##### Table of Contents



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 1934ORo
    
    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. 33-5014

FIRST SUNAMERICA LIFE INSURANCE COMPANY

Incorporated in New York
    
    06-0992729
IRS Employer
Identification No.


733 Third Avenue, 4th Floor, New York, New York 10017
Registrants telephone number, including area code: (800) 996-9786

INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (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 in 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 $10,000.00 per share)
    
    300 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





---

TABLE OF CONTENTS



|                               |                                          |                                              |  |  |  |  |  | 
|------------------------------ | ---------------------------------------- | -------------------------------------------- |  |  |  |  |  | 
|Part I  Financial Information
|                               |                                          | BALANCE SHEET                               
|                               |                                          | STATEMENT OF INCOME AND COMPREHENSIVE INCOME
|                               |                                          | STATEMENT OF CASH FLOWS                     
|                               |                                          | NOTES TO FINANCIAL STATEMENTS               
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings               
|                               | Item 5. Other Information               
|                               | Item 6. Exhibits and Reports on Form 8-K
|SIGNATURES                    
|Exhibit Index                 
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32                    



---



##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

INDEX

PageNumber(s)Part I  Financial InformationBalance Sheet (Unaudited) -
September 30, 2003 and December 31, 2002
    
    
    3Statement of Income and Comprehensive Income
(Unaudited)- Three Months and Nine Months Ended
September 30, 2003 and 2002
    
    
    4-5Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2003 and 2002
    
    
    6-7Notes to Financial Statements (Unaudited)
    
    
    8-9Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    10-30Quantitative and Qualitative Disclosures About Market
Risk
    
    
    31Controls & Procedures
    
    
    32Part II  Other Information
    
    
    33Exhibits and Reports on Form 8-K
    
    
    35-38


2



---



##### Table of Contents















FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
(Unaudited)

September 30,
    
    December 31,2003
    
    2002(In thousands)ASSETSInvestments and cash:Cash and short-term investments
    
    $
    181,418
    
    
    $
    37,955Bonds and notes available for sale,
at fair value (amortized cost:September 30, 2003, $2,129,860;
December 31, 2002, $1,375,026)
    
    
    2,184,658
    
    
    
    1,410,053Mortgage loans
    
    
    218,787
    
    
    
    193,035Policy loans
    
    
    35,399
    
    
    
    36,052Common stocks available for sale, at
fair value (cost: September 30, 2003 and
December 31, 2002, $1,629)
    
    
    1,749
    
    
    
    1,140Securities lending collateral
    
    
    112,105
    
    
    
    29,569Total investments and cash
    
    
    2,734,116
    
    
    
    1,707,804Variable annuity assets held in separate
accounts
    
    
    410,412
    
    
    
    399,017Accrued investment income
    
    
    20,722
    
    
    
    15,849Deferred acquisition costs
    
    
    129,240
    
    
    
    104,459Income taxes currently receivable from Parent
    
    
    10,218
    
    
    
    9,831Receivable from brokers
    
    
    1,594
    
    
    
    1,025Other assets
    
    
    1,693
    
    
    
    1,401TOTAL ASSETS
    
    $
    3,307,995
    
    
    $
    2,239,386LIABILITIES AND SHAREHOLDERS EQUITYReserves, payables and accrued liabilities:Reserves for fixed annuity contracts
    
    $
    2,051,386
    
    
    $
    1,290,702Reserves for universal life insurance
contracts
    
    
    233,381
    
    
    
    237,862Securities lending payable
    
    
    112,105
    
    
    
    29,569Payable to brokers
    
    
    152,153
    
    
    
    Other liabilities
    
    
    39,398
    
    
    
    38,804Total reserves, payables and accrued liabilities
    
    
    2,588,423
    
    
    
    1,596,937Variable annuity liabilities related to
separate accounts
    
    
    410,412
    
    
    
    399,017Deferred income taxes
    
    
    43,998
    
    
    
    30,394Total liabilities
    
    
    3,042,833
    
    
    
    2,026,348Shareholders equity:Common stock
    
    
    3,000
    
    
    
    3,000Additional paid-in capital
    
    
    184,428
    
    
    
    144,428Retained earnings
    
    
    59,912
    
    
    
    51,740Accumulated other comprehensive income
    
    
    17,822
    
    
    
    13,870Total shareholders equity
    
    
    265,162
    
    
    
    213,038TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,307,995
    
    
    $
    2,239,386


See accompanying notes to financial statements.

3



---



##### Table of Contents









FIRST SUNAMERICA LIFE INSURANCE 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
    
    $
    2,082
    
    
    $
    1,722
    
    
    $
    5,961
    
    
    $
    5,604Universal life insurance policy fees
    
    
    1,773
    
    
    
    2,461
    
    
    
    3,790
    
    
    
    4,792Surrender charges
    
    
    392
    
    
    
    540
    
    
    
    1,223
    
    
    
    1,288Total fee income
    
    
    4,247
    
    
    
    4,723
    
    
    
    10,974
    
    
    
    11,684Investment income
    
    
    30,022
    
    
    
    22,753
    
    
    
    82,027
    
    
    
    69,981Net realized investment (losses) gains
    
    
    (2,311
    )
    
    
    (1,943
    )
    
    
    2,391
    
    
    
    (6,164
    )Total revenues
    
    
    31,958
    
    
    
    25,533
    
    
    
    95,392
    
    
    
    75,501BENEFITS AND EXPENSESInterest expense:Fixed annuity contracts
    
    
    17,057
    
    
    
    11,591
    
    
    
    45,364
    
    
    
    34,048Universal life insurance contracts
    
    
    2,793
    
    
    
    2,884
    
    
    
    8,283
    
    
    
    8,644Securities lending agreements
    
    
    225
    
    
    
    
    
    
    
    469
    
    
    
    Total interest expense
    
    
    20,075
    
    
    
    14,475
    
    
    
    54,116
    
    
    
    42,692General and administrative expenses
    
    
    1,267
    
    
    
    1,265
    
    
    
    5,544
    
    
    
    5,106Amortization of deferred acquisition
costs
    
    
    7,050
    
    
    
    4,218
    
    
    
    18,300
    
    
    
    12,807Annual commissions
    
    
    352
    
    
    
    188
    
    
    
    807
    
    
    
    596Claims on universal life contracts,
net of reinsurance recoveries
    
    
    608
    
    
    
    1,028
    
    
    
    2,211
    
    
    
    2,652Guaranteed minimum death benefits
    
    
    125
    
    
    
    404
    
    
    
    583
    
    
    
    1,142Total benefits and expenses
    
    
    29,477
    
    
    
    21,578
    
    
    
    81,561
    
    
    
    64,995PRETAX INCOME
    
    
    2,481
    
    
    
    3,955
    
    
    
    13,831
    
    
    
    10,506Income tax expense
    
    
    980
    
    
    
    1,642
    
    
    
    5,659
    
    
    
    4,282NET INCOME
    
    $
    1,501
    
    
    $
    2,313
    
    
    $
    8,172
    
    
    $
    6,224


See accompanying notes to financial statements.

4



---



##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE 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 (loss) gains on debt
and equity securities available for
sale identified in the current period
    
    $
    (770
    )
    
    $
    20,593
    
    
    $
    7,443
    
    
    $
    21,874Less reclassification adjustment for
net realized (gains)losses included
in net income
    
    
    (594
    )
    
    
    679
    
    
    
    (1,363
    )
    
    
    2,171Income tax benefit (expense)
    
    
    478
    
    
    
    (7,445
    )
    
    
    (2,128
    )
    
    
    (8,416
    )OTHER COMPREHENSIVE (LOSS) INCOME
    
    
    (886
    )
    
    
    13,827
    
    
    
    3,952
    
    
    
    15,629COMPREHENSIVE INCOME
    
    $
    615
    
    
    $
    16,140
    
    
    $
    12,124
    
    
    $
    21,853


See accompanying notes to financial statements.

5



---



##### Table of Contents









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

2003
    
    2002(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    8,172
    
    
    $
    6,224Adjustments to reconcile net income to
net cash provided by operating activities:Interest credited to:Fixed annuity contracts
    
    
    45,364
    
    
    
    34,048Universal life insurance contracts
    
    
    8,283
    
    
    
    8,644Net realized investment (gains) losses
    
    
    (2,391
    )
    
    
    6,164Accretion of net discounts on investments
    
    
    (470
    )
    
    
    (1,191
    )Amortization of deferred acquisition costs
    
    
    18,300
    
    
    
    12,807Acquisition costs deferred
    
    
    (57,381
    )
    
    
    (21,921
    )Provision for deferred income taxes
    
    
    11,476
    
    
    
    10,327Change in:Accrued investment income
    
    
    (4,873
    )
    
    
    2,774Income taxes currently receivable from Parent
    
    
    (387
    )
    
    
    (8,087
    )Other liabilities
    
    
    (1,818
    )
    
    
    5,368Other, net
    
    
    2,049
    
    
    
    1,986NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    26,324
    
    
    
    57,143CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of:Bonds and notes
    
    
    (974,206
    )
    
    
    (295,184
    )Mortgage loans
    
    
    (43,070
    )
    
    
    (30,839
    )Common stocks
    
    
    
    
    
    
    (777
    )Other investments, excluding short-term
investments
    
    
    (749
    )
    
    
    (270
    )Sales of:Bonds and notes
    
    
    173,976
    
    
    
    153,273Redemptions and maturities of:Bonds and notes
    
    
    199,681
    
    
    
    86,304Mortgage loans
    
    
    17,478
    
    
    
    23,436Other investments, excluding short-term
investments
    
    
    1,402
    
    
    
    894NET CASH USED IN INVESTING ACTIVITIES
    
    $
    (625,488
    )
    
    $
    (63,163
    )


See accompanying notes to financial statements.

6



---



##### Table of Contents



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

2003
    
    2002(In thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Deposits received on:Fixed annuity contracts
    
    $
    808,160
    
    
    $
    230,144Universal life insurance contracts
    
    
    7,427
    
    
    
    7,489Net exchanges to the fixed accounts
of variable annuity contracts
    
    
    1,520
    
    
    
    24,996Withdrawal payments on:Fixed annuity contracts
    
    
    (78,347
    )
    
    
    (105,458
    )Universal life insurance contracts
    
    
    (6,141
    )
    
    
    (7,479
    )Claims and annuity payments on:Fixed annuity contracts
    
    
    (23,153
    )
    
    
    (23,936
    )Universal life insurance contracts
    
    
    (9,251
    )
    
    
    (15,328
    )Capital contributions
    
    
    40,000
    
    
    
    Net repayments of other short term financings
    
    
    2,412
    
    
    
    12,991NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    742,627
    
    
    
    123,419NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS
    
    
    143,463
    
    
    
    117,399CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD
    
    
    37,955
    
    
    
    28,982CASH AND SHORT-TERM INVESTMENTS AT END OF
PERIOD
    
    $
    181,418
    
    
    $
    146,381SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid on indebtedness
    
    $
    470
    
    
    $
    Net income taxes (paid to) refunded by Parent
    
    $
    (5,430
    )
    
    $
    2,042


See accompanying notes to financial statements.

7



---



##### Table of Contents









FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)



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



| |  | First SunAmerica Life Insurance Company (the Company) is a direct wholly
owned subsidiary of SunAmerica Life Insurance Company (the Parent), which
is an indirect 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, retirement savings and asset management. The Company is a New
York-domiciled life insurance company engaged primarily in the sale and
administration of deposit-type insurance contracts, including fixed and
variable annuities and universal life contracts in the State of New York.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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
cash flows 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 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
|-- |  | ----------------------



| |  | 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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | RELATED PARTY TRANSACTIONS
|-- |  | --------------------------



| |  | On September 30, 2003, the Parent declared and paid a $40,000,000 capital
contribution to the Company.
| |  | ------------------------------------------------------------------------------------------------------



|4. |  | 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 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. The adoption of SOP 03-1
will not have a material impact on the Companys separate accounts.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, SOP 03-1 will require the Company to recognize a liability for
guaranteed minimum death benefits and modify certain disclosures and
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------

8



---



##### Table of Contents





| |  | financial statement presentations for this product. The Company continues
to evaluate the provisions of SOP 03-1. Management currently expects the
one-time cumulative accounting charge upon adoption to approximate $5
million after taxes, to be recorded in the first quarter of 2004, which is not material to the Companys financial
condition or liquidity.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



---



##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE 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 First SunAmerica 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 or
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
the debt and equity securities available for sale amounted to $20.8 million at
September 30, 2003 and $28.4 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

10



---



##### Table of Contents



operating results 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 $513.3
million 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 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
72% of the Companys DAC balance at September 30, 2003 related to fixed annuity
and universal life products and 28% related to variable annuity 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 approximate 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

11



---



##### Table of Contents



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 fixed and variable annuity
products. The fixed annuity products offer investors a guaranteed fixed rate
investment. 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 December 9, 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 monthly 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
$0.4 million for the third quarter of 2003 and $1.2 million for the nine months
of 2003. The Company accrued and received $1.8 million of fee income for the
entire year of 2002 in December of 2002. Thus, no amounts were recorded in the
first three quarters of 2002.

RESULTS OF OPERATIONS

NET INCOME totaled $1.5 million in the third quarter of 2003, compared to
$2.3 million in the third quarter of 2002. For the nine months, net income
amounted to $8.2 million in 2003, compared to $6.2 million in 2002. The
operating results for 2003 include $0.4 million and $1.2 million of fees earned
by the Company pursuant to the SAAMCO Agreement in the three months and nine
months ending September 30, 2003, respectively.

PRETAX INCOME totaled $2.5 million in the third quarter of 2003, compared
to $4.0 million in the third quarter of 2002. For the nine months, pretax
income totaled $13.8 million in 2003, compared to $10.5 million in 2002. The
decrease in the third quarter of 2003 primarily resulted from higher DAC
amortization, partially offset by higher net investment spread. The increase
in the nine months of 2003 primarily resulted from higher net realized
investment gains, partially offset by higher DAC amortization.

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 $9.9 million in the third
quarter of 2003, compared to $8.3 million in the third quarter of 2002. These
amounts equal 1.77% on average invested assets (computed on a daily basis) of
$2.25 billion in the third quarter of 2003 and 2.28% on average invested assets
of $1.45 billion in the third quarter of 2002 on an

12



---



##### Table of Contents



annualized basis. For the
nine months, net investment spread increased to $27.9 million in 2003 from
$27.3 million in 2002, representing 1.88% of average invested assets of $1.98 billion in 2003 and 2.61% of average
invested assets of $1.40 billion in 2002 on an annualized basis. The decrease in the net investment spread rate
was primarily due to the investment of new deposits into invested assets with shorter durations than the Companys fixed rate
liabilities.

Growth in average invested assets resulted primarily from increased sales
in the latter half of 2002 and in 2003 relating to the marketing of fixed
annuities through new distribution relationships. Also contributing to the
increased sales was higher demand for guaranteed fixed-return products, as
investors sought security in an uncertain market environment. Changes in
average invested assets also reflect net exchanges to fixed accounts from the
separate accounts of variable annuity contracts, sales of fixed account options
of the Companys variable annuity products, and renewal deposits on its
universal life products (UL Deposits). Sales of fixed annuities and fixed
account options (Fixed Annuity Deposits) and UL Deposits totaled $339.6
million in the third quarter of 2003, $154.7 million in the third quarter of
2002, $815.6 million in the nine months of 2003 and $218.6 million in the nine
months of 2002, and are largely deposits for the fixed annuities. On an
annualized basis, these deposits represent 69%, 49%, 71% and 23%, respectively,
of the related reserve balances at the beginning of the respective periods.
The increase in Fixed Annuity Deposits in 2003 is due primarily to increased
sales relating to the marketing of fixed annuities through new distribution
relationships.

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 $89.3 million in the third quarter of 2003,
compared to $116.6 million in the third quarter of 2002. For the nine months,
average invested assets exceeded average interest-bearing liabilities by $106.0
million in 2003, compared with $102.2 million in 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 1.62% in the third
quarter of 2003, 1.93% in the third quarter of 2002, 1.67% in the nine months
of 2003 and 2.28% in the nine months of 2002.

Investment income (and the related yields on average invested assets)
totaled $30.0 million (5.33%) in the third quarter of 2003, $22.8 million
(6.27%) in the third quarter of 2002, $82.0 million (5.53%) in the nine months
of 2003 and $70.0 million (6.68%) in the nine months 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 $0.2 million in the
third quarter of 2003, $0.1 million in the third quarter of 2002, $0.5 million
in the nine months of 2003 and $0.4 million in the nine months of 2002.

Interest expense totaled $20.1 million in the third quarter of 2003 and
$14.5 million in the third quarter of 2002. For the nine months,

13



---



##### Table of Contents



interest
expense aggregated $54.1 million in 2003, compared with $42.7 million in 2002.
The average rate paid on all interest-bearing liabilities was 3.71% in the
third quarter of 2003, compared to 4.34% in the third quarter of 2002. For the
nine months, the average rate paid on all interest-bearing liabilities was
3.86% for 2003 and 4.40% for 2002. Interest-bearing liabilities averaged $2.16
billion during the third quarter
of 2003, $1.34 billion during the third quarter of 2002, $1.87 billion
during the nine months of 2003 and $1.29 billion during the nine months of
2002. The decline in overall rates paid in 2003 compared to 2002 resulted
primarily from the impact of a declining interest rate environment, as the
Company issued new fixed annuities at rates substantially below the prior year
average rates.

NET REALIZED INVESTMENT LOSSES totaled $2.3 million in the third quarter
of 2003 and $1.9 million in the third quarter of 2002 and include impairment
writedowns of $2.3 million and $1.8 million, respectively. For the nine
months, net realized investment gains totaled $2.4 million in 2003, compared
with net realized investment losses of $6.2 million in 2002 and include
impairment writedowns of $2.6 million and $2.7 million, respectively. Thus,
there were no realized gains from sales and redemptions of investments in the
third quarter of 2003, compared to net realized losses of $0.1 million in the
third quarter of 2002. For the nine months, net realized gains from sales and
redemptions of investments totaled $5.0 million in 2003, compared to net
realized losses of $3.4 million in 2002.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $136.5 million in the third quarter of 2003, $120.5 million in the
third quarter of 2002, $388.1 million in the nine months of 2003 and $268.2
million in the nine months 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 0.00%, 0.03%, 0.34% and 0.33% 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 $2.3 million, $1.8 million, $2.6 million and
$2.7 million of provisions applied to bonds 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 0.41%,
0.50%, 0.18% and 0.26% 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 up to 3.99% and
have averaged 0.80%. Such writedowns are based upon estimates of the fair
value of invested assets and recorded when declines in the value of such assets
are considered to be other than temporary. Actual realization will be
dependent upon future events.

14



---



##### Table of Contents



VARIABLE ANNUITY POLICY FEES are based on the market value of assets in
separate accounts supporting variable annuity contracts. Such fees totaled
$2.1 million in the third quarter of 2003 (including $0.4 million attributable
to the SAAMCO Agreement) and $1.7 million in the third quarter of 2002. For
the nine months, variable annuity fees totaled $6.0 million in 2003 (including
$1.2 million attributable to the SAAMCO Agreement), compared to $5.6 million in
2002. Excluding the impact of the SAAMCO Agreement, variable annuity fees
would have been $1.7 million in the third quarter of
2003 and $4.8 million in the nine months of 2003. The decreased fees in
the nine months of 2003 as compared to the nine months of 2002 primarily
reflects 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
2.0%, 1.6%, 2.0% and 1.6% of average variable annuity assets in the third
quarters of 2003 and 2002 and the nine months of 2003 and 2002, respectively.
Excluding the impact of the SAAMCO Agreement, variable annuity fees would have
represented 1.6% of average variable annuity assets in both periods of 2003.
Variable annuity assets averaged $418.9 million, $433.7 million, $404.9 million
and $480.1 million during the respective periods. Variable annuity deposits,
which exclude deposits allocated to the fixed accounts of variable annuity
products, totaled $6.1 million and $15.1 million in the third quarters of 2003
and 2002, respectively. For the nine months, variable annuity deposits totaled
$17.9 million in 2003, compared with $60.6 million in 2002. On an annualized
basis, these amounts represent 6%, 13%, 6% and 16% of separate account
liabilities at the beginning of the respective periods. Variable annuity
deposits were higher in 2002 due to increased demand for FSA Advisor, which was
initially marketed in January 2001. 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 $52.8
million, $25.8 million, $98.0 million and $89.5 million in the third quarters
of 2003 and 2002 and the nine months of 2003 and 2002, respectively. The
increase in Variable Annuity Product Sales reflect the sales of the Companys
new products, WM Diversified Strategies III and Polaris II. Introduced at the
beginning of 2003, WM Diversified Strategies III, product sales totaled $25.6
million in the third quarter of 2003 and $41.9 million in the nine months of
2003. Polaris II was introduced in late 2002, product sales totaled $20.9
million in the third quarter of 2003 and $35.8 million in the nine months of
2003.

15



---



##### Table of Contents



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 $1.8 million in the third
quarter of 2003 and $2.5 million in the third quarter of 2002. For the nine
months, universal life insurance fees totaled $3.8 million in 2003 and $4.8
million in 2002. Universal life insurance policy fees consist of mortality
charges, up-front fees earned on deposits received and 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 July 1, 1999 and does not actively market such
contracts. Such fees annualized represent 3.0%, 4.1%, 2.2% and 2.6% of average
reserves for universal life insurance contracts in the respective periods.

SURRENDER CHARGES on fixed annuity, variable annuity and universal life
contracts totaled $0.4 million in the third quarter of 2003 and $0.5 million in
the third quarter of 2002. For the nine months, such surrender
charges totaled $1.2 million in 2003 and $1.3 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. Withdrawal payments, which exclude claims and annuitization benefits,
totaled $46.9 million in the third quarter of 2003, compared to $47.4 million
in the third quarter of 2002. For the nine months, such withdrawal payments
totaled $131.2 million in 2003 and $145.3 million in 2002. Annualized, these
payments, when expressed as a percentage of average related reserves, represent
7.67%, 11.0%, 8.08% and 11.2% for the third quarters of 2003 and 2002 and the
nine months of 2003 and 2002, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.3 million in the third
quarters of 2003 and 2002. For the nine months, general and administrative
expenses totaled $5.5 million in 2003 and $5.1 million in 2002. 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 $7.1 million in the
third quarter of 2003, compared to $4.2 million in the third quarter of 2002.
For the nine months, such amortization totaled $18.3 million in 2003, compared
to $12.8 million in 2002. The increase in amortization in 2003 was primarily
related to the substantial increase in fixed annuity deposits, as well as the
impact of increased net investment gains.

16



---



##### Table of Contents



ANNUAL COMMISSIONS totaled $0.4 million in the third quarter of 2003,
compared to $0.2 million in the third quarter of 2002. For the nine months,
annual commissions amounted to $0.8 million in 2003 and $0.6 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.

CLAIMS ON UNIVERSAL LIFE INSURANCE CONTRACTS, NET OF REINSURANCE
RECOVERIES totaled $0.6 million in the third quarter of 2003, compared to $1.0
million in 2002 (net of reinsurance recoveries of $1.2 million in 2003 and $0.6
million in 2002). For the nine months, such claims totaled $2.2 million in
2003, compared to $2.7 million in 2002 (net of reinsurance recoveries of $3.1
million in 2003 and $3.0 million in 2002).

GUARANTEED MINIMUM DEATH BENEFITS on variable annuity contracts totaled
$0.1 million in the third quarter of 2003, compared to $0.4 million in the
third quarter of 2002. For the nine months, guaranteed minimum death benefits
amounted to $0.6 million in 2003 and $1.1 million in 2002. The decrease in
such benefits reflects 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.
In accordance with Generally Accepted Accounting Principles, the Company
expenses such benefits in the period incurred, and therefore does not provide
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).

INCOME TAX EXPENSE totaled $1.0 million in the third quarter of 2003, $1.6
million in the third quarter of 2002, $5.7 million in the nine months of 2003
and $4.3 million in the nine months of 2002, representing effective annualized
tax rates of 40%, 42%, 41% and 41%, respectively.

17



---



##### Table of Contents



CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY increased to $265.2 million at September 30, 2003
from $213.0 million at December 31, 2002. The increase reflected a capital
contribution of $40.0 million, net income of $8.2 million and other
comprehensive income of $4.0 million.

INVESTMENTS AND CASH at September 30, 2003 totaled $2.73 billion, compared
to $1.71 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 and notes (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
    
    $
    3,467
    
    
    
    0.1
    %
    
    $
    3,208
    
    
    
    0.2
    %Mortgage-backed securities
    
    
    549,293
    
    
    
    20.1
    
    
    
    471,065
    
    
    
    27.6Other bonds and notes
    
    
    1,631,898
    
    
    
    59.7
    
    
    
    935,780
    
    
    
    54.8Total Bond Portfolio
    
    
    2,184,658
    
    
    
    79.9
    
    
    
    1,410,053
    
    
    
    82.6Mortgage loans
    
    
    218,787
    
    
    
    8.0
    
    
    
    193,035
    
    
    
    11.3Common stocks
    
    
    1,749
    
    
    
    0.1
    
    
    
    1,140
    
    
    
    0.1Cash and short-term
investments
    
    
    181,418
    
    
    
    6.6
    
    
    
    37,955
    
    
    
    2.2Other
    
    
    147,504
    
    
    
    5.4
    
    
    
    65,621
    
    
    
    3.8Total investments and cash
    
    $
    2,734,116
    
    
    
    100.0
    %
    
    $
    1,707,804
    
    
    
    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.

THE BOND PORTFOLIO, which constituted 80% of the Companys total
investment portfolio at September 30, 2003, had an aggregate fair value that
was $54.8 million greater than its amortized cost at September 30, 2003,
compared with $35.0 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 $2.18 billion and an aggregate amortized cost of $2.13
billion. At September 30, 2003, the Bond Portfolio included $1.94 billion of
bonds rated by Standard & Poors (S&P), Moodys Investors Services
(Moodys), Fitch (Fitch) or the National Association of Insurance
Commissioners (NAIC), and $242.5 million of bonds rated by the Company
pursuant to statutory rating guidelines established by the NAIC. At

18



---



##### Table of Contents



September 30, 2003, approximately $2.04 billion of the Bond Portfolio was
investment grade, including $546.9 million of mortgage-backed securities
(MBS) and U.S. government/agency securities.

At September 30, 2003, the Bond Portfolio included $146.1 million of bonds
that were not rated investment grade. These non-investment-grade bonds
accounted for approximately 4.5% of the Companys total assets and
approximately 5.5% 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
61 issues with one issuer representing 10.2% of the total non-investment grade
bond portfolio. No other issuer represented more than 10% of the total
non-investment grade bond portfolio. These non-investment-grade securities are
comprised of bonds spanning 10 industries with 23% of these assets concentrated
in financial institutions, 20% concentrated in communications, 14% concentrated
in utilities and 14% concentrated in cyclical consumer industries. 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.

19



---



##### Table of Contents



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-]
    
    $
    1,242,089
    
    
    $
    1,278,162
    
    
    
    1
    
    
    $
    255,789
    
    
    $
    264,539
    
    
    $
    1,497,878
    
    
    $
    1,542,701
    
    
    
    57.58
    %BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
    
    
    377,090
    
    
    
    390,543
    
    
    
    2
    
    
    
    103,230
    
    
    
    105,345
    
    
    
    480,320
    
    
    
    495,888
    
    
    
    18.51
    %BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
    
    
    76,689
    
    
    
    74,612
    
    
    
    3
    
    
    
    21,000
    
    
    
    21,024
    
    
    
    97,689
    
    
    
    95,636
    
    
    
    3.57
    %B+ to B-
(B1 to B3)
[B+ to B-]
    
    
    25,050
    
    
    
    24,864
    
    
    
    4
    
    
    
    16,909
    
    
    
    16,934
    
    
    
    41,959
    
    
    
    41,798
    
    
    
    1.56
    %CCC+ to C
(Caa to C)
[CCC]
    
    
    7,781
    
    
    
    6,068
    
    
    
    5
    
    
    
    2,183
    
    
    
    2,484
    
    
    
    9,964
    
    
    
    8,552
    
    
    
    0.32
    %C1 to D
[DD]
{D}
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2,050
    
    
    
    83
    
    
    
    2,050
    
    
    
    83
    
    
    
    0.00
    %TOTAL RATED
ISSUES
    
    $
    1,728,699
    
    
    $
    1,774,249
    
    
    
    
    
    
    $
    401,161
    
    
    $
    410,409
    
    
    $
    2,129,860
    
    
    $
    2,184,658


Footnotes appear on the following page.

20



---



##### Table of Contents



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 ranging 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 nondefaulted 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 $242.5 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21



---



##### Table of Contents



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 $2.6 million in the nine months of 2003 and $2.7 million in the
nine months of 2002.

Excluding the impairments noted above, the changes in market 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.

22



---



##### Table of Contents



At September 30, 2003, the Companys Bond Portfolio had gross unrealized
gains of $75.6 million and gross unrealized losses of $20.8 million. No
single issuer accounted for more than 10% of the unrealized losses.

At September 30, 2003, the fair value of the Companys Bond Portfolio
aggregated $2.18 billion. Of this aggregate fair value, approximately 0.6%
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 $522.5 million of the Bond Portfolio
had a gross unrealized loss of $20.8 million. The gross unrealized losses in
the Bond Portfolio included the following concentrations:

GrossConcentration
    
    Unrealized Losses(In thousands)Investment Grade:Communications
    
    $
    267Finance companies
    
    
    5,502Non-Corporate
    
    
    2,754Transportation
    
    
    2,166Utility
    
    
    255Other
    
    
    298Not rated and Below Investment Grade:Communications
    
    
    1,468Finance companies
    
    
    5,733Non-Corporate
    
    
    404Transportation
    
    
    37Utility
    
    
    725Other
    
    
    1,189


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

Amortized Cost(In thousands)Due in one year or less
    
    $
    2,000Due after one year through five years
    
    
    118,704Due after five years through ten years
    
    
    240,696Due after ten years
    
    
    181,903Total
    
    $
    543,303


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 $1.7 million. The aggregate fair value of securities sold was $80.1
million, which was approximately 98.% 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 15 months.

23



---



##### Table of Contents



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
    
    $
    203,539
    
    
    $
    4,115
    
    
    
    227-12 months
    
    
    3,121
    
    
    
    11
    
    
    
    2>12 months
    
    
    17,044
    
    
    
    445
    
    
    
    5Below Investment Grade:0-6 months
    
    $
    218,545
    
    
    $
    7,057
    
    
    
    477-12 months
    
    
    24,992
    
    
    
    166
    
    
    
    4>12 months
    
    
    76,062
    
    
    
    9,006
    
    
    
    24Total:0-6 months
    
    $
    422,084
    
    
    $
    11,172
    
    
    
    697-12 months
    
    
    28,113
    
    
    
    177
    
    
    
    6>12 months
    
    
    93,106
    
    
    
    9,451
    
    
    
    29


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 and certain structured securities. The aggregate carrying
value of these securities at September 30, 2003 was approximately $513.3
million.

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 $79.6 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 $53.6 million of privately
traded securities and $26.0 million of publicly traded securities. These
Secured Loans are composed of loans to borrowers spanning 8 industries, with
34% of these assets concentrated in the electric industry, 17% of these assets
concentrated in consumer services, 17% of these assets concentrated in energy
and 12% of these assets concentrated in utilities. No other industry
concentration constituted more than 10% of these assets.

24



---



##### 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 ratings guidelines established by the NAIC.

MORTGAGE LOANS aggregated $218.8 million at September 30, 2003 and
consisted of 88 commercial first mortgage loans with an average loan balance of
approximately $2.5 million, collateralized by properties located in 29 states.
The properties collateralizing the portfolios were approximately 42% office,
21% multifamily residential, 12% industrial, 14% retail, and 11% other types.
At September 30, 2003, approximately 31% and 12% of this portfolio was secured
by properties located in California and Texas, 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 3 mortgage loans with an outstanding
balance of $10 million or more, which collectively aggregated approximately 22%
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 23% 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.

At September 30, 2003, approximately 22% of the mortgage loans were
seasoned loans underwritten to the Companys standards and purchased at or near
par from other financial institutions. Such loans generally have higher
average interest rates than loans that could be originated today. The balance
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 seasoned nature of the Companys mortgage loan
portfolio and its 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 $35.4 million at September 30, 2003, compared to
$36.1 million at December 31, 2002, and primarily represent loans taken against
universal life insurance policies.

SECURITIES LENDING COLLATERAL totaled $112.1 million at September 30,
2003, compared to $29.6 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
applicable collateral agreements permit the cash collateral to be invested in
highly liquid short and long-term investment portfolios. At least 75% of the

25



---



##### Table of Contents



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 75% of the Companys fixed annuity and universal life 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 and notes; mortgage loans; and policy loans.
At September 30, 2003, these assets had an aggregate fair value of $2.73
billion with an option-adjusted duration of 3.4. The Companys fixed-rate
liabilities include fixed annuity and universal life insurance 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 $2.38 billion with an option-adjusted duration of 3.8. The
Companys potential exposure due to a relative 10% increase in prevailing
interest rates from their September 30, 2003 levels is a loss of approximately
$0.6 million, representing a decrease in fair value of its fixed-rate assets
that is not offset by a decrease in fair value of its fixed-rate liabilities.
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 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

26



---



##### Table of Contents



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. In 2003, the State
of New York adopted legislation reducing the minimum contractual rate that can
be credited to policyholders on new contracts to 1.5%. As a result, certain
contracts issued in 2003 will have a 1.5% minimum contractual guaranteed rate.
This will not impact the previously issued contracts.

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
is counterparty risk. The Company believes, however, that the counterparties
to its Dollar Roll Repos 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. 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.

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,

27



---



##### Table of Contents



factors impacting the current and expected payment status of the loan and, if
available, the current fair value of the underlying collateral.

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 $1.4 million of bonds at
September 30, 2003, which constituted approximately 0.05% of total invested
assets. At December 31, 2002, defaulted investments totaled $5.7 million of
bonds which constituted less than 0.3% 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 $1.66 billion of the Bond Portfolio had an aggregate unrealized
gain of $75.6 million while approximately $522.5 million of the Companys Bond
Portfolio had an aggregate unrealized loss of $20.8 million. In addition, the
Companys investment portfolio currently provides approximately $15.5 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
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

28



---



##### Table of Contents



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.

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 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. The adoption of SOP 03-1 will not have a
material impact on the Companys separate accounts.

In addition, SOP 03-1 will require the Company to recognize a liability
for guaranteed minimum death benefits and modify certain disclosures and
financial statement presentations for this product. The Company continues to
evaluate the provisions of SOP 03-1. Management currently expects the one-time
cumulative accounting charge upon adoption to approximate $5 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 a
state 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

29



---



##### Table of Contents



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 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 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.

30



---



##### Table of Contents



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 25 and
26 herein.

31



---



##### Table of Contents



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.

32



---



##### Table of Contents









FIRST SUNAMERICA LIFE INSURANCE COMPANY
PART II  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 35 herein.

REPORTS ON FORM 8-K

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

33



---



##### Table of Contents









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.

FIRST SUNAMERICA LIFE INSURANCE COMPANY
RegistrantDate:
    
    November 13, 2003
    
    /s/ N. SCOTT GILLISN. Scott Gillis
Senior Vice President and Director
(Principal Financial Officer)Date:
    
    November 13, 2003
    
    /s/ STEWART POLAKOVStewart Polakov
Senior Vice President and Controller
(Principal Accounting Officer)


34



---



##### Table of Contents









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


35