage loans
    
    
    35,215
    
    
    
    71,964Other investments, excluding short-term investments
    
    
    70,107
    
    
    
    110,345NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    $
    186,984
    
    
    $
    (500,527
    )


See accompanying notes to financial statements

7



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the nine months ended September 30, 2003 and 2002
(Unaudited)

2003
    
    2002(In thousands)CASH FLOW FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity contracts
    
    $
    1,181,329
    
    
    $
    1,259,701Universal life insurance contracts
    
    
    34,176
    
    
    
    36,658Net exchanges from the fixed accounts of
variable annuity contracts
    
    
    (735,617
    )
    
    
    (281,274
    )Withdrawal payments on:Fixed annuity contracts
    
    
    (349,241
    )
    
    
    (392,719
    )Universal life insurance contracts
    
    
    (45,307
    )
    
    
    (52,433
    )Guaranteed investment contracts
    
    
    (7,647
    )
    
    
    (83,119
    )Claims and annuity payments on:Fixed annuity contracts
    
    
    (82,191
    )
    
    
    (72,794
    )Universal life insurance contracts
    
    
    (90,912
    )
    
    
    (76,362
    )Net repayments of other short-term financings
    
    
    (9,090
    )
    
    
    6,929Net payment related to a modified coinsurance
transaction
    
    
    (18,959
    )
    
    
    (23,511
    )Net cash and short-term investments transferred
to the Parent in the distribution of Saamsun
Holdings Corp.
    
    
    
    
    
    
    (82,873
    )NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (123,459
    )
    
    
    238,203NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS
    
    
    237,638
    
    
    
    17,649CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD
    
    
    65,872
    
    
    
    200,064CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD
    
    $
    303,510
    
    
    $
    217,713SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid on indebtedness
    
    $
    4,168
    
    
    $
    9,688Net income taxes (paid to) refunded by Parent
    
    $
    (21,928
    )
    
    $
    54,550


See accompanying notes to financial statements

8



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)



|1.   BASIS OF PRESENTATION |  | 
|-------------------------- |  | 

AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance
Company) (the Company) is a direct wholly owned subsidiary of SunAmerica Life
Insurance Company (the Parent), which is a wholly owned subsidiary of AIG
SunAmerica Inc. (SAI), a wholly owned subsidiary of American International
Group, Inc. (AIG). AIG is a holding company which through its subsidiaries
is engaged in a broad range of insurance and insurance-related activities,
financial services and retirement savings and asset management. The Company is
an Arizona-domiciled life insurance company principally engaged in the business
of writing variable annuities directed to the market for tax-deferred,
long-term savings products. It also administers closed blocks of fixed
annuities, universal life policies and guaranteed investment contracts (GICs)
directed to the institutional marketplace.

The Company changed its name to SunAmerica National Life Insurance Company on
October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance
Company on January 24, 2002. The Company continued to do business as Anchor
National Life Insurance Company until February 28, 2003, at which time it began
doing business under its new name.

In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments necessary, consisting of normal recurring items, to
present fairly the Companys financial position as of September 30, 2003 and
December 31, 2002, the results of its operations for the
three months and nine months ended September 30, 2003 and 2002
and its cashflows for the nine months ended September 30, 2003
and 2002. The results of
operations for the nine months ended September 30, 2003 are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2002,
contained in the Companys 2002 Annual Report on Form 10-K. Certain prior
period items have been reclassified to conform to the current periods
presentation.



|2.   CONTINGENT LIABILITIES |  | 
|--------------------------- |  | 

The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. In addition, the Company guarantees the payment of these
securities upon redemption. The maximum liability under these guarantees at
September 30, 2003 is $785,570,000. Related to each of these agreements are
participation agreements with the Parent under which the Parent will share in
$339,423,000 of these liabilities in exchange for a proportionate percentage of
the fees received under these agreements. The expiration dates and related
amounts of these commitments are as follows: $240,500,000 in 2004, $387,070,000
in 2005 and $158,000,000 in 2006. Management does not anticipate any material
losses with respect to these commitments.

9



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In the third quarter of 2002, the Company began issuing certain variable
annuity products which offer an optional Guaranteed Minimum Account Value
(GMAV) living benefit. As of September 30, 2003, the premiums subject to
guarantee totaled approximately $515,585,000 and the estimated fair values of
the GMAV benefit included in the accompanying statement of income and
comprehensive income were not material.

Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other similar types of matters are not considered material in relation to the
financial position, results of operations or cash flows of the Company.



|2.   RECENTLY ISSUED ACCOUNTING STANDARDS |  |  | 
|----------------------------------------- |  |  | 

In November 2002, 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
45), which requires that, for guarantees within the scope of FIN 45 issued or
amended by the Company after December 31, 2002, a liability for the fair value
of the obligation undertaken in issuing the guarantee be recognized. FIN 45
also requires additional disclosures in financial statements starting with the
Companys 2002 year-end financial statements. The adoption of FIN 45 did not
have a significant impact on the Companys results of operations or financial
condition.

In July 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Non-traditional Long-Duration Contracts and for
Separate Accounts (SOP-03-1). This statement is effective for the Company as
of January 1, 2004. Under SOP 03-1, variable annuity assets held in separate
accounts will continue to be measured at fair value and reported in summary
total on the Companys financial statements, with an equivalent summary total
reported for related liabilities, if the separate account arrangement meets
certain specified conditions. Assets underlying the Companys interest in a
separate account (separate account seed money) do not qualify for separate
account accounting and reporting. The Company will be required to look
through the separate account for purposes of accounting for its interest
therein, and account for and classify separate account seed money based on its
nature as if the assets of the separate account underlying the Companys
interest were held directly by the general account rather than through the
separate account structure. The adoption of SOP 03-1 will not have a material
impact on the Companys separate accounts or separate account seed money.

In addition, SOP 03-1 will require the Company to recognize a liability for
guaranteed minimum death benefits, guaranteed minimum income benefits and
enhanced earnings benefits and modify certain disclosures and financial
statement presentations for these products. The Company continues to evaluate
the provisions of SOP 03-1. Management currently expects the one-time
cumulative accounting charge upon adoption to approximate $60 million after
taxes, to be recorded in the first quarter of 2004, which is not material to the Companys financial condition or liquidity.

10



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements discussion and analysis of financial condition and results of
operations of AIG SunAmerica Life Assurance Company (FKA Anchor National Life
Insurance Company) (the Company) for the three months and nine months ended
September 30, 2003 and September 30, 2002 follows. Certain prior period
amounts have been reclassified to conform to the current periods presentation.

In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with
the Securities and Exchange Commission (the SEC). Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as expect, anticipate, believe or words of similar
import generally involve forward-looking statements. Without limiting the
foregoing, forward-looking statements include statements which represent the
Companys beliefs concerning future levels of sales and redemptions of the
Companys products, investment spreads and yields, or the earnings and
profitability of the Companys activities.

Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Companys control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Companys investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.

CRITICAL ACCOUNTING POLICIES

The Company considers among its most critical accounting policies those
policies with respect to valuation of certain financial instruments and
amortization of deferred acquisition costs. In the implementation of each of
the aforementioned policies, management is required to exercise its judgment on
both a quantitative and qualitative basis. Further explanation of how
management exercises that judgment follows:

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on
debt and equity securities available for sale amounted to $84.2 million at
September 30, 2003 and $170.7 million at December 31, 2002. When a decline in
fair value below amortized cost is deemed to be other-than-temporary, the
Company recognizes an impairment loss in the current period operating results

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to the extent of the decline (See also discussion within Capital Resources and
Liquidity herein).

Securities in our portfolio with a carrying value of approximately $1.32
billion at September 30, 2003 do not have readily determinable market prices.
For these securities, we estimate their fair value with internally prepared
valuations (including those based on estimates of future profitability).
Otherwise, we use our most recent purchases and sales of similar unquoted
securities, independent broker quotes or comparison to similar securities with
quoted prices when possible to estimate the fair value of those securities.
All such securities are classified as available for sale. Our ability to
liquidate our positions in these securities will be impacted to a significant
degree by the lack of an actively traded market, and we may not be able to
dispose of these investments in a timely manner. Although we believe our
estimates reasonably reflect the fair value of those securities, our key
assumptions about the risk-free interest rates, risk premiums, performance of
underlying collateral, if any, and other factors may not reflect those of an
active market.

AMORTIZATION OF DEFERRED ACQUISITION COSTS: We amortize our deferred
acquisition costs (DAC) based on a percentage of expected gross profits
(EGPs) over the life of the underlying policies. EGPs are computed based on
assumptions related to the underlying policies written, including their
anticipated duration, the growth rate of the separate account assets (with
respect to variable annuities) or general account assets (with respect to fixed
annuities, fixed options of variable annuities and universal life contracts)
supporting the annuity obligations, the anticipated value of guaranteed minimum
death benefits to be paid, and the level of expenses necessary to maintain the
policies. The Company adjusts DAC amortization (a DAC unlocking) when
estimates of current or future gross profits to be realized from its annuity
policies are revised. Approximately 95% of the Companys DAC balance at
September 30, 2003 related to variable annuity products and 5% related to fixed
annuity and universal life products.

DAC amortization is sensitive to surrender rates, claims costs, and the
actual and assumed future growth rate of the assets supporting the Companys
obligations under annuity policies. With respect to fixed annuities, the
growth rate depends on the yield on the general account assets supporting those
annuities. With respect to variable annuities, the growth rate depends on the
performance of the investment options available under the annuity contract and
the allocation of assets among these various investment options.

The assumption we use for the long-term annual net growth of the separate
account assets in the determination of DAC amortization with respect to our
variable annuity policies is 10% (the long-term growth rate assumption). We
use a reversion to the mean methodology which allows us to maintain this 10%
long-term growth rate assumption, while also giving consideration to the effect
of short-term swings in the equity markets. For example, if performance were
15% during the first year following the introduction of a product, the DAC
model would assume that market returns for the following five years (the
short-term growth rate assumption) would be approximately 9%, resulting in an
average annual growth rate of 10% during the life of the product. Similarly,
following periods of below 10% performance, the model will assume a short-term
growth rate higher than 10%. A DAC unlocking will occur if management deems
the short-term growth rate assumption (i.e., the growth rate required to revert
to the mean 10% growth rate over a five-year period) to be unreasonable. The
use of a reversion to

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the mean assumption is common within the industry; however, the parameters
used in the methodology are subject to judgment and vary within the industry.

BUSINESS SEGMENTS

The Company has one business segment, annuity operations, which consists
of the sale and administration of deposit-type insurance contracts, such as
fixed and variable annuities and universal life insurance contracts. The
Company focuses primarily on the marketing of variable annuity products. The
variable annuity products offer investors a broad spectrum of fund
alternatives, with a choice of investment managers, as well as guaranteed
fixed-rate account options. The Company earns fee income on investments in the
variable account options and net investment spread on the fixed-rate account
options.

On June 10, 2002, the Company entered into a profit sharing agreement with
AIG SunAmerica Asset Management Corp. (SAAMCO), an affiliate, whereby SAAMCO
will contribute to the Company on a quarterly basis its profits earned in
connection with its role as investment advisor and/or business manager to
several open-end investment management companies registered under the
Investment Company Act of 1940, as amended, that fund the variable investment
options available to investors through the Companys variable annuity contracts
(the SAAMCO Agreement). The SAAMCO Agreement was retroactive to January 1,
2002. Amounts paid to or accrued by the Company under this agreement totaled
$14.4 million for the third quarter of 2003 and $38.9 million for the nine
months of 2003. Amounts paid to or accrued by the Company under this agreement
totaled $12.6 million for the third quarter of 2002 and $42.4 million for the
nine months of 2002.

RESULTS OF OPERATIONS

NET INCOME totaled $13.2 million in the third quarter of 2003, compared to
a net loss of $6.0 million in the third quarter of 2002. For the nine months,
net income amounted to $46.5 million in 2003, compared to $38.0 million in
2002.

PRETAX INCOME totaled $17.4 million in the third quarter of 2003, compared
to pretax loss of $8.6 million in the third quarter of 2002. For the nine
months, pretax income totaled $54.1 million in 2003, compared to $43.2 million
in 2002. The increase in the third quarter of 2003 primarily resulted from
decreased guaranteed minimum death benefits, decreased amortization of deferred
acquisition costs and increased variable annuity fee income, offset by
increased general and administrative expenses. The increase in the nine months
of 2003 primarily resulted from decreased amortization of deferred acquisition
costs, increased investment income and decreased net realized investment
losses, offset by decreased variable annuity fee income, increased general and
administrative expenses and increased guaranteed minimum death benefits.

NET INVESTMENT SPREAD, which is the spread between the income earned on
invested assets and the interest credited to fixed annuity contracts and paid
on other interest-bearing liabilities, totaled $39.3 million in the third
quarter of 2003, compared to $35.0 million in the third quarter of 2002. These
amounts equal 2.27% on average invested assets (computed on a daily basis) of
$6.93 billion in the third quarter of 2003 and 2.01% on average invested assets
of $6.96 billion in the third quarter of 2002 on an

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annualized basis. For the nine months, net investment spread increased to
$116.1 million in 2003 from $106.6 million in 2002, representing 2.18% of
average invested assets of $7.12 billion in 2003 and 2.17% of average invested
assets of $6.56 billion in 2002 on an annualized basis.

Growth in average invested assets resulted primarily from sales of the
fixed account options of the Companys variable annuity products (Fixed
Annuity Deposits), and renewal deposits on its universal life product (UL
Deposits), partially offset by net exchanges from fixed accounts into the
separate accounts of variable annuity contracts. Sales of Fixed Annuity
Deposits and UL Deposits totaled $389.3 million in the third quarter of 2003
and $456.4 million in the third quarter of 2002, $1.22 billion in the nine
months of 2003 and $1.30 billion in the nine months of 2002, and are largely
deposits for the fixed accounts of variable annuities. On an annualized basis,
these deposits represent 25%, 34%, 27% and 33%, respectively, of the related
reserve balances at the beginning of the respective periods.

Under accounting principles generally accepted in the United States of
America, deposits collected on non-traditional life and annuity insurance
products, such as those sold by the Company, are not reflected as revenues in
the Companys statement of income, as they are recorded directly upon receipt
to reserves for fixed annuity and universal life contracts.

Net investment spreads include the effect of income earned or interest
paid on the difference between average invested assets and average
interest-bearing liabilities. Average invested assets exceeded average
interest-bearing liabilities by $245.4 million in the third quarter of 2003,
compared to $110.5 million in the third quarter of 2002. For the nine months,
average invested assets exceeded average interest-bearing liabilities by $252.9
million in 2003, compared with $87.6 million in 2002. The increase in 2003
reflected a $200.0 million capital contribution from the Parent in the third
quarter of 2002. The difference between the Companys yield on average
invested assets and the rate paid on average interest-bearing liabilities (the
Spread Difference) was 2.14% in the third quarter of 2003, 1.96% in the third
quarter of 2002, 2.05% in the nine months of 2003 and 2.11% in the nine months
of 2002.

Investment income (and the related yields on average invested assets)
totaled $99.8 million (5.76%) in the third quarter of 2003, $98.6 million
(5.67%) in the third quarter of 2002, $300.1 million (5.62%) in the nine months
of 2003 and $289.9 million (5.89%) in the nine months of 2002. The increase in
the investment yield in the third quarter of 2003 is due to the impact of $1.6
million of seed money gains in 2003 versus $1.8 million of seed money losses in
2002. Excluding the impact of seed money investment gains/losses, investment
returns would have been 5.66% in the third quarter of 2003 and 5.76% in the
third quarter of 2002. The decrease in the investment yield in 2003 compared
to 2002 primarily reflects a lower prevailing interest rate environment.
Investment income has been reduced by expenses incurred to manage the
investment portfolio of $0.6 million in the third quarter of 2003, $0.5 million
in the third quarter of 2002, $1.7 million in the nine months of 2003 and $1.5
million in the nine months of 2002.

Interest expense totaled $60.5 million in the third quarter of 2003 and
$63.7 million in the third quarter of 2002. For the nine months, interest
expense aggregated $184.0 million in 2003, compared with $183.3 million in

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2002. The average rate paid on all interest-bearing liabilities was 3.62% in
the third quarter of 2003, compared to 3.72% in the third quarter of 2002.
For the nine months, the average rate paid on all interest-bearing liabilities
was 3.57% in 2003 and 3.78% in 2002. Interest-bearing liabilities averaged
$6.69 billion during the third quarter of 2003, $6.85 billion during the third
quarter of 2002, $6.87 billion during the nine months of 2003 and $6.47 billion
during the nine months of 2002. The decline in the overall rates paid in 2003
compared to 2002 resulted primarily from the impact of a declining interest
rate environment.

NET REALIZED INVESTMENT LOSSES totaled $17.9 million in the third quarter
of 2003 and $17.5 million in the third quarter of 2002 and include impairment
writedowns of $20.3 million and $10.5 million, respectively. For the nine
months, net realized investment losses totaled $26.6 million in 2003, compared
with $31.2 million in 2002 and include impairment writedowns of $35.9 million
and $22.0 million, respectively. Thus, net realized gains from sales and
redemptions of investments totaled $2.4 million in the third quarter of 2003,
compared to net realized losses of $7.0 million in the third quarter of 2002.
For the nine months, net realized gains from sales and redemptions of
investments totaled $9.3 million in 2003, compared to net realized losses of
$9.2 million in 2002.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $265.4 million in the third quarter of 2003, $517.9 million in the
third quarter of 2002, $1.62 billion in the nine months of 2003 and $1.22
billion in the nine months of 2002. Sales of investments result from the
active management of the Companys investment portfolio. Because redemptions
of investments are generally involuntary and sales of investments are made in
both rising and falling interest rate environments, net gains and losses from
sales and redemptions of investments fluctuate from period to period, and, on
an annualized basis, represent 0.14%, 0.40%, 0.17% and 0.19% of average
invested assets in the third quarter of 2003, the third quarter of 2002, the
nine months of 2003 and the nine months of 2002, respectively. Active
portfolio management involves the ongoing evaluation of asset sectors,
individual securities within the investment portfolio and the reallocation of
investments from sectors that are perceived to be relatively overvalued to
sectors that are perceived to be relatively undervalued. The intent of the
Companys active portfolio management is to maximize total returns on the
investment portfolio, taking into account credit, option, liquidity and
interest-rate risk.

Impairment writedowns include $20.3 million, $10.5 million, $35.9 million
and $22.0 million of provisions applied to bonds, partnerships and other
invested assets in the third quarter of 2003, the third quarter of 2002, the
nine months of 2003 and the nine months of 2002, respectively. On an
annualized basis, impairment writedowns represent 1.17%, 0.60%, 0.67% and 0.45%
of average invested assets in the respective periods. For the twenty quarters
ended September 30, 2003, impairment writedowns, as an annualized percentage of
average invested assets, have ranged from 0.03% to 1.95% and have averaged
0.62%. Such writedowns are based upon estimates of the fair value of invested
assets and recorded when declines in value of such assets are considered to be
other than temporary. Actual realization will be dependent upon future events.

VARIABLE ANNUITY POLICY FEES are based on the market value of assets in
separate accounts supporting variable annuity contracts. Such fees totaled

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$74.5 million in the third quarter of 2003 and $68.0 million in the third
quarter of 2002 and are net of reinsurance premiums of $8.9 million and $6.1
million, respectively. These amounts include $15.7 million and $14.6
million attributable to the SAAMCO Agreement, respectively. For the nine
months, variable annuity fees totaled $207.5 million in 2003, compared to
$229.8 million in 2002 and are net of reinsurance premiums of $23.0 million and
$15.8 million, respectively. These amounts include $43.8 million and $48.4
million attributable to the SAAMCO Agreement, respectively. The increased fees
in the third quarter of 2003 as compared to 2002 reflect the improved equity
market conditions during the period, and the resulting favorable impact on
market values of assets in the separate accounts. The decreased fees in the
nine months of 2003 as compared to the nine months of 2002 primarily reflect
the unfavorable equity market conditions in 2002 and the early part of 2003,
and the resulting unfavorable impact on market values of the assets in the
separate accounts. On an annualized basis, variable annuity fees represent
1.8% of average variable annuity assets in all periods. Variable annuity
assets averaged $16.88 billion, $15.14 billion, $15.68 billion and $17.03
billion during the respective periods. Variable annuity deposits, which
exclude deposits allocated to the fixed accounts of variable annuity products,
totaled $484.1 million and $236.5 million in the third quarters of 2003 and
2002, respectively. For the nine months, variable annuity deposits totaled
$1.21 billion in 2003, compared with $873.2 million in 2002. On an annualized
basis, these amounts represent 12%, 6%, 11% and 6% of separate account
liabilities at the beginning of the respective periods. Transfers from the
fixed accounts of the Companys variable annuity products to the separate
accounts are not classified as variable annuity deposits. Accordingly, changes
in variable annuity deposits are not necessarily indicative of the ultimate
allocation by customers among fixed and variable account options of the
Companys variable annuity products.

Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $863.2
million, $680.3 million, $2.39 billion and $2.13 billion in the third quarters
of 2003 and 2002 and nine months of 2003 and 2002, respectively. Such sales
primarily reflect those of the Companys Polaris, Seasons and Diversified
Strategies variable annuity products. The Companys variable annuity products
are multi-manager variable annuities that offer investors a choice of several
variable funds as well as a number of guaranteed fixed-rate funds. Investors
can select from a choice of 4 to 41 variable funds and up to 7 guaranteed
fixed-rate funds depending on the product. The increase in Variable Annuity
Product Sales reflect improving market conditions as well as sales of the
Companys new products, primarily Polaris Platinum II. Introduced in late
2002, Polaris Platinum II product sales totaled $222.4 million in the third
quarter of 2003 and $538.8 million in the nine months of 2003.

The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time,
Federal initiatives are proposed that could affect the taxation of annuities
(see Regulation).

UNIVERSAL LIFE INSURANCE POLICY FEES amounted to $8.2 million in the third
quarter of 2003 and $8.5 million in the third quarter of 2002. For the nine
months, universal life insurance policy fees totaled $26.5 million in 2003 and
$26.8 million in 2002. Universal life insurance policy fees consist of
mortality charges, up-front fees earned on deposits received and

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administrative
fees, net of reinsurance premiums. The administrative fees are assessed based
on the number of policies in force as of the end of each
month. The Company acquired its universal life contracts as part of the
acquisition of business from MBL Life Assurance Corporation on December 31,
1998 and does not actively market such contracts. Such fees annualized
represent 2.1%, 2.1%, 2.2% and 2.1% of average reserves for universal life
insurance contracts in the respective periods.

SURRENDER CHARGES on fixed annuity, variable annuity and universal life
contracts totaled $6.9 million in the third quarter of 2003 and $9.1 million in
the third quarter of 2002. For the nine months, such surrender charges totaled
$21.2 million in 2003 and $24.0 million in 2002. Surrender charge periods
range from zero to nine years from the date a deposit is received. Surrender
charges generally are assessed on withdrawals at declining rates during the
first seven or nine years following receipt of the deposit. Withdrawal
payments, which exclude claims and annuitization benefits, totaled $525.4
million in the third quarter of 2003, compared to $630.1 million in the third
quarter of 2002. For the nine months, such withdrawal payments totaled $1.57
billion in 2003 and $1.68 billion in 2002. Annualized, these payments when
expressed as a percentage of average related reserves represent 9.3%, 12.3%,
9.7% and 10.1% for the third quarters of 2003 and 2002 and nine months of 2003
and 2002, respectively. Withdrawals from the variable annuity separate
accounts totaled $408.7 million (annualized representing 9.7% of average
variable annuity liabilities), $403.3 million (annualized representing 10.7% of
average variable annuity liabilities), $1.18 billion (annualized representing
10.1% of average variable annuity liabilities) and $1.24 billion (annualized
representing 9.7% of average variable annuity liabilities) in the third
quarters and nine months of 2003 and 2002, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $19.0 million in the third
quarter of 2003 and $12.8 million in the third quarter of 2002. For the nine
months, general and administrative expenses totaled $59.3 million in 2003 and
$51.2 million in 2002. General and administrative expenses were lower in the
third quarter of 2002 primarily due to lower expenses relating to the Companys
modified coinsurance transaction, certain premium tax refunds, and lower programming and other operating
expenses. Current quarter general and administrative expenses are
more indicative of ongoing operations. General and administrative expenses remain closely controlled
through a company-wide cost containment program and continue to represent less
than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $44.4 million in the
third quarter of 2003, compared to $50.7 million in the third quarter of 2002.
For the nine months, such amortization totaled $123.5 million in 2003, compared
to $158.1 million in 2002. The decrease in amortization in the
nine months of 2003 was primarily
related to the decreased variable annuity policy fee income and increased
guaranteed minimum death benefits.

ANNUAL COMMISSIONS totaled $11.4 million in the third quarter of 2003,
compared to $13.6 million in the third quarter of 2002. For the nine months,
annual commissions amounted to $41.6 million in 2003 and $45.2 million in 2002.
Annual commissions represent renewal commissions paid quarterly in arrears to
maintain the persistency of certain of the Companys variable annuity
contracts. Substantially all of the Companys currently available variable
annuity products allow for an annual commission payment option in return for a
lower immediate commission. The vast majority of the Companys average
balances of its variable annuity products are currently subject to

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such annual
commissions. These commissions are expected to increase in future periods.

CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled
$4.0 million in the third quarter of 2003, compared to $4.6 million in the
third quarter of 2002 (net of reinsurance recoveries of $9.0 million in 2003
and $12.1 million in 2002). For the nine months, such claims totaled $15.3
million in 2003 and $12.5 million in 2002 (net of reinsurance recoveries of
$26.8 million in 2003 and $22.7 million in 2002). The increase in such claims
in 2003 resulted principally from increased mortality experience, which
fluctuates and cannot necessarily be expected to continue in future periods.

GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (Net
GMDB) on variable annuity contracts totaled $14.7 million in the third quarter
of 2003, compared to $30.9 million in the third quarter of 2002 (net of
reinsurance recoveries of $1.3 million in 2003 and $3.0 million in 2002). For
the nine months, Net GMDB amounted to $51.2 million in 2003 and $48.7 million
in 2002 (net of reinsurance recoveries of $7.1 million in 2003 and $5.7 million
in 2002). Net GMDB consists primarily of guaranteed minimum death benefits as
well as immaterial amounts of earnings enhancement benefits, guaranteed minimum
income benefits and guaranteed minimum account value benefits. These
guarantees are described in more detail in the following paragraphs. The
decrease in Net GMDB for the quarter, reflects the upturn in the equity markets
in the second and third quarters of 2003. The increase in Net GMDB in 2003
reflects the downturn in the equity markets in 2002 and early part of 2003
partially offset by the upturn in the equity markets in the second and third
quarters of 2003. Further downturns in the equity markets could increase these
expenses.

A majority of the Companys variable annuity products are issued with a
death benefit feature which provides that, upon the death of a contractholder,
the contractholders beneficiary will receive the greater of (1) the
contractholders account value, or (2) a guaranteed minimum death benefit that
varies by product (the GMDB). The Company bears the risk that death claims
following a decline in the equity markets may exceed contractholder account
balances, and that the fees collected under the contract are insufficient to
cover the costs of the benefit to be provided. At September 30, 2003, a
portion of the GMDB risk on approximately 31% of the account value with such
features had been reinsured. Approximately half of this reinsurance will cease
at the time the modified coinsurance deposit liability is fully paid down,
which is presently estimated to occur in early 2004. A substantial majority of
all new contracts sold have reinsurance coverage. However, the Company does
not currently have reinsurance coverage on contracts to be sold after 2003.
Reinsurance coverage is subject to limitations such as caps and deductibles.
GMDB-related contractholder benefits incurred, net of related reinsurance, were
$14.7 million (net of reinsurance recoveries of $1.3 million) for the third
quarter of 2003 and $30.9 million (net of reinsurance recoveries of $3.0
million) for the third quarter of 2002. GMDB-related contractholder benefits
incurred, net of related reinsurance, were $51.2 million (net of reinsurance
recoveries of $7.1 million) for the nine months of 2003 and $48.7 million (net
of reinsurance recoveries of $5.7 million) for the nine months of 2002. In
accordance with Generally Accepted Accounting Principles, the Company expenses
such benefits in the period incurred, and therefore does not provide

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reserves
for future benefits. However, effective January 1, 2004, the Company will be
required to record a liability for GMDBs (See Note 3 of Notes to Financial
Statements).

EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional Earnings Enhancement Benefit (EEB)
feature. For contractholders who elect the feature, the EEB provides an
additional death benefit amount equal to a fixed percentage of earnings in the
contract, subject to certain maximums. The Company bears the risk that account
values following favorable performance of the financial markets will result in
greater EEB death claims and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. At September
30, 2003, approximately 8% (calculated based on current account value) of
in-force contracts include EEB coverage, with 97% of the EEB risk fully
reinsured.

GUARANTEED MINIMUM INCOME BENEFIT (GMIB): The Company issues certain
variable annuity products that contain or offer a Guaranteed Minimum Income
Benefit (GMIB) living benefit feature. This feature provides a minimum annuity
payment guarantee for those contractholders who choose to receive fixed
lifetime annuity payments after a seven, nine, or ten-year waiting period in
their deferred annuity contracts. The Company bears the risk that the
performance of the financial markets will not be sufficient for accumulated
policyholder account balances to support GMIB benefits and that the fees
collected under the contract are insufficient to cover the costs of the benefit
to be provided. For contracts sold prior to September 30, 2003, substantially
all of the Companys products containing the GMIB feature have been reinsured;
furthermore, substantially all of the GMIB risk per individual reinsured
contract has been transferred to the reinsurer.

GUARANTEED MINIMUM ACCOUNT VALUE (GMAV): In the third quarter of 2002,
the Company began issuing certain variable annuity products that offer an
optional Guaranteed Minimum Account Value (GMAV) living benefit. If elected by
the policyholder at the time of contract issuance, this feature guarantees that
the account value under the contract will equal or exceed the amount of the
initial principal invested, adjusted for withdrawals, at the end of a ten-year
waiting period. The Company bears the risk that protracted under-performance
of the financial markets could result in GMAV guarantees being higher than the
underlying contractholder account balance and that the fees collected under
the contract are insufficient to cover the costs of the benefit to be provided.
As of September 30, 2003, the premiums subject to guarantee totaled
approximately $515 million, and the estimated fair values of the GMAV benefit
included in the accompanying statement of income and comprehensive income were
not material.

With respect to its reinsurance agreements, the Company could become
liable for all obligations of the reinsured policies if the reinsurers were to
become unable to meet the obligations assumed under the respective reinsurance
agreements. The Company monitors its credit exposure with respect to these
agreements. However, due to the credit ratings and continuous monitoring of
the ratings of these reinsurers, such risks are considered to be minimal.

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INCOME TAXES totaled $4.2 million of tax expense in the third quarter of
2003, $2.5 million of tax benefit in the third quarter of 2002, $7.6 million of
tax expense in the nine months of 2003 and $5.2 million of tax expense in the
nine months of 2002, representing effective annualized tax rates of 24%, 30%,
14% and 12%, respectively. The increase in the tax rate in the third quarter
of 2003 is the result of an adjustment increasing the current estimated annual
tax rate due to a change in estimated permanent tax
differences. The benefit recorded in the third quarter of 2002 is the
result of an adjustment reducing the current estimated annual tax rate as a
result of lower than expected relative pretax income without corresponding
reductions in permanent tax differences.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY increased to $1.43 billion at September 30, 2003 from
$1.32 billion at December 31, 2002. The increase reflected net income of $46.5
million and other comprehensive income of $62.3 million.

INVESTMENTS AND CASH at September 30, 2003 totaled $7.28 billion, compared
to $7.19 billion at December 31, 2002. The Companys invested assets are
managed by its affiliates. The following table summarizes the Companys
portfolio of bonds, notes and redeemable preferred stocks (the Bond
Portfolio) and other investments and cash at September 30, 2003 and December
31, 2002:

September 30, 2003
    
    December 31, 2002Carrying
    
    Percent of
    
    Carrying
    
    Percent ofValue
    
    Portfolio
    
    Value
    
    PortfolioBond Portfolio:
    
    (In thousands, except for percentages)U.S. government securities
    
    $
    19,782
    
    
    
    0.3
    %
    
    $
    32,820
    
    
    
    0.5
    %Mortgage-backed securities
    
    
    1,242,252
    
    
    
    17.1
    
    
    
    1,547,568
    
    
    
    21.5Other bonds, notes and
redeemable preferred
stocks
    
    
    4,452,657
    
    
    
    61.1
    
    
    
    3,948,181
    
    
    
    54.9Total Bond Portfolio
    
    
    5,714,691
    
    
    
    78.5
    
    
    
    5,528,569
    
    
    
    76.9Mortgage loans
    
    
    747,274
    
    
    
    10.2
    
    
    
    738,601
    
    
    
    10.3Common stocks
    
    
    4,410
    
    
    
    0.1
    
    
    
    2,609
    
    
    
    0.0Cash and short-term
investments
    
    
    303,510
    
    
    
    4.2
    
    
    
    65,872
    
    
    
    0.9Other
    
    
    513,943
    
    
    
    7.0
    
    
    
    858,053
    
    
    
    11.9Total investments and cash
    
    $
    7,283,828
    
    
    
    100.0
    %
    
    $
    7,193,704
    
    
    
    100.0
    %


The Companys general investment philosophy is to hold fixed-rate assets
for long-term investment. Thus, it does not have a trading portfolio.
However, the Company has determined that all of the Bond Portfolio is available
to be sold in response to changes in market interest rates, changes in relative
value of asset sectors and individual securities, changes in prepayment risk,
changes in the credit quality outlook for certain securities, the Companys
need for liquidity and other similar factors.

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THE BOND PORTFOLIO, which constituted 78% of the Companys total
investment portfolio at September 30, 2003, had an aggregate fair value that
was $167.0 million greater than its amortized cost at September 30, 2003,
compared with $35.9 million at December 31, 2002. The increase in net
unrealized gains on the Bond Portfolio during 2003 principally reflected the
impact of impairment writedowns in 2003 as well as the decrease in prevailing
interest rates and the corresponding effect on the fair value of the Bond
Portfolio at September 30, 2003.

At September 30, 2003, the Bond Portfolio had an aggregate carrying value
(i.e. fair value) of $5.71 billion and an aggregate amortized cost of $5.55
billion. At September 30, 2003, the Bond Portfolio (excluding $1.4 million of
redeemable preferred stocks) included $5.45 billion of bonds rated by Standard
& Poors (S&P), Moodys Investors Service (Moodys), Fitch (Fitch) or the
National Association of Insurance Commissioners (NAIC), and $265.3 million of
bonds rated by the Company pursuant to statutory rating guidelines established
by the NAIC. At September 30, 2003, approximately $5.37 billion of the Bond
Portfolio was investment grade, including $1.12 billion of mortgage-backed
securities (MBS) and U.S. government/agency securities.

At September 30, 2003, the Bond Portfolio included $346.9 million of bonds
that were not rated investment grade. These non-investment-grade bonds
accounted for approximately 1.3% of the Companys total assets and
approximately 4.8% of its invested assets. Non-investment-grade securities
generally provide higher yields and involve greater risks than investment-grade
securities because their issuers typically are more highly leveraged and more
vulnerable to adverse economic conditions than investment-grade issuers. In
addition, the trading market for these securities is usually more limited than
for investment-grade securities. An economic downturn could produce higher
than average issuer defaults on the non-investment-grade securities, which
could cause the Companys investment returns and net income to decline. At
September 30, 2003, the Companys non-investment-grade portfolio consisted of
100 issues with no single issuer representing more than 10% of the total
non-investment grade portfolio. These non-investment-grade securities are
comprised of bonds spanning 11 industries with 21% of these assets concentrated
in financial institutions, 18% concentrated in consumer goods, 17% concentrated
in communications, 15% concentrated in utilities and 10% concentrated in
transportation. No other industry concentration constituted more than 10% of
these assets.

The table on the following page summarizes the Companys rated bonds by
rating classification as of September 30, 2003.

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

Issues not rated by S&P/Moody's/Issues rated by S&P/Moody's/Fitch
    
    Fitch, by NAIC category
    
    TotalPercentEstimated
    
    NAIC
    
    
    
    
    
    Estimated
    
    
    
    
    
    Estimated
    
    of totalS&P/Moody's/Fitch
    
    Amortized
    
    fair
    
    category
    
    Amortized
    
    fair
    
    Amortized
    
    fair
    
    investedCategory (1)
    
    cost
    
    value
    
    (2)
    
    Cost
    
    value
    
    cost
    
    value
    
    assetsAAA+ to A-
(Aaa to A3)
[AAA to A-]
    
    $
    2,993,707
    
    
    $
    3,106,116
    
    
    
    1
    
    
    $
    597,308
    
    
    $
    613,412
    
    
    $
    3,591,015
    
    
    $
    3,719,528
    
    
    
    51.06
    %BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
    
    
    1,261,072
    
    
    
    1,322,521
    
    
    
    2
    
    
    
    313,935
    
    
    
    324,401
    
    
    
    1,575,007
    
    
    
    1,646,922
    
    
    
    22.61
    %BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
    
    
    176,359
    
    
    
    159,152
    
    
    
    3
    
    
    
    40,072
    
    
    
    40,905
    
    
    
    216,431
    
    
    
    200,057
    
    
    
    2.75
    %B+ to B-
(B1 to B3)
[B+ to B-]
    
    
    112,471
    
    
    
    99,139
    
    
    
    4
    
    
    
    2,744
    
    
    
    2,970
    
    
    
    115,215
    
    
    
    102,109
    
    
    
    1.40
    %CCC+ to C
(Caa to C)
[CCC]
    
    
    31,184
    
    
    
    27,330
    
    
    
    5
    
    
    
    14,997
    
    
    
    15,094
    
    
    
    46,181
    
    
    
    42,424
    
    
    
    0.58
    %C1 to D
[DD]
{D}
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2,482
    
    
    
    2,274
    
    
    
    2,482
    
    
    
    2,274
    
    
    
    0.03
    %TOTAL RATED
ISSUES
    
    $
    4,574,793
    
    
    $
    4,714,258
    
    
    
    
    
    
    $
    971,538
    
    
    $
    999,056
    
    
    $
    5,546,331
    
    
    $
    5,713,314




---

| |  | Footnotes appear on the following page.
| |  | ---------------------------------------

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Footnotes to the table of Rated Bonds by Rating Classification



|(1) |  | S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debts relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories range from Aaa (the highest) to
C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debts relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moodys and Fitch ratings if
rated by multiple agencies.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for non-defaulted bonds plus one category, 6, for bonds in or
near default. These six categories correspond with the S&P/Moodys/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $265.3 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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The valuation of invested assets involves obtaining a fair value for each
security. The source for the fair value is generally from market exchanges,
with the exception of non-traded securities.

Another aspect of valuation pertains to impairment. As a matter of
policy, the determination that a security has incurred an other-than-temporary
decline in value and the amount of any loss recognition requires the judgment
of the Companys management and a continual review of its investments.

In general, a security is considered a candidate for impairment if it
meets any of the following criteria:



| |  | Trading at a significant discount to par, amortized cost (if lower)
or cost for an extended period of time;
|- |  | -----------------------------------------------------------------------------------------------------------



| |  | The occurrence of a discrete credit event resulting in; (i) the
issuer defaulting on a material outstanding obligation; or (ii) the
issuer seeking protection from creditors under the bankruptcy laws or
similar laws intended for the court supervised reorganization of
insolvent enterprises; or (iii) the issuer proposing a voluntary
reorganization pursuant to which creditors are asked to exchange their
claims for cash or securities having a fair value substantially lower
than the par value of their claims; or
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the opinion of the Companys management, it is unlikely the
Company will realize a full recovery on its investment, irrespective of
the occurrence of one of the foregoing events.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Once a security has been identified as potentially impaired, the amount of
such impairment is determined by reference to that securitys contemporaneous
market price. However, the market price following a significant credit event
of any issuer may be volatile after such an event. Factors such as market
liquidity, hedge fund activity, sensitivity to headline risk, and the
widening of bid/ask spreads contribute to price volatility. Because of such
volatility, the market price may not be indicative of the fair value or a
reasonable estimate of realizable value.

The Company has the ability to hold any security to its stated maturity.
Therefore, the decision to sell reflects the judgment of the Companys
management that the security sold is unlikely to provide, on a relative value
basis, as attractive a return in the future as alternative securities entailing
comparable risks. With respect to distressed securities, the sale decision
reflects managements judgment that the risk-discounted anticipated ultimate
recovery is less than the value achieved on sale.

As a result of these policies, the Company recorded pretax impairment
writedowns of $35.9 million in the nine months of 2003 and $22.0 million in the
nine months of 2002.

Excluding the impairments noted above, the changes in fair value for the
Companys Bond Portfolio, which constitutes the vast majority of the Companys
investments, were recorded as a component of other comprehensive income in
shareholders equity as unrealized gains or losses.

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At September 30, 2003, the Companys Bond Portfolio had gross unrealized
gains of $251.1 million and gross unrealized losses of $84.1 million. One
issuer accounted for 11% of unrealized losses. No other single issuer
accounted for more than 10% of unrealized losses.

At September 30, 2003, the fair value of the Companys Bond Portfolio
aggregated $5.71 billion. Of this aggregate fair value, approximately 1.4%
represented securities trading at or below 75% of amortized cost. The impact
of unrealized losses on net income will be further mitigated upon realization
by the impact of the realized losses on DAC amortization and income taxes.

At September 30, 2003, approximately $918.0 million of the Bond Portfolio
had gross unrealized losses of $84.1 million. The gross unrealized losses in
the Bond Portfolio included the following concentrations:

GrossUnrealizedConcentration
    
    Losses(In thousands)Investment Grade:Finance companies
    
    $
    20,562Non-corporate
    
    
    14,690Transportation
    
    
    5,912Other
    
    
    1,564Not Rated and Below Investment Grade:Finance companies
    
    
    15,829Non-corporate
    
    
    4,896Transportation
    
    
    11,208Other
    
    
    9,407


The amortized cost of the Bond Portfolio in an unrealized loss position at
September 30, 2003, by contractual maturity, is shown below:

AmortizedCost(In thousands)Due in one year or less
    
    $
    7,070Due after one year through five years
    
    
    267,968Due after five years through ten years
    
    
    443,576Due after ten years
    
    
    283,433Total
    
    $
    1,002,047


In the nine months ended September 30, 2003, the pretax realized losses
incurred with respect to the sale of fixed securities in the Bond Portfolio
were $7.4 million. The aggregate fair value of securities sold was $265.3
million, which was approximately 97% of amortized cost. The average period of
time that securities sold at a loss during 2003 were trading continuously at a
price below amortized cost was approximately 13 months.

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The aging of the Bond Portfolio in an unrealized loss position at
September 30, 2003 is shown below:

Amortized
    
    Unrealized
    
    Number ofCost
    
    Losses
    
    Items(In thousands)Investment Grade:0-6 months
    
    $
    190,852
    
    
    $
    4,277
    
    
    
    197-12 months
    
    
    66,949
    
    
    
    1,257
    
    
    
    14>12 months
    
    
    98,921
    
    
    
    3,685
    
    
    
    29Below Investment Grade:0-6 months
    
    $
    200,902
    
    
    $
    14,423
    
    
    
    357-12 months
    
    
    105,544
    
    
    
    1,860
    
    
    
    13>12 months
    
    
    338,879
    
    
    
    58,566
    
    
    
    59Total:0-6 months
    
    $
    391,754
    
    
    $
    18,700
    
    
    
    547-12 months
    
    
    172,493
    
    
    
    3,117
    
    
    
    27>12 months
    
    
    437,800
    
    
    
    62,251
    
    
    
    88


As stated previously, the valuation for the Companys Bond Portfolio comes
from market exchanges or dealer quotations, with the exception of non-traded
securities. The Company considers non-traded securities to mean certain fixed
income investments, certain structured securities and limited partnerships.
The aggregate carrying value of these securities at September 30, 2003 was
approximately $1.32 billion.

The methodology used to estimate fair value of non-traded fixed income
investments is by reference to traded securities with similar attributes and
using a matrix pricing methodology. This technique takes into account such
factors as the industry, the securitys rating and tenor, its coupon rate, its
position in the capital structure of the issuer and other relevant factors.
The change in fair value is recognized as a component of other comprehensive
income.

For certain structured securities, the carrying value is based on an
estimate of the securitys future cash flows pursuant to the requirements of
Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets. The change in carrying value is recognized in income.

Each of these investment categories is regularly tested to determine if
impairment in value exists. Various valuation techniques are used with respect
to each category in this determination.

Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $296.3 million at September 30, 2003. Secured Loans are senior
to subordinated debt and equity and are secured by assets of the issuer. At
September 30, 2003, Secured Loans consisted of $230.2 million of privately
traded securities and $66.1 million of publicly traded securities. These
Secured Loans are composed of loans to 59 borrowers spanning 20 industries,
with 11% of these assets concentrated in food and 10% concentrated in media.
No other industry constituted more than 10% of these assets.

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##### Table of Contents



While the trading market for the Companys privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these
Secured Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of
loss upon default for these Secured Loans is mitigated by such financial
covenants and the collateral values underlying the Secured Loans. The Companys
Secured Loans are rated by S&P, Moodys, Fitch, the NAIC or by the Company,
pursuant to comparable statutory rating guidelines established by the NAIC.

MORTGAGE LOANS aggregated $747.3 million at September 30, 2003 and
consisted of 123 commercial first mortgage loans with an average loan balance
of approximately $6.1 million, collateralized by properties located in 33
states. The properties collateralizing the portfolios were approximately 35%
office, 18% multifamily residential, 15% manufactured housing, 10% industrial,
10% hotels, 5% retail, and 7% other types. At September 30, 2003,
approximately 28%, 11% and 10% of this portfolio was secured by properties
located in California, New York, and Massachusetts, respectively, and no more
than 10% of this portfolio was secured by properties located in any other
single state. At September 30, 2003, there were 16 mortgage loans with
outstanding balances of $10 million or more, which collectively aggregated
approximately 48% of the portfolio. At the time of their origination or
purchase by the Company, virtually all mortgage loans had loan-to-value ratios
of 75% or less. At September 30, 2003, approximately 24% of the mortgage loan
portfolio consisted of loans with balloon payments due before October 1, 2006.
During 2003 and 2002, loans delinquent by more than 90 days, foreclosed loans
and restructured loans have not been significant in relation to the total
mortgage loan portfolio.

Substantially all of the mortgage loan portfolio has been originated by
the Company under its underwriting standards. Commercial mortgage loans on
properties such as offices, hotels and shopping centers generally represent a
higher level of risk than do mortgage loans secured by multifamily residences.
This greater risk is due to several factors, including the larger size of such
loans and the more immediate effects of general economic conditions on these
commercial property types. However, due to the Companys underwriting
standards, the Company believes that it has prudently managed the risk
attributable to its mortgage loan portfolio while maintaining attractive
yields.

POLICY LOANS totaled $202.9 million at September 30, 2003, compared to
$215.8 million at December 31, 2002, and primarily represent loans taken
against universal life insurance policies.

SEPARATE ACCOUNT SEED MONEY totaled $23.6 million at September 30, 2003,
compared to $25.4 million at December 31, 2002, and consists principally of
seed money for mutual funds used as investment vehicles for the Companys
variable annuity separate accounts.

SECURITIES LENDING COLLATERAL totaled $254.7 million at September 30,
2003, compared to $585.8 million at December 31, 2002, and consisted of cash
collateral invested in highly rated short-term securities received in
connection with the Companys securities lending program. Although the cash
collateral is currently invested in highly rated short-term securities, the

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##### Table of Contents



applicable collateral agreements permit the cash collateral to be invested
in highly liquid short and long-term investment portfolios. At least 75% of
the portfolios short-term investments must have external issue ratings of
A-1/P-1, one of the highest ratings for short-term credit quality. Long-term
investments include corporate notes with maturities of five years or less and a
credit rating by at least two nationally recognized statistical rating
organizations (NRSRO), with no less than a S&P rating of A or equivalent by any
other NRSRO.

ASSET-LIABILITY MATCHING is utilized by the Company in an effort to
minimize the risks of interest rate fluctuations and disintermediation (i.e.
the risk of being forced to sell investments during unfavorable market
conditions). The Company believes that its fixed-rate liabilities should be
backed by a portfolio principally composed of fixed-rate investments that
generate predictable rates of return. The Company does not have a specific
target rate of return. Instead, its rates of return vary over time depending
on the current interest rate environment, the slope of the yield curve, the
spread at which fixed-rate investments are priced over the yield curve and
general economic conditions. Its portfolio strategy is constructed with a view
to achieve adequate risk-adjusted returns consistent with its investment
objectives of effective asset-liability matching, liquidity and safety. The
Companys fixed-rate products incorporate surrender charges, market value
adjustments or other restrictions in order to encourage persistency.
Approximately 78% of the Companys fixed annuity, universal life and GIC
reserves had surrender penalties or other restrictions at September 30, 2003.

As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used interest rate scenarios. With the results of these
computer simulations, the Company can measure the potential gain or loss in
fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
and cash flows of the fixed-rate assets to that of its fixed-rate liabilities.
The fixed-rate assets in the Companys asset-liability modeling included: cash
and short-term investments; bonds, notes and redeemable preferred stocks;
mortgage loans; policy loans; and investments in limited partnerships that
invest primarily in fixed-rate securities. At September 30, 2003, these assets
had an aggregate fair value of $7.28 billion with an option-adjusted duration
of 3.9. The Companys fixed-rate liabilities included fixed annuity, universal
life and GIC contracts. At September 30, 2003, these liabilities had an
aggregate fair value (determined by discounting future contractual cash flows
by related market rates of interest) of $6.61 billion with an option-adjusted
duration of 3.5. The Companys potential exposure due to a relative 10%
decrease in prevailing interest rates from its September 30, 2003 levels is a
loss of approximately $15.2 million, representing an increase in fair value of
its fixed-rate liabilities that is not offset by an increase in fair value of
its fixed-rate assets. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.

Option-adjusted duration is a common measure for the price sensitivity of
a fixed-maturity portfolio to changes in interest rates. For example, if
interest rates increase 1%, the fair value of an asset with a duration of

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5.0 is expected to decrease in value by approximately 5%. The Company
estimates the option-adjusted duration of its assets and liabilities using a
number of different interest rate scenarios, assuming continuation of existing
investment and interest crediting strategies, including maintaining an
appropriate level of liquidity. Actual company and contract owner behaviors
may be different than was assumed in the estimate of option-adjusted duration
and these differences may be material.

The overall interest-credited rate environment has continued to decline in
2003. A significant portion of the Companys fixed annuity contracts
(including the fixed option of variable contracts) has reached or is near the
minimum contractual guaranteed rate (generally 3%). Continual declines in
interest rates could cause the spread between the yield on the portfolio and
the interest rate credited to policyholders to deteriorate.

As a component of its asset-liability management strategy, the Company may
utilize interest rate swap agreements (Swap Agreements) to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes.

The Company seeks to enhance its spread income with dollar roll repurchase
agreements (Dollar Roll Repos). Dollar Roll Repos involve a sale of MBS by
the Company and an agreement to repurchase substantially similar MBS at a later
date at an agreed upon price. The Company also seeks to provide liquidity by
investing in MBSs. MBSs are generally investment-grade securities
collateralized by large pools of mortgage loans. MBSs generally pay principal
and interest monthly. The amount of principal and interest payments may
fluctuate as a result of prepayments of the underlying mortgage loans.

There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Companys Dollar Roll Repos
and Swap Agreements is counterparty risk. The Company believes, however, that
the counterparties to its Dollar Roll Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions
is minimal. It is the Companys policy that these agreements are entered into
with counterparties who have a debt rating of A/A2 or better from both S&P and
Moodys. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Companys Swap Agreements are intended to
hedge variable-rate assets or liabilities. The primary risk associated with
MBSs is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase. As part of its decision to purchase such a security, the
Company assesses the risk of prepayment by analyzing the securitys projected
performance over an array of interest-rate scenarios. Once such a security is
purchased, the Company monitors its actual prepayment experience monthly to
reassess the relative attractiveness of the security with the intent to
maximize total return.

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INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values 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 conducting these reviews for bonds, management principally
considers the adequacy of any collateral, 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 bonds, management also considers market value
quotations, if available. For mortgage loans, management generally considers
information concerning the mortgaged property and, among other things, factors
impacting the current and expected payment status of the loan and, if
available, the current fair value of the underlying collateral. For investments
in partnerships, management reviews the financial statements and other
information provided by the general partners.

The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to fair value. The provisions
for impairment on mortgage loans are based on losses expected by management to
be realized on transfers of mortgage loans to real estate, on the disposition
and settlement of mortgage loans and on mortgage loans that management believes
may not be collectible in full. Accrual of interest is suspended when principal
and interest payments on mortgage loans are past due more than 90 days.
Impairment losses on securitized assets are recognized if the fair value of the
security is less than its book value, and the net present value of expected
future cash flows is less than the net present value of expected future cash
flows at the most recent (prior) estimation date.

DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $31.6 million of bonds at
September 30, 2003, which constituted approximately 0.4% of total invested
assets. At December 31, 2002, defaulted investments totaled $15.6 million
($8.9 million of bonds and $6.7 million of mortgage loans), which constituted
approximately 0.2% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Companys existing portfolio of cash and short-term
investments, Dollar Roll
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. The Companys liquidity is primarily derived from operating cash flows.
At September 30, 2003, approximately $4.80 billion of the Companys Bond
Portfolio had an aggregate unrealized gain of $251.1 million, while
approximately $918.0 million of the Bond Portfolio had an aggregate unrealized
loss of $84.1 million. In addition, the Companys investment portfolio
currently provides approximately $51.3 million of monthly cash flow from
scheduled principal and interest payments. Historically, cash flows from
operations and from the sale of the Companys annuity products have been more
than sufficient in amount to satisfy the Companys liquidity needs.

Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Companys average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in

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duration to, and higher yielding than, the liabilities assumed. The
Company believes that liquidity to fund withdrawals would be available through
incoming cash flow, the sale of short-term or floating-rate instruments or
Dollar Roll Repos on the Companys substantial MBS segment of the Bond
Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable
bond market.

In a declining rate environment, the Companys cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.

If a substantial portion of the Companys Bond Portfolio diminished
significantly in value and/or defaulted, the Company would need to liquidate
other portions of its investment portfolio and/or arrange financing. Such
events that may cause such a liquidity strain could be the result of economic
collapse or terrorist acts.

Management believes that the Companys liquid assets and its net cash
provided by operations will enable the Company to meet any foreseeable cash
requirements for at least the next twelve months.

GUARANTEES AND OTHER COMMITMENTS

The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. In addition, the Company guarantees the payment of these
securities upon redemption. The maximum liability under these guarantees at
September 30, 2003 is $785.6 million. Related to each of these agreements are
participation agreements with the Companys Parent, under which the Parent will
share in $339.4 million of these liabilities in exchange for a proportionate
percentage of the fees received under these agreements. The expiration dates
of these commitments are as follows: $240.5 million in 2004, $387.1 million in
2005 and $158.0 million in 2006.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and
for Separate Accounts (SOP-03-1). This statement is effective for the
Company as of January 1, 2004. Under SOP 03-1, variable annuity

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assets held in separate accounts will continue to be measured at fair value and reported
in summary total on the Companys financial statements, with an equivalent
summary total reported for related liabilities, if the separate account
arrangement meets certain specified conditions. Assets underlying the
Companys interest in a separate account (separate account seed money) do not
qualify for separate account accounting and reporting. The Company will be
required to look through the separate account for purposes of accounting for
its interest therein, and account for and classify separate account seed money
based on its nature as if the assets of the separate account underlying the
Companys interest were held directly by the general account rather than
through the separate account structure. The adoption of SOP 03-1 will not have
a material impact on the Companys separate accounts or separate account seed
money.

In addition, SOP 03-1 will require the Company to recognize a liability
for guaranteed minimum death benefits, guaranteed minimum income benefits and
enhanced earnings benefits and modify certain disclosures and financial
statement presentations for these products. The Company continues to evaluate
the provisions of SOP 03-1. Management currently expects the one-time
cumulative accounting charge upon adoption to approximate $60 million after
taxes, to be recorded in the first quarter of 2004, which is not material to the Companys financial condition or liquidity.

REGULATION

The Company, in common with other insurers, is subject to regulation and
supervision by the states and other jurisdictions in which it does business.
Within the United States, the method of such regulation varies but generally
has its source in statutes that delegate regulatory and supervisory powers to
an insurance official. The regulation and supervision relate primarily to
approval of policy forms and rates, the standards of solvency that must be met
and maintained, including risk based capital measurements, the licensing of
insurers and their agents, the nature of and limitations on investments,
restrictions on the size of risks which may be insured under a single policy,
deposits on securities for the benefit of policyholders, methods of accounting,
periodic examinations of the affairs of insurance companies, the form and
content of reports of financial condition required to be filed, and reserves
for unearned premiums, losses and other purposes. In general, such regulation
is for the protection of policyholders rather than security holders.

Risk based capital (RBC) standards are designed to measure the adequacy
of an insurers statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurers RBC is deficient. The RBC formula develops a risk-adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the
target level of statutory surplus varies not only as a result of the insurers
size, but also on the risk profile of the insurers operations. The RBC Model
Law provides four incremental levels of regulatory attention for insurers whose
surplus is below the calculated RBC target. These levels of attention range in
severity from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under

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regulatory control. The statutory capital and surplus of the Company
exceeded its RBC requirements as of September 30, 2003.

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in
2001 and established new consumer protections regarding the security,
confidentiality, and uses of nonpublic personal information of individuals.
The law also requires financial institutions to fully disclose their privacy
policies to their customers. Additional privacy legislation pending in the
United States Congress and several states is designed to provide further
privacy protections to consumers of financial products and services. These
statutes and regulations may result in additional regulatory compliance costs,
may limit the Companys ability to market its products, and may otherwise
constrain the nature or scope of the Companys insurance and financial services
operations. The Gramm-Leach-Bliley Act also allows combinations between
insurance companies, banks and other entities. In addition, from time to time,
Federal initiatives are proposed that could affect the Companys businesses.
Such initiatives include employee benefit plan regulations and tax law changes
affecting the taxation of insurance companies and the tax treatment of
insurance and other investment products. Proposals made in recent years to
limit the tax deferral of annuities or otherwise modify the tax rules related
to the treatment of annuities have not been enacted. While certain of such
proposals, if implemented, could have an adverse effect on the Companys sales
of affected products, and, consequently, on its results of operations, the
Company believes these proposals have a small likelihood of being enacted,
because they would discourage retirement savings and there is strong public and
industry opposition to them.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Managements Discussion
and Analysis of Financial Condition and Results of Operations on pages 28 to 29
herein.

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CONTROLS & PROCEDURES

The Companys disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, as amended (Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Companys management, including the Companys Chief Executive Officer
and Principal Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. The Companys Chief Executive Officer and the
Principal Financial Officer have reviewed the effectiveness of its disclosure
controls and procedures as of September 30, 2003 and have concluded that the
disclosure controls and procedures are effective. There was no change in the
Companys internal control over financial reporting that occurred during the
three months ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
OTHER INFORMATION

Item 1. Legal Proceedings

Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

Exhibits are listed in the Exhibit Index beginning on page 38 herein.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended
September 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

AIG SUNAMERICA LIFE ASSURANCE COMPANY
RegistrantDate: November 14, 2003
    
    /s/ N. SCOTT GILLIS

N. Scott Gillis
Senior Vice President and Director   (Principal
Financial Officer)Date: November 14, 2003
    
    /s/ Stewart Polakov

Stewart Polakov
Senior Vice President and Controller   (Principal
Accounting Officer)


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Exhibit Index

Exhibit(31.1)
    
    Rule 13a-14(a)/15d-14(a) Certifications(31.2)
    
    Rule 13a-14(a)/15d-14(a) Certifications(32)
    
    Section 1350 Certifications


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