FORM 10-Q

~~UNITED STATES~~ SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended ~~June~~December 3031, 2002

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

For the transition period from to

Commission file number ~~–333~~1-~~72346-01~~31576

WESTERN UNITED HOLDING COMPANY

(Exact name of registrant as specified in its charter)

WASHINGTON		73-1642091
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
601 W. 1ST AVENUE, SPOKANE, WASHINGTON		99201
(Address of principal executive offices)		(Zip Code)

601 W. 1ST AVENUE, SPOKANE, WASHINGTON		99201
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (509)835-2500

Former name, former address and former fiscal year, if changed since last report: N/A.

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 [X ]

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: N/A.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ] N/A.

APPLICABLE ONLY TO CORPORATE ISSUERS:

~~Indicate~~The ~~the~~ number of shares outstanding of ~~each of~~ the ~~issuer~~Registrant’s ~~classes of~~ common stock, as of January 31, ~~the~~2002 ~~latest~~was ~~practicable date~~100.

Common: 100 shares at August 31, 2002.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		BALANCE SHEETS
		CONSOLIDATED BALANCE SHEETS
		STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		STATEMENTS OF COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
		STATEMENT OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
		STATEMENTS OF CASH FLOWS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO FINANCIAL STATEMENTS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CERTIFICATIONS

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY INDEX

PART I — FINANCIAL INFORMATION

Western United Holding Company was formed in May 2002 and had no significant operations for the quarter ended June 30, 2002. Subsequent to the quarter end, Metropolitan Mortgage & Securities Co., Inc. transferred its 46.3% ownership of Western United Life Assurance Company to Western Holding and Consumer Group Holding Company also transferred its 53.7% ownership of Western Life to Western Holding, thereby making Western Life a wholly owned subsidiary of Western Holding. The financial statements and financial information contained in this report relate solely to Western Life.


ITEM 1. FINANCIAL STATEMENTS
	Consolidated Balance Sheets As of December 31, 2002 and September 30, 2002
	Consolidated Statements of Operations Three Months Ended December 31, 2002 and 2001
	Consolidated Statements of Comprehensive Income (Loss) Three Months Ended December 31, 2002 and 2001
	Consolidated Statement of Stockholder’s Equity Three Months Ended December 31, 2002
	Consolidated Statements of Cash Flows Three Months Ended December 31, 2002 and 2001
	Notes to Consolidated Financial Statements

ITEM 1. FINANCIAL STATEMENTS

Balance Sheets As of June 30, 2002 and September 30, 2001 Statements of Operations Three Months Ended June 30, 2002 and 2001 Nine Months Ended June 30, 2002 and 2001 Statements of Comprehensive Income Three Months Ended June 30, 2002 and 2001 Nine Months Ended June 30, 2002 and 2001 Statement of Stockholders’ Equity Nine Months Ended June 30, 2002 and 2001 Statements of Cash Flows Nine Months Ended June 30, 2002 and 2001 Notes to Financial Statements

PART I — FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

				June 30,			September 30,
				December 31,			September 30,
				2002			~~2001~~2002
				(unaudited)
Assets:
	Investments:
		Trading securities, at fair value		$	—		$	48,818,530
		Available-for-sale securities, at fair value		$	273,352,082		$	458,488,402
		Available-for-sale securities, at fair value			379,113,338			267,833,620
		Held-to-maturity securities, at amortized cost			290,409,205			39,223,983
		Held-to-maturity securities, at amortized cost			24,881,958			—
		Real estate contracts and mortgage notes and other receivables, net of discounts and origination fees			779,819,846			683,918,878
		Real estate contracts and mortgage notes receivable, net of discounts and origination fees and net of allowances of $7,458,512 and $8,078,416			491,741,753			382,179,446
		Allowance for losses on receivables			(10,104,354	)		(8,697,778	)
		Real estate held for sale and development at the lower of cost or market, net of allowances of $1,980,473 and $2,448,670			50,701,138			39,121,577
		Policy loans			19,908,094			20,238,963
		Other receivable investments, net of discounts and origination fees and net of allowances of $383,932 and $1,088,347			137,247,678			148,763,735
		Real estate held for sale and development at the lower of cost or market, net of allowances of $2,125,098 and $1,462,966			70,977,726			51,208,831
		Policy loans			19,688,311			19,381,119
			Total investments		1,424,362,599			1,244,381,279
			Total investments		1,103,374,176			906,098,027
	Cash and cash equivalents				25,931,170			44,035,987
	Cash and cash equivalents				18,811,504			53,286,888
	Accrued interest on investments				20,606,134			14,464,644
	Accrued interest on investments				13,103,102			9,254,198
	Reinsurance receivable				148,145,873			148,392,448
	Reinsurance receivable				141,088,780			109,608,025
	Deferred policy acquisition costs				73,500,941			72,257,621
	Deferred acquisition costs				56,296,331			56,356,646
	Due from affiliate				—			6,276,448
	Indebtedness of related parties				1918,~~177~~661,~~743~~114			1918,~~879~~921,~~627~~930
	Land, buildings and equipment, net				4,~~254~~244,~~161~~739			4,~~609~~282,~~295~~048
	Current income taxes receivable				—			4,246,667
	Other assets				11,667,486			10,978,546
	Other assets				10,643,078			14,024,375
			Total other assets		302,757,457			319,609,672
			Total other assets		263,374,699			271,265,721
			Total assets	$	1,727,120,056		$	1,563,990,951
			Total assets	$	1,366,748,875		$	1,177,363,748
Liabilities:
	Reserves, payables, and accrued liabilities:
		Life insurance and annuity reserves		$	1,~~089~~289,~~227~~477,~~017~~162		$	~~970~~1,~~094~~224,~~228~~344,910
		Policyholder funds on deposit			1,~~258~~318,~~387~~448			1,~~121~~315,~~949~~343
		Accounts payable and accrued expenses			266,~~405~~789,~~113~~518			274,~~207~~556,~~203~~963
		Current income taxes payable			1,675,756			—
		Due to affiliate			10,192,355			—
		Due to affiliate			1,573,559			2,092,651
			Total reserves, payables, and accrued liabilities		1,307,777,483			1,230,217,216
			Total reserves, payables, and accrued liabilities		1,120,139,832			1,000,516,031
		Debt payable, including accrued interest			149,366,930			104,222,683
		Debt payable, including accrued interest			62,515,324			23,254,909
		Current income taxes payable			9,040,042			12,326,770
		Deferred income taxes, net			19,~~164~~056,~~655~~269			1719,~~553~~231,~~270~~189
			Total liabilities		1,201,819,811			1,041,324,210
		Minority Interest			50,000,000			50,000,000
Stockholders’ equity:
			Total liabilities		1,535,240,724			1,415,997,858
	Preferred stock, $10 par value, 5,000,000 shares authorized, 3,960,000 shares issued and outstanding (liquidation preference $39,600,000)				39,600,000			39,600,000
Stockholder’s equity:
	Common stock, Class A, $1 par value, 5,000,000 shares authorized, 3,513,348 shares and 2,981,745 shares issued and outstanding				3,513,348			2,981,745
	Preferred stock, $10 par value, 5,000,000 shares authorized, no shares issued or outstanding				—			—
	Paid-in and contributed capital				38,601,255			21,932,820
	Common stock, Class A, $0.01 par value, 5,000,000 shares authorized, 100 shares issued and outstanding				1			1
	Accumulated other comprehensive income (loss)				651,787			(2,344,793	)
	Paid-in and contributed capital				84,697,238			43,297,238
	Retained earnings				82,562,674			73,869,766
	Accumulated other comprehensive income				2,563,934			2,888,792
			Total stockholders’ equity		164,929,064			136,039,538
	Retained earnings				104,618,159			101,807,062
			Total liabilities and stockholders’ equity	$	1,366,748,875		$	1,177,363,748
			Total stockholder’s equity		191,879,332			147,993,093
			Total liabilities and stockholder’s equity	$	1,727,120,056		$	1,563,990,951

The accompanying notes are an integral part of the ~~financial~~consolidated financial statements.

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

			Three Months Ended						~~Nine Months Ended~~
			June 30,						June 30,
			December 31,
			2002			2001			~~2002~~			~~2001~~
Revenues:
	Premiums and annuity considerations		$	~~119~~403,~~383~~761		$	~~141~~471,~~690~~171		$	~~383,097~~		$	~~514,490~~
	Net investment income			2629,~~831~~782,~~777~~900			1722,~~387~~048,~~326~~524			~~72,286,161~~			~~50,505,177~~
	Net losses on sales of investments			(3,394,389	)		(1,715,253	)		(10,209,827	)		(10,104,047	)
	Net gains (losses) on sales of investments			(4,686,425	)		347,124
		Total revenues		2325,~~556~~500,~~771~~236			1522,~~813~~866,~~763~~819			~~62,459,431~~			~~40,915,620~~
Expenses:
	Life insurance and annuity benefits			1215,~~707~~593,~~810~~631			1113,~~576~~168,~~154~~323			~~37,664,617~~			~~34,815,631~~
	Commissions to agents			13,~~629~~464,~~572~~426			1,~~885~~589,~~146~~611			~~4,390,854~~			~~7,164,090~~
	Administrative and other expenses			12,~~379~~133,~~431~~962			1923,~~439,337~~107			~~3,619,170~~			~~4,256,429~~
	Capitalization of deferred acquisition costs			(1,917,238	)		(2,430,860	)		(5,214,685	)		(9,046,151	)
	Capitalization of deferred policy acquisition costs			(3,820,950	)		(1,879,840	)
	Amortization of deferred acquisition costs			(175,000	)		3,225,000			5,275,000			9,675,000
	Amortization of deferred policy acquisition costs			2,700,000			2,525,000
		Total expenses		1320,~~624~~071,~~575~~069			1516,~~694~~326,~~777~~201			~~45,734,956~~			~~46,864,999~~
Income (loss) before income taxes				9,932,196			118,986			16,724,475			(5,949,379	)
Income before income taxes and minority interest				5,429,167			6,540,618
Income tax (provision) benefit				(3,476,270	)		11,156,862			(5,853,567	)		13,277,151
Income taxes				(1,899,320	)		(2,289,217	)
Net income				6,455,926			11,275,848			10,870,908			7,327,772
Net income before minority interest				3,529,847			4,251,401
Preferred stock dividends				(569,250	)		(1,039,500	)		(2,178,000	)		(2,900,750	)
Income of consolidated subsidiary allocated to minority stockholders				(718,750	)		(1,039,500	)
Income applicable to common stockholders			$	5,886,676		$	10,236,348		$	8,692,908		$	4,427,022
Net income			$	2,811,097		$	3,211,901

The accompanying notes are an integral part of the ~~financial~~consolidated financial statements.

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

			Three Months Ended						~~Nine Months Ended~~
			June 30,						June 30,
			December 31,
			2002			2001			~~2002~~			~~2001~~
Net income			$	62,~~455~~811,~~926~~097		$	113,~~275~~211,~~848~~901		$	~~10,870,908~~		$	~~7,327,772~~
Other comprehensive income (loss), net of income tax:
	Unrealized gains (losses) on investments:
		Unrealized holding gains (losses) arising during period*		1,679,107			(838,880	)		(2,453,635	)		5,267,935
		Unrealized holding gains (losses) arising during period(1)		(1,175,986	)		(3,900,826	)
		Less: reclassification adjustment for (gains) losses included in net income**		1,790,587			(108,259	)		5,450,215			1,208,522
		Less reclassification adjustment for (gains) losses included in net income(2)		851,128			(672,798	)
	Net other comprehensive income (loss)			3(324,~~469,694~~858	)		(~~947~~4,~~139~~573,624	)		~~2,996,580~~			~~6,476,457~~
Comprehensive income			$	9,925,620		$	10,328,709		$	13,867,488		$	13,804,229
Comprehensive income (loss)			$	2,486,239		$	(1,361,723	)

*		Net of related tax of $904,133 and $(437,392) for the three months ended June 30, 2002 and 2001, respectively, and $(1,323,346) and $2,746,702 for the nine months ended June 30, 2002 and 2001, respectively.
(1)		Net of related tax of ($633,220) and ($2,097,779) during the three months ended December 31, 2002 and 2001, respectively.
**		Net of related tax of $964,162 and $(58,294) for the three months ended June 30, 2002 and 2001, respectively, and $2,934,731 and $650,742 for the nine months ended June 30, 2002 and 2001, respectively.
(2)		Net of related tax of $458,300 and ($362,276) during the three months ended December 31, 2002 and 2001, respectively.

The accompanying notes are an integral part of the ~~financial~~consolidated financial statements.

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF ~~STOCKHOLDERS~~STOCKHOLDER’S EQUITY (UNAUDITED)

					Accumulated			~~Accumulated~~
					Additional			Other
			Paid-in and		Other						Total
	Preferred		Common		Paid-in			Comprehensive			Retained
	Common		Contributed		Comprehensive			Retained			Stockholder's
	Stock		~~Stock~~Capital		~~Capital~~Income			~~Income (Loss)~~Earnings			~~Earnings~~Equity			~~Total~~
Balance, October 1, 2001	$	39,600,000	$	2,981,745	$	21,932,820		$	(2,344,793	)	$	73,869,766		$	136,039,538
Balance, October 1, 2002	$	1	$	43,297,238	$	2,888,792		$	101,807,062		$	147,993,093
Net income									2,811,097			102,~~870~~811,~~908~~097			~~10,870,908~~
Net unrealized gains on available-for-sale securities, net of income tax provision of $1,611,385									2,996,580						2,996,580
Net unrealized losses on available- for-sale securities, net of income tax benefit of $174,920						(324,858	)					(324,858	)
Cash dividends, preferred stock (variable rate)												(2,178,000	)		(2,178,000	)
Contributed capital				41,400,000								41,400,000
Issuance of common stock (531,603 shares)				531,603		16,668,435									17,200,038
Balance, December 31, 2002	$	1	$	84,697,238	$	2,563,934		$	104,618,159		$	191,879,332
Balance, June 30, 2002	$	39,600,000	$	3,513,348	$	38,601,255		$	651,787		$	82,562,674		$	164,929,064

The accompanying notes are an integral part of the ~~financial~~consolidated financial statements.

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

					Nine Months Ended
					Three Months Ended
					June 30,
					December 31,
					2002			2001
Cash flow from operating activities:
	Net income				$	102,~~870~~811,~~908~~097		$	73,~~327~~211,~~772~~901
	Adjustments to reconcile net income to net cash from operating activities:
	Adjustments to reconcile net income to net cash provided by operating activities:
			Proceeds from sales of trading securities			~~13,590,118~~—			3313,~~385~~590,~~063~~118
			Proceeds from maturities of trading securities			~~1,020,171~~—			51,~~044~~020,~~525~~171
			Purchase of trading securities			(4,669,460	)		(33,958,765	)
			Acquisition of trading securities			—			(4,669,460	)
			Earned discount on receivables and investments			(20,433,058	)		(12,962,325	)
			Earned discount on investments			(7,692,270	)		(6,553,678	)
			Losses on investments and receivables, net			7,516,905			5,490,613
			Losses (gains) on investments, net			1,339,312			(1,165,653	)
			Gains on sales of real estate			(36,605	)		(237,758	)
			Losses (gains) on sales of real estate, net			6,219			(956	)
			Provision for losses on real estate assets			3,433,942			4,851,192
			Provision for losses			3,272,043			819,486
			Recovery of losses on other assets			(704,415	)		—
			Depreciation and amortization			227,706			200,655
			Depreciation and amortization			618,900			592,001
			Deferred income tax benefit			(174,920	)		(2,460,055	)
			Deferred income tax (benefit) provision			1,611,385			(12,511,864	)
			Changes in assets and liabilities:
				Deferred acquisition costs, net		60(1,~~315~~243,320	)		~~628~~645,~~850~~160
				Life insurance and annuity reserves		3811,~~476~~594,~~934~~680			3413,~~736~~349,~~887~~169
				Compound and accrued interest on debt payable		132,441			(809,995	)
				Accrued interest on investments		(6,488,407	)		(2,667,496	)
				Accrued interest on investments		(5,149,539	)		50,523
				Accrued interest on debt payable		166,906			31,218
				Other assets		4(3,~~326~~535,~~478~~786	)		397,~~284~~344,~~021~~698
				Accounts payable and accrued expenses		32,~~581~~232,~~179~~555			~~213~~(148,~~582~~797	)
				Amounts due to/from affiliates		~~(519~~16,~~092~~468,803	)		(144,~~034~~480,~~609~~110	)
				Other, net		(296,208	)		—
				Net cash provided by operating activities		18,984,618			18,066,371
				Net cash provided by operating activities		53,431,299			57,089,713
Cash flow from investing activities:
	Principal payments received on real estate contracts and mortgage notes receivable and other receivable investments					124,618,580			84,536,092
	Proceeds from maturities of available-for-sale securities					8,215,533			18,080,164
	Proceeds from sales of real estate contracts and mortgage notes receivable and other receivable investments					13,222,056			86,829,347
	Proceeds from sales of available-for-sale securities					93,142,165			26,433,172
	Proceeds from sales of real estate					6,415,222			10,429,020
	Purchases of available-for-sale securities					(183,462,812	)		(109,845,587	)
	Proceeds from maturities of available-for-sale investments					39,708,356			8,252,131
	Proceeds from maturities of held-to-maturity securities					12,668,929			—
	Proceeds from sales of available-for-sale investments					105,732,273			68,913,169
	Principal payments received on real estate contracts and mortgage notes and other receivable investments					11,444,363			37,838,439
	Acquisition of real estate contracts and mortgage notes receivable					(232,647,651	)		(187,636,416	)
	Proceeds from sales of real estate contracts and mortgage notes and other receivable investments					3,797,431			2,001,273
	Purchases of available-for-sale investments					(223,616,841	)		(106,400,374	)
	Purchases and originations of real estate contracts and mortgage notes and other receivable investments					(107,442,496	)		(49,353,528	)
	Purchases of held-to-maturity investments					(24,943,185	)		—
	Proceeds from sales of real estate					2,142,671			1,897,492
	Purchases of and costs associated with real estate held for sale and development					(117,~~087~~897,~~309~~786	)		(81,~~644,356~~709	)
	Proceeds from sale of land					216,000			—
	Other capital expenditures					(34,536	)		(22,341	)
	Capital expenditures					(71,006	)		(49,042	)
			Net cash used in investing activities			(177,426,538	)		(72,972,625	)
			Net cash used in investing activities			(192,453,505	)		(43,770,429	)
Cash flow from financing activities:
	Increase (decrease) in notes payable					39,127,974			(1,916,453	)
	Receipts from life and annuity products					87,540,646			40,013,211
	Decrease in indebtedness of related party					701,884			461,454
	Withdrawals of life and annuity products					(36,272,594	)		(29,367,103	)
	Receipts from life and annuity products					162,095,252			113,858,387
	Ceding of life and annuity products to reinsurers					—			(83,669	)
	Withdrawals of life and annuity products					(85,715,436	)		(92,307,083	)
	Ceding of life and annuity products from reinsurers					2,430,894			3,217,219
	Ceding of life and annuity products to reinsurers					(26,684,890	)		6,034,094
	Increase (decrease) in notes payable					44,977,341			9,853,684
	Issuance of preferred stock					—			5,000,000
	Increase (decrease) in related party indebtedness					260,816			199,502
	Issuance of common stock					17,200,038			10,232,187
	Issuance of common stock to Parent					—			17,200,038
	Cash dividends					(2,178,000	)		(2,900,750	)
	Contributed capital from Parent					41,400,000			—
		Net cash provided by financing activities				~~104~~140,~~546~~337,~~822~~103			3841,~~461~~032,~~836~~882
Net change in cash and cash equivalents						(3418,~~475~~104,~~384~~817	)		51(13,~~781~~873,~~120~~372	)
Cash and cash equivalents:
	Beginning of year					53,286,888			390,242
	Beginning of period					44,035,987			53,286,888
	End of year				$	18,811,504		$	52,171,362
	End of period				$	25,931,170		$	39,413,516
Non cash investing and financing activities of Company:
	Real estate acquired through foreclosure				$	21,121,460		$	5,205,490
	Real estate held for sale and development acquired through foreclosure					5,788,307			2,295,818
	Transfers between annuity products					407,~~023~~514,~~788~~794			678,~~734~~614,~~738~~706
	Receivables originated to facilitate the sale of real estate					780,000			575,590
	Transfer of investments from available-for-sale portfolio to held-to-maturity portfolio					262,518,789			—
	Transfer of investments from held-to-maturity to available-for-sale					—			58,522,805
	Transfer of investments from trading portfolio to available-for-sale portfolio					—			37,382,757
	Transfer of investments from trading to available-for-sale					38,593,522			—
	Timing difference on settlements of securities sales					—			11,522,708
	Assumption of other debt payable in connection with the acquisition of real estate contracts and mortgage notes					—			176,941
	Timing difference on settlements of securities purchases					—			100,957
	Timing difference on settlements of securities sales					4,147,031			—
	Timing difference on settlements of securities purchases					15,292,250			1,543,466

The accompanying notes are an integral part of the ~~financial~~consolidated financial statements.

WESTERN UNITED ~~LIFE~~HOLDING ~~ASSURANCE~~ COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis ~~Business~~of ~~and Organization~~Presentation

~~Western~~The ~~United~~accompanying ~~Life~~unaudited ~~Assurance~~consolidated ~~Company~~financial ~~(“Western”~~statements orhave been prepared in accordance with accounting principles generally accepted in the United ~~“Company”)~~States of America for interim financial information. Accordingly, athey ~~subsidiary~~do ~~substantially~~not ~~owned~~include all of the information and footnotes required by ~~Metropolitan~~generally accepted ~~Mortgage~~accounting &principles ~~Securities~~for Cocomplete financial statements. In the opinion of management, ~~Inc.~~the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Western United Holding Company and Subsidiary (the “~~Metropolitan~~Company”) as of December 31, is2002, ~~engaged~~the inresults of operations for the ~~offering~~three months ended December 31, ~~issuance~~2002 and ~~sale~~2001 ofand ~~annuity~~the ~~and~~cash ~~life~~flows ~~insurance~~for ~~policies.~~the ~~Western~~three ismonths ~~licensed~~ended toDecember 31, ~~sell~~2002 ~~insurance~~and in2001. ~~sixteen~~The results of ~~states~~operations for the three months ended December 31, ~~but~~2002 ~~its~~and ~~business~~2001 isare ~~primarily~~not necessarily ~~concentrated~~indicative inof the ~~states~~results ofto ~~Idaho,~~be expected for the full year. These ~~Montana,~~financial ~~Oregon,~~statements ~~Texas,~~should ~~Utah~~be ~~and~~read ~~Washington~~in conjunction with the consolidated financial statements including notes thereto included in the Company’s fiscal 2002 Form 10-K.

~~The~~Certain ~~Company~~amounts isin ~~a 53.7% owned subsidiary of Consumers Insurance Company, which is owned by Consumers Group Holding Company (“CGHC”). Metropolitan is~~ the ~~ultimate~~ ~~parent~~prior ~~company~~year’s ~~and~~consolidated ~~owns~~financial ~~all~~statements ~~of the common stock of CGHC. Metropolitan~~have ~~also~~been ~~has~~reclassified ato ~~46.3%~~conform ~~direct~~to ~~ownership of~~ the ~~common~~current ~~stock~~year’s ~~and 88~~presentation.6% ~~direct~~These ~~ownership~~reclassifications ofhad ~~the~~no ~~outstanding~~effect ~~preferred~~on ~~stock~~net ofincome ~~the~~(loss) or ~~Company.~~retained ~~The~~earnings ~~remaining~~as ~~11.4%~~previously ~~of the outstanding preferred stock is owned by Consumers Insurance Company~~reported. ~~Metropolitan is effectively controlled by C. Paul Sandifur, Jr.~~ ~~through common stock ownership and voting control.~~

2. InSubsequent ~~November 2001 and December 2001, respectively, the Company issued~~Event ~~309,501 and 222,102 shares of its common stock to Metropolitan for $17.2~~ ~~million.~~

2 The Company registered for sale up to $50.0 million ~~Basis~~of Series A preferred stock at December 31, 2002. Effective January 2, 2003, the preferred stock sale was completed and the Company issued 437,604 shares of ~~Presentation~~preferred stock and received proceeds of approximately $10.9 million.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Western United Life Assurance Company (the “Company”) as of June 30, 2002, and the results of its operations for the three and nine months ended June 30, 2002 and 2001 and cash flows for the nine months ended June 30, 2002 and 2001. The results of operations for the three and nine months ended June 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements for fiscal 2001, including notes thereto, included in Western United Holding Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission (SEC) on July 30, 2002.

3. Formation of Holding Company:

In May 2002, Metropolitan formed Western United Holding Company (“WUHC”) as a wholly owned subsidiary and in August 2002 transferred Metropolitan’s 46.3% ownership of the Company to WUHC. In August 2002, CGHC also transferred its 53.7% ownership of the Company to WUHC, thereby making the Company a wholly owned subsidiary of WUHC.

4. Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. The Statement will require discontinuing the amortization of goodwill and other intangible assets with indefinite useful lives. Instead, these assets will be tested periodically for impairment and written down to their fair market values as necessary. This Statement is effective for fiscal years beginning after December 15, 2001. The Company has completed an evaluation of the effects of this Statement and does not believe it will have a material impact on the Company’s financial statements.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. This Statement addresses accounting and reporting of long-lived assets, except goodwill, that are either held and used or disposed of through sale or other means. The Company is currently evaluating the impact of this Statement on the Company’s financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company has completed an evaluation of the effects of this Statement and does not believe it will have a material impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities initiated after December 31, 2002. The Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company is currently evaluating the impact of this Statement and does not believe it will have a material impact on the Company’s financial statements.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These discussions may contain forward-looking statements. A forward-looking statement may contain words such as “will continue to be,” “will be,” “continue to,” “expect to,” “anticipates that,” “to be,” or “can impact.” Management cautions that forward-looking statements are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from those projected in forward-looking statements.

General

Western United ~~Life~~Holding ~~Assurance~~ Company ~~was~~(“Western ~~incorporated~~Holding” inor the ~~state~~“Company”), ofa ~~Washington~~wholly inowned ~~1963~~subsidiary ~~and~~of ~~became~~Metropolitan Mortgage & Securities Co., Inc. (“Metropolitan”), is a ~~member~~holding ofcompany ~~the~~for Western United Life Assurance Company (“Western Life”). Metropolitan ~~group~~is ofeffectively ~~companies~~controlled by C. Paul inSandifur, ~~1972~~Jr. asthrough common stock ownership and voting control. Western Life is engaged in the ~~result~~offering, issuance and sale of aannuity ~~stock~~and ~~purchase~~life ~~transaction~~insurance policies. ~~Through~~Western ~~growth~~Life ~~and~~is licensed to sell insurance in sixteen states, but its ~~acquisitions~~business itis ~~has~~primarily ~~developed~~concentrated ~~into~~in athe ~~diversified~~states ~~financial~~of ~~institution~~Idaho, ~~with~~Montana, Oregon, ~~assets~~Texas, ~~exceeding~~Utah $1and Washington.~~4 billion.~~

InThe ~~conjunction~~consolidated ~~with~~financial ~~Metropolitan~~statements ~~Mortgage~~include ~~& Securities Co., Inc., its parent company,~~ the ~~Company~~accounts ~~has been investing in receivables for its own account for 28 years. One~~ of ~~the Company’s principal investment activities is~~Western ~~investing~~Holding inand ~~receivables~~its ~~that~~majority-owned ~~are cash flowing assets~~subsidiary, ~~consisting~~Western ~~of obligations collateralized by real estate, structured settlements, annuities, lottery prizes, and other investments (“Receivables”)~~Life. InAll ~~January 2001, the~~significant ~~Company~~intercompany ~~changed~~transactions ~~the focus of its investment strategy away from acquiring residential real estate loans for securitization purposes to acquiring, originating~~ and ~~holding~~balances ~~both~~have ~~residential~~been ~~real~~eliminated ~~estate~~in ~~loans and commercial loans~~consolidation.

~~Critical~~ In ~~Accounting~~conjunction ~~Policies~~with Metropolitan, the Company has been investing in receivables for its own account for 28 years. One of the Company’s principal investment activities is investing in receivables that are cash flowing assets, consisting of obligations collateralized by real estate, structured settlements, annuities, lottery prizes, and other investments (“Receivables”).

The accounting policies described below are those that the Company considers critical in preparing its financial statements. These policies include significant estimates made by management using information available at the time the estimates were made. However, the estimates could change materially if different information or different assumptions were used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the Company in preparing its financial statements is included in Note 1 of Western Holding’s Registration Statement on Form S-1 filed with the SEC on July 30, 2002.

Critical Accounting Policies

The accounting policies described below are those that the Company considers critical in preparing its consolidated financial statements. These policies include significant estimates the Company makes using information available at the time the estimates are made. However, the estimates could change materially if different information or assumptions are used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the Company in preparing its consolidated financial statements is included elsewhere in the Company’s audited financial statements for the year ended September 30, 2002.

Asset Valuations

Investments

The Company classifies its investments in debt and equity securities as “~~trading,” “~~available-for-sale,” or “held-to-maturity”.” The significant accounting policies related to these investment classifications are as follows:

Trading Securities: Trading securities consist primarily of mortgage- and asset-backed securities and are recorded at fair value based on quoted market prices. Realized and unrealized gains and losses on these securities are included in the statements of operations. Available-for-Sale Securities:. Available-for-sale securities, consisting primarily of mortgage- and asset-backed securities, government-backed bonds, corporate bonds, equity securities and venture capital investments, are carried at quoted and estimated fair values. Unrealized gains and losses on available-for-sale securities are excluded from earnings and presented as accumulated other comprehensive income or loss, net of related deferred income taxes, as a component of stockholder’s equity. The Company continually monitors its investment portfolio for other than temporary ~~declines~~impairment ~~in the fair value~~ of ~~of its~~ securities. When an other- than- a temporary decline in the value below cost or amortized cost is identified, the investment is reduced to its fair value, which becomes the new cost basis of the investment. The amount of the reduction is reported as a realized loss in the statement of operations. Any recovery of value in excess of the investment’s new cost basis is recognized as a realized gain only ~~upon~~on sale, maturity or other disposition of the investment. Factors that the Company ~~considers~~evaluates in determining the existence of an other than temporary decline in ~~fair~~ value include (1) the length of time and extent to which the fair value has been less than cost or carrying value, (2) the circumstances contributing to the decline in fair value (including a change in interest rates or spreads to benchmarks), (3) recent performance of the security, (4) the financial strength of the issuer, and (5) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for anticipated recovery. Additionally, for asset-backed securities, the Company ~~also~~ considers the ~~credit~~security rating and the amount of credit support available for the security. The Company holds debt securities generated from securitization transactions. For securities without an established market price, estimated fair value is derived from expected discounted future cash flows. When determining expected future cash flows, the Company considers interest rates, estimated prepayment rates, collateral value and historical default rates experienced by the securities. To the extent that actual experience is less favorable than the assumptions, an impairment in the debt securities could result. The Company periodically assesses the assumptions used in valuing the cash flows and the related carrying value of these securities. Held-to-Maturity Securities: Held-to-maturity securities are carried at amortized cost. Premiums and discounts on these securities are amortized on a specific-identification basis using the interest method. The Company has the ability and intent to hold these investments until maturity.

~~Real~~The ~~Estate~~Company ~~Held~~holds ~~for~~debt ~~Sale~~securities generated from its own securitization transactions. For these securities, estimated fair market value is derived from expected discounted future cash flows. When determining expected future cash flows, the Company considers interest rates, estimated prepayment rates, collateral value and ~~Development~~ historical default rates experienced by the securities. To the extent that actual experience is less favorable than the assumptions, impairment in the debt securities could result. The Company periodically assesses the assumptions used in valuing the cash flows and the related carrying value of these securities.

~~Real~~Held-to-Maturity ~~estate~~Securities: ~~held~~Held-to-maturity ~~for~~securities ~~sale~~are ~~and~~carried ~~development is stated~~ at ~~the~~amortized ~~lower of~~ cost ~~or fair value less estimated costs to sell~~. ~~The~~Premiums ~~Company principally acquires real estate through acquisition~~ and ~~foreclosure.~~discounts ~~Cost~~on isthese ~~determined~~securities byare ~~the purchase~~amortized ~~price~~on ofa ~~the~~specific-identification ~~real~~basis ~~estate~~using ~~or, for real estate acquired by foreclosure, at~~ the ~~lower~~interest ~~of the fair value of the property at the date of foreclosure less estimated selling costs, or carrying value at the date of foreclosure~~method. ~~Project costs,~~The ~~including~~Company ~~interest,~~has ~~associated with~~ the ~~development~~ability ~~of real estate are capitalized~~ and ~~included~~intent into ~~the~~hold ~~cost~~these ~~basis~~investments ofuntil ~~the real estate~~maturity.

Profit on sales of real estate is recognized when the buyers’ initial and continuing investment is adequate to demonstrate a commitment to fulfill the terms of the transaction, that collectibility of the remaining sales price due is reasonably assured, and the Company maintains no continuing involvement or obligation in relation to the property sold and has transferred all the risks and rewards of ownership to the buyer.

Allowances for Losses

Allowance for Losses on ~~Real~~Receivables. ~~Estate~~Commercial ~~Contracts~~Loans are individually monitored for impairment. A loan is considered impaired when, based on current information and ~~Mortgage~~events, ~~Notes Receivable~~it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. ~~Originated~~Probable ~~commercial~~is ~~loans~~defined as “future events are ~~individually~~likely ~~monitored~~to ~~for impairment~~occur.” When a loan has been identified as impaired, the Company determines the allowance for loss based on the estimated fair ~~value~~market ~~of the collateral~~value, less estimated liquidation expenses, of the collateral compared to the carrying value of the receivable. IfThe ~~the~~ estimated fair market value is based on the most recent appraisal of the collateral. If the most recent appraisal is ~~less~~more than one year old, a new appraisal is ordered. In the ~~carrying~~ ~~value~~interim, anestimated ~~allowance~~fair ~~for~~market ~~loss~~value is ~~recognized~~established through a review of the appraisal in addition to a review of other relevant market information. ~~Additionally~~When reviewing the most recent appraisal, the Company ~~has~~ ~~established~~considers athe 0type of property, changes in the economic factors of the region and the underlying appraisal assumptions.~~25%~~ ~~allowance~~If ~~for~~the ~~losses~~estimated ~~that~~fair ~~represent~~market ~~inherent~~value ~~losses within~~of the ~~commercial~~collateral ~~loan~~is ~~portfolio~~less atthan the ~~balance~~carrying ~~sheet~~value, ~~date~~an allowance for loss is recognized.

TheTable remaining real estate contracts and mortgage notes receivable portfolio consists of a large group of smaller-balance homogenous loans that are collectively evaluated for impairment. The Company establishes an allowance for inherent losses on the receivables (both principal and interest) based primarily on historical foreclosure and loss experience. To the extent actual experience differs from assumptions, such adjustments would be included in the statement of operations. Contents

~~Allowance for Losses on Real Estate Held for Sale and Development.~~ The ~~allowance~~ ~~for~~remaining ~~losses on~~ real estate ~~held~~contracts ~~for sale~~ and ~~development~~mortgage ~~includes amounts~~notes ~~for~~receivable ~~estimated~~portfolio ~~losses~~is asmade aup ~~result~~ of ana ~~impairment~~large ingroup ~~the value~~ of ~~the real~~smaller-balance ~~property.~~homogenous ~~The~~loans ~~Company~~that ~~reviews~~are ~~its~~collectively ~~real~~evaluated ~~estate properties~~ for impairment ~~periodically or whenever events or circumstances indicate that the carrying value of the asset may not be recoverable~~. The ~~carrying~~Company ~~value~~establishes ofan aallowance ~~repossessed property~~for isinherent ~~determined~~losses ~~as of the date of repossession of the property and is based~~ on the ~~lower~~receivables ~~of fair value or carrying value. The fair value is~~ based primarily on an ~~appraisal~~current bydelinquencies aand ~~licensed~~recent ~~independent~~foreclosure ~~appraiser~~and atloss ~~the time of repossession~~experience. If ~~expected~~To ~~future undiscounted cash flows from~~ the ~~use~~extent ofactual ~~the~~experience ~~asset~~differs ~~or the fair value, less selling costs,~~ from ~~the disposition of the asset is less than its carrying value~~assumptions, ansuch ~~impairment~~adjustments iswould ~~recognized~~be included in the statement of operations.

~~Deferred~~Allowances ~~Costs~~ for losses on real estate contracts and mortgage notes receivable are based on the carrying value of the receivable, including accrued interest. Accordingly, the Company accrues interest on delinquent receivables until foreclosure.

~~Deferred~~Allowance ~~acquisition~~for ~~costs,~~Losses ~~consisting~~on ofReal ~~commissions~~Estate toHeld ~~agents~~for Sale and ~~other insurance~~Development. ~~underwriting~~The ~~and~~allowance ~~annuity~~for ~~policy~~losses ~~costs,~~on ~~are~~real ~~deferred.~~estate ~~Cost~~held for ~~annuity contracts~~sale and ~~life~~development ~~insurance~~includes ~~policies~~amounts ~~are~~for ~~amortized~~estimated ~~over~~losses ~~the~~as ~~lives~~a result of ~~the contracts~~impairment orin ~~policies~~value. The Company reviews its real estate properties for impairment in ~~proportion~~value towhenever events or circumstances indicate that the ~~present~~carrying value of ~~estimated~~the ~~future gross~~asset ~~profits~~may exceed its fair market value. ToThe carrying value of a repossessed property is determined as of the ~~extent~~date ~~actual~~of ~~experience~~repossession ~~differs~~of ~~from~~the ~~assumptions,~~property and to ~~the~~is ~~extent~~based ~~estimates~~on the lower of ~~future~~fair ~~gross~~market ~~profits~~value ~~require~~less ~~revision~~selling costs or carrying value at the time the property was repossessed. For non-commercial properties, an appraisal is obtained on the ~~unamortized~~ ~~balance~~foreclosed property to determine its fair market value at time of ~~deferred~~repossession. ~~acquisition~~For ~~costs~~commercial properties, an appraisal is ~~adjusted~~obtained ~~accordingly;~~on ~~such adjustments~~the ~~would~~foreclosed beproperty ~~included~~to indetermine the ~~statement~~fair market value only if the most recent appraisal is more than one year old, otherwise the existing appraisal is used. Periodically, the Company may not order an updated appraisal in accordance with its established policies if current negotiations with a potential purchaser can establish an indication of ~~operations~~value.


	Subsequent to repossession (or acquisition in the case of development properties), if the value of the property declines such that the fair market value, less selling costs, from the disposition of the asset is less than its carrying value, an impairment is recognized in the statement of operations.

Deferred Policy Acquisition Costs

Deferred policy acquisition costs, consisting of commissions and other insurance underwriting and annuity policy costs, are deferred, and amortized over the lives of the contracts or policies in proportion to the present value of estimated future gross profits. To the extent actual experience differs from assumptions, and to the extent estimates of future gross profits require revision, the unamortized balance of deferred policy acquisition costs is adjusted accordingly; these adjustments would be included in the statement of operations.

Life Insurance and Annuity Reserves

Premiums for annuities and universal life insurance contracts ~~and annuities~~ are reported as life insurance and annuity reserves under the deposit method. of accounting. Reserves for annuities and universal life insurance ~~and annuities~~ are equal to the sum of the ~~account~~ account balances, including credited interest and deferred service charges. Based on past experience, consideration is given in actuarial calculations to the number of policyholder and annuitant deaths that might be expected, policy lapses, surrenders and terminations. As a result of ~~possible~~ changes in the factors considered in the actuarial calculations, it is reasonably possible that the reserves for ~~universal life~~ insurance and annuities could change in the near future.

Liquidity and Capital Resources

The objective of liquidity management is to provide funds at an acceptable cost to meet demands for receivable purchases and commercial loans and to service other liabilities as they become due. Managing liquidity also enables the Company to take advantage of opportunities for business expansion. The Company finances its business operations and growth with proceeds from the sale of annuity and life insurance products, the sale of equity securities to affiliates, a secured line of credit agreement, reverse repurchase agreements, receivable cash flows, the sale of real estate, the sale of marketable securities and securities portfolio earnings.

In January 2001, the Company changed the focus of its investment strategy away from acquiring residential real estate loans for securitization purposes to acquiring, originating and holding both residential real estate loans and commercial loans. Historically, proceeds from securitizations were used to pay-down a secured line of credit that was used to fund the acquisition of securitizable product. Therefore, the Company does not anticipate that the change in investment strategy away from securitizations will have a negative effect on its ability to acquire and hold residential and commercial loans.

~~The~~Results annuity and life insurance business is highly competitive. The Company competes with other financial institutions including ones with greater resources and greater name recognition. Premium rates, annuity yields and commissions to agents are particularly sensitive to competitive forces. The Company believes that it is in an advantageous position in this regard because of ~~its earnings capability through investments in receivables compared to that~~Operations ~~of most other life insurance companies. Additionally, the Company believes the~~ primary competitive factors among life insurance companies for investment-oriented insurance products, like annuities, include product flexibility, net return after fees, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels, and service rendered to the customer before and after a policy or contract is issued. Other factors affecting the annuity business include the benefits, including before-tax and after tax investment returns, and guarantees provided to the customer and the commissions paid to the agent. If the Company is unable to effectively price its annuities, offer competitive commissions and effectively compete for the sale of our annuity products, its liquidity could be adversely affected.

OnThree ~~October 25,~~Months ~~2001,~~Ended ~~A.M. Best announced that they were downgrading the financial strength rating of the Company from B+ (Very Good) to B (Fair). According to A.M. Best~~December 31, ~~the~~2002 ~~rating~~Compared ~~action reflected the Company’s significant investment in mortgages, mortgage-backed bonds, real estate relative~~ to ~~surplus,~~ ~~decreased~~Three ~~surrender~~Months ~~charge~~Ended ~~protection on annuity reserves and~~December ~~declining risk-adjusted capitalization~~31, ~~as well as the weakened financial~~2001 ~~position of Metropolitan, the parent organization. Partially offsetting these~~ ~~items were the Company’s historic profitability and ability to grow its core individual annuity lines of business.~~

The ~~Company~~following ~~anticipates~~table ~~that~~presents the ~~change~~components ~~in ratings will result in a slight increase to its cost~~ of ~~funds in addition to a slight increase in surrender rates as current policies enter their surrender periods. However,~~ the ~~change in~~results the Company’s investment strategy to acquiring and holding both residential and real estate loans and commercial loans has resulted in higher yields on investments. Therefore, the Company expects the slight increase in the cost of ~~funds~~ ~~will be offset by the higher yields obtained through the new strategy. In~~operations ~~response~~during to the ~~rating~~three ~~downgrade,~~months ~~the~~ended ~~Company increased its capital through a $17.2~~December ~~million~~31, ~~sale~~2002 ~~of common stock to Metropolitan in addition to focusing on issuing annuity~~ and ~~life insurance policies with greater surrender charge~~2001: ~~protection. A.M. Best ratings are performed on an annual basis and the Company~~ ~~does not anticipate any change to its rating in the coming year.~~

In 1993, the state of Washington enacted the Risk-Based Capital Model law, which requires an insurance company to maintain minimum amounts of capital and surplus based on complex calculations of risk factors that encompass the invested assets and business activities of the insurance company. The Company’s capital and surplus levels exceeded the calculated minimum requirements at our statutory reporting period ended December 31, 2001. Recently, the Company has maintained adequate levels of capital through the sale of common stock and preferred stock to its affiliates. If its affiliates do not maintain adequate levels of liquidity, the Company’s ability to generate capital from affiliates could be adversely affected, which in turn could negatively affect its ability to increase its investments in higher risk-adjusted assets such as commercial loans, real estate and equity investments.


	Three Months Ended
	December 31,

	2002			2001

Net investment spread	$	14,189,269		$	8,880,201
Net non-investment expense		(5,194,627	)		(2,041,547	)
Capitalized deferred costs, net of amortization		1,120,950			(645,160	)

Income before gains (losses) on investments		10,115,592			6,193,494
Net gains (losses) on investments		(4,686,425	)		347,124

Income before income taxes		5,429,167			6,540,618
Income taxes		(1,899,320	)		(2,289,217	)

Net income before minority interest		3,529,847			4,251,401
Income of consolidated subsidiary allocated to minority stockholders		(718,750	)		(1,039,500	)

Net income	$	2,811,097		$	3,211,901

~~The~~Net ~~Company~~Investment ~~has a line of credit agreement with the Federal Home Loan Bank~~Spread ~~of Seattle (“FHLB”). When an institution becomes a stockholder in the FHLB, it~~ can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At June 30, 2002, the Company had a stock investment in the FHLB of approximately $3.5 million, which resulted in a borrowing capacity of approximately $70.0 million, subject to collateral requirements. The collateral used to secure the borrowing is predefined by the FHLB and generally consists of high quality collateralized mortgage obligations. Each type of collateral has a minimum pledge requirement that ranges from 100% to 125%. At June 30, 2002, the Company had pledged approximately $218.3 million in eligible collateral with a fair value of approximately $222.0 million resulting in a borrowing potential of approximately $170.6 million. At June 30, 2002, the Company had approximately $61.4 million in outstanding borrowings leaving an unused borrowing potential of approximately $8.6 million based on its stock investment. In order to increase the unused borrowing potential to match the amount of collateral pledged, the Company would be required to purchase approximately $5.0 million in additional FHLB stock.

Net investment spread consists of interest and earned discounts on 12Receivables and other investments, net of interest expense, insurance policy and annuity benefits, and salaries, commissions and other expenses incurred as a result of owning the investments.

Insurance policy and annuity benefits primarily consist of interest credited on outstanding policies at the rates of return specified in the policy. When an annuity or an insurance policy is issued, these rates of return are guaranteed for a limited number of years. After that, subject to any guaranteed rate of return specified in the insurance policy or annuity, these rates of return may be adjusted at the Company’s discretion. Additionally, insurance and annuity policy benefits also include payments of death claims on mortality contracts. These mortality contracts account for approximately 2% of direct premiums with a portion of the life risk being offset by reinsurance treaties.

The following table presents the components of net investment spread during the three months ended December 31, 2002 and 2001:


			Three Months Ended
			December 31,

			2002			2001

Net investment spread:
	Gross investment income		$	34,196,360		$	25,119,751
	Investment expenses			(4,413,460	)		(3,071,227	)
	Insurance policy and annuity benefits			(15,593,631	)		(13,168,323	)

		Net investment spread	$	14,189,269		$	8,880,201

The ~~Company~~following ~~has~~table apresents ~~reinsurance~~the ~~agreement~~net ~~with~~average ~~Old~~yields ~~Standard~~realized ~~Life~~by ~~Insurance~~the Company ~~(“Old~~on ~~Standard”),~~interest ansensitive ~~affiliate,~~assets ~~which~~and ~~became~~liabilities ~~effective~~during ~~July 1,~~the ~~1998~~three ~~and~~months ~~remained~~ended ~~in effect at June~~December 3031, 2002. ~~Under~~and ~~this~~2001 ~~agreement,~~based ~~the Company can reinsure with Old Standard 75% of the risk~~ on ~~certain~~average ~~annuity~~monthly ~~products. The~~ending ~~reinsurance~~asset/liability ~~agreement is an ongoing arrangement with no stated expiration or~~balances: ~~termination date, although either party may stop and restart at their~~ ~~discretion by providing a 30-day advance written notice.~~

Another source of liquidity is derived from payments received on receivable cash flows and the sale of real estate. A decrease in the prepayment rate on receivables or the ability to sell real estate would reduce future cash flows from receivables. Additionally, to increase liquidity, the Company may occasionally sell securities to a broker-dealer under the provision that the securities will be repurchased by a predetermined date for a specific price, often called a reverse repurchase agreement. At June 30, 2002, the Company did not have any reverse repurchase agreements outstanding.


		December 31,			December 31,
		2002 Average			2001 Average

Interest sensitive assets:
Securities Investments (including cash)		$	588,418,442		$	376,673,414
	Yield		5.18	%		6.52	%
Real estate contracts and mortgage notes receivable		$	618,391,131		$	401,354,692
	Yield		14.99	%		14.30	%
Other receivables		$	104,710,411		$	151,124,575
	Yield		8.13	%		8.62	%
Policy loans		$	19,619,151		$	19,409,527
	Yield		7.39	%		7.14	%
Indebtedness of related parties		$	18,791,803		$	19,780,128
	Yield		8.53	%		9.34	%
Interest sensitive liabilities:
Life insurance and annuity reserves, net of reinsurance receivable		$	1,113,499,015		$	876,259,394
	Yield		5.60	%		6.01	%
Debt payable		$	139,302,048		$	25,680,008
	Yield		4.31	%		7.37	%

The ~~Company’s~~increase ~~ability~~in tonet ~~sell~~investment ~~available-for-sale~~spread ~~investments~~from ~~for~~2001 ~~liquidity purposes~~to is2002 ~~partially~~was ~~affected~~primarily ~~by the laws of the state of Washington that~~due ~~limit~~to ~~the~~an ~~Company’s~~increase ~~investments~~ in ~~real~~annuity ~~estate~~products ~~related~~sold ~~assets~~by toWestern ~~65%~~Life, ofwhich ~~its statutory~~resulted ~~assets.~~in ~~The Company is restricted from selling non-real estate~~an ~~related~~increase ~~assets~~in ~~if, after~~ the ~~sale,~~commercial ~~its~~lending ~~real~~activities ~~estate assets would exceed 65%~~ of ~~its~~ ~~statutory~~Western ~~assets~~Life. ~~However~~Commercial Loans, ~~occasionally~~which ~~the~~have ~~Company~~higher ~~may~~yields ~~acquire~~than ~~real estate related receivables that qualify as mortgage-related securities under~~ the ~~Secondary~~ ~~Mortgage~~residential ~~Market Enhancement Act~~portfolio, oraccounted ~~SMMEA. SMMEA generally provides~~for ~~that~~62% ~~qualifying~~of ~~loans may be acquired to~~ the ~~same~~outstanding ~~extent that obligations that are issued by or guaranteed as to~~ principal ~~and~~balance ~~interest~~of ~~by the United States Government, its agencies and the instrumentalities can be acquired. As a result, the Company can acquire qualifying~~ real estate ~~loans~~contracts inand ~~amounts in~~mortgage ~~excess~~notes ofreceivable ~~the~~at ~~65% limitation. At June~~December 3031, 2002, ~~the~~compared ~~Company~~to ~~had approximately 60~~35% ofat ~~its~~December 31, ~~statutory admitted assets invested in real estate related assets that did not qualify as SMMEA investments~~2001.

~~For~~Western ~~statutory~~Life ~~purposes,~~has ~~the~~experienced ~~Company~~a ~~performs~~decrease ~~cash~~in ~~flow~~the ~~testing~~yields ~~under~~on ~~seven~~its investment ~~different~~portfolio as the 5-year constant maturity U.S. Treasury rate, ~~scenarios~~which is similar to the average maturity of its fixed income portfolio, has decreased. AnDuring the ~~annual~~twelve-month ~~opinion~~period ~~regarding~~ended December 31, 2002 proceeds from the ~~adequacy~~sale and maturities of the ~~cash~~investment portfolio totaled $448.5 million. As proceeds from ~~flow~~the ~~testing~~sales isand ~~filed~~maturities ~~with~~were reinvested back into a lower interest rate market, the ~~insurance~~overall ~~departments~~portfolio inyield was reduced. Additionally, Western Life’s recent focus on improving the ~~states~~average ~~where~~credit rating of the investment portfolio ~~Company~~has isalso ~~licensed~~contributed to the reduction in the investment yields. At December 31, ~~2001~~ 2002, ~~the~~approximately ~~results~~74.6% of ~~the~~Western ~~cash~~Life’s ~~flow~~portfolio was rated either AAA or ~~testing~~AA ~~were~~compared ~~satisfactory~~to 56.2% at December 31, 2001. The higher credit rating is expected to result in a lower effective yield, but also reduced credit risk.

~~During~~The ~~the~~reduction ~~nine~~in ~~month~~the ~~period~~interest ~~ended~~rate ~~June 30,~~environment ~~2002,~~during ~~$563.3 million~~the inlast ~~funds~~twelve ~~provided~~months byhas ~~the~~allowed ~~Company’s~~Western ~~various~~Life ~~liquidity~~to ~~sources~~borrow ~~were~~funds ~~used~~on toits ~~(1) invest~~secured line of credit ~~$482.4 million~~with ~~primarily~~the inFederal ~~receivables~~Home ~~and~~Loan ~~investments~~Bank ~~and~~of ~~(2) fund~~Seattle ~~$115~~at lower interest rates.4 This ~~million~~borrowing infacility ~~debt~~has ~~maturities,~~led ~~annuity~~to ~~product~~a ~~surrenders,~~reduction ~~and~~in the ~~payment~~current ofyear debt payable cost ~~dividends~~of funds.

~~During~~The ~~the~~increase ~~nine~~in ~~month~~investment ~~period~~expenses ~~ended~~was ~~June 30,~~primarily ~~2001,~~due to approximately $~~451~~0.69 million increase in ~~funds~~interest expense and approximately $0.4 million ~~provided~~increase byin ~~the~~servicing ~~Company’s~~fees. ~~various~~The ~~liquidity~~increase ~~sources~~in ~~were~~interest ~~used~~expense tois ~~(1) invest~~primarily the ~~$302.7 million~~result ~~primarily~~of an increase in ~~receivables~~advances ~~and~~on ~~investments~~the ~~and~~secured ~~(2) fund~~line ~~$97.1~~of credit with the ~~million~~Federal Home Loan Bank of Seattle. The increase in ~~debt~~servicing ~~maturities,~~fees ~~annuity~~is ~~product~~the result ~~surrenders,~~of ~~and~~an increase in the ~~payment~~Company’s ~~of dividends~~Receivable portfolio.

Transactions with Affiliates

On March 28, 2002, the Company agreed to sell to Old Standard and Old West Life Insurance & Annuity Company a 69.20% undivided beneficial interest in a certain Lottery Trust owned by the Company. The purchase price of $11.2 million, which was derived from future expected cash flows discounted at a 6.957% market rate, resulted in a gain of approximately $0.6 million. The primary purpose of entering into the lottery trust purchase and sale agreement was to generate additional funds that could be used for commercial lending activities.

Delinquency

The principal amount of receivables collateralized by real estate as to which payments were in arrears more than three months was $27.7 million at June 30, 2002 and $16.4 million at June 30, 2001. The principal amount of non-guaranteed receivables collateralized by real estate as to which payments were in arrears more than three months was $24.3 million at June 30, 2002 and $14.0 million at June 30, 2001. The increase from June 30, 2001 to June 30, 2002 was due primarily to growth in the Company’s commercial loan receivables, which have principal balances that are larger than those of residential real estate receivables.

The principal amount of other receivables as to which payments were in arrears more than three months was $4.6 million at June 30, 2002 and $1.9 million at June 30, 2001.

~~Results~~ The offollowing ~~Operations~~table summarizes the rate/volume changes in the Company’s interest sensitive assets between the three months ended December 31, 2002 and 2001 by interest sensitive asset class:

Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001


	Three months ended December 31, 2002 vs.
	Three months ended December 31, 2001

	Increase (Decrease)
	Due to

	Volume			Rate			Total Change

Interest sensitive assets:
Investments (including cash)	$	3,449,217		$	(1,958,673	)	$	1,490,544
Real estate contracts and mortgage notes receivable		7,758,262			1,073,264			8,831,526
Other receivables		(999,757	)		(127,686	)		(1,127,443	)
Policy loans		3,743			12,196			15,939
Indebtedness of related party		(23,076	)		(38,239	)		(61,315	)

	$	10,188,389		$	(1,039,138	)	$	9,149,251

~~Net~~Gains ~~income~~(Losses) ~~after income taxes for the nine-month period ended June 30, 2002 was $10.9 million~~ on ~~$62.5 million in revenues compared to a net income of~~Investments ~~$7.3 million on $40.9 million in revenues for the nine-month period ended June~~ ~~30, 2001. Income before income taxes for the nine months ended June 30, 2002~~ ~~was approximately $16.7 million compared to a loss of approximately $5.9 million for the nine months ended June 30, 2001.~~

The ~~increase~~components inof ~~net~~gains ~~income~~(losses) on ~~before~~investments ~~income~~for ~~taxes~~the ofthree ~~$22.7~~months ended December ~~million~~31, ~~was~~2002 ~~due~~and ~~primarily~~2001 toare as follows:

	•		an increase in net interest sensitive income of $18.8 million and
		Three Months Ended
	•		a decrease in non-interest expense of $4.0 million.
		December 31,
		2002			2001
Net gains (losses) on sale of real estate		$	(6,219	)	$	956
Net investment securities gains (losses)			(1,339,311	)		1,165,654
Realized gains on sale of receivables			(68,852	)		—
Provision for loss on real estate loans and assets			(3,272,043	)		(819,486	)
Net gains (losses) on investments		$	(4,686,425	)	$	347,124

~~These~~Net ~~changes~~Investment ~~were~~Securities ~~partially~~Gains ~~offset by:~~(Losses)

• The ancomponents ~~increase~~of innet investment securities gains (losses) onfor ~~sales~~the ofthree ~~investments~~months ended ofDecember 31, ~~$0.1~~2002 ~~million.~~and 2001 are as follows:

Net interest sensitive income


		Three Months Ended
		December 31,

		2002			2001

Other than temporary declines in value:
	Equity securities	$	(122,289	)	$	(10,476	)
	Other securities		(1,333,765	)		(20,296	)
Realized gains (losses):
	Securities investments		116,743			1,065,846
Realized gains on trading securities			—			130,580

Net investment securities gains (losses)		$	(1,339,311	)	$	1,165,654

Interest sensitive income consists of interest on receivables, earned discounts on receivables, insurance revenues and other investment interest. The related expenses consist of salaries, commissions and other operating expenses incurred as a result of owning the interest sensitive assets, interest expense on borrowed money and insurance policy and annuity benefits.

The Company is in a “liability sensitive” position in that its interest sensitive liabilities reprice or mature more quickly than do its interest sensitive assets. Consequently, in a rising interest rate environment, the net return from interest sensitive assets and liabilities will tend to decrease. Conversely, in a declining interest rate environment, the net return from interest sensitive assets and liabilities will tend to improve. The Company believes there has not been a material change in its market risk since the end of its last fiscal year.

The following table represents the average yields realized by the Company on interest sensitive assets and liabilities during the nine month periods ended June 30, 2002 and 2001 based on average monthly ending balances:

	2002			2001
	Average			Average
Investments	$	364,712,075		$	285,074,389
Yield		6.83	%		7.74	%
Real estate contracts		435,360,118			346,458,162
Yield		14.80	%		10.76	%
Other receivables		147,699,132			151,792,282
Yield		8.39	%		8.87	%
Policy Loans		19,515,860			19,326,193
Yield		7.47	%		7.33	%
Indebtedness of related parties		19,543,887			20,310,643
Yield		8.75	%		10.51	%
Life reserves		901,748,248			804,091,773
Yield		5.82	%		6.30	%
Debt payable		37,074,993			23,583,761
Yield		4.40	%		7.37	%

~~For~~Other ~~the~~than ~~nine~~temporary ~~months~~declines ~~ended June 30, 2002, net interest sensitive income was approximately $35.0 million compared to $16.2 million~~ in ~~the comparable prior~~value ~~year period. The increase in net interest sensitive income between periods was~~ primarily the result of an increase in the Company’s commercial lending activities. During the nine months ended June 30, 2002, average monthly interest earning assets were approximately $1.0 billion compared to $0.9 billion during the same period in the previous year. Additionally, the Company’s average net interest margin increased to approximately 4.6% for the nine months ended June 30, 2002 compared to approximately 2.8% for the nine months ended June 30, 2001.

~~Non~~ During the three-~~interest~~month ~~expense~~period ended December 31, 2002, the Company recorded approximately $1.3 million in other than temporary impairments on certain fixed income securities. The impairments were primarily due to deterioration in the underlying collateral of certain asset-backed securities in addition to credit deterioration in some higher yielding corporate bond investments.

~~Non-interest~~Net ~~expense consists of commissions to agents, capitalization and amortization of deferred acquisition costs and administrative and other expenses.~~ Non-~~interest~~Investment ~~expense was approximately $8.1 million for the nine~~Expense ~~months ended June 30, 2002 compared to approximately $12.0 million for the nine~~ months ended June 30, 2001. The reduction in non-interest expense during the current period was primarily the result of a reduction in deferred policy acquisition amortization of approximately $4.4 million due primarily to lower than expected surrender rates. In addition, administrative expenses decreased approximately $0.5 million due to a decrease in overhead allocations from Metropolitan.

~~Net~~ The ~~losses~~following ontable ~~investments~~presents the components of net non-investment expense during the three months ended December 31, 2002 and 2001:

For the nine months ended June 30, 2002, the Company reported a loss on sales of investments of approximately $10.2 million compared to a loss of approximately $10.1 million in the comparable previous year period. The components of net losses on investments for the nine months ended June 30, 2002 and 2001 are as follows:


			Three Months Ended
			December 31,

			2002		2001

Non-investment income:
	Premiums and annuity considerations		$	403,761	$	471,171

		Total non-investment income		403,761		471,171

Non-investment expense:
	Commissions to agents			3,464,426		1,589,611
	Administrative and other expenses			2,133,962		923,107

		Total non-investment expense		5,598,388		2,512,718

		Net non-investment expense	$	5,194,627	$	2,041,547

	June 30,
	2002			2001
Net gains on sales of real estate	$	36,605		$	237,758
Net investment securities losses		(8,091,435	)		(6,662,862	)
Realized gains on sales of receivables		574,530			1,172,249
Provision for losses on real estate loans and assets		(2,729,527	)		(4,851,192	)
Net losses on investments	$	(10,209,827	)	$	(10,104,047	)

The increase in administrative and other expenses was primarily due to a $0.3 million increase in cost sharing expenses paid to Metropolitan in accordance with an established inter-company agreement, a $0.3 million increase in audit fees, a $0.3 million increase in guaranty fund assessments as a result of a $0.2 million refund received during the three month period ended December 31, 2001, and an increase in other operating expenses as a result of an overall growth in the Company’s assets.

~~Net~~Capitalized ~~investment~~deferred ~~securities~~policy ~~losses.~~acquisition ~~During the nine month period ended June 30~~costs, ~~2002,~~net the Company reported an $8.1 million loss on investments. At June 30, 2002, the Company determined that certain “available-for-sale” interest only certificates retained from its securitization activities had other than temporary declines in fair value. Accordingly, the carrying values of ~~the~~amortization ~~investments were reduced approximately $2.7 million, representing the amount~~ impaired. The declines in value were due primarily to an increase in prepayment rates on the underlying collateral. The Company continues to periodically assess the assumptions used in valuing the cash flows and the related carrying value of securities generated from its securitization activities. Additionally, the Company recognized an impairment charge of approximately $2.5 million on certain asset-backed fixed income securities due to a deterioration of the underlying collateral.

ACapitalized ~~$4.8 million~~deferred ~~decline~~policy inacquisition ~~the~~costs, ~~fair~~net ~~value~~of amortization, is comprised of ~~various~~the ~~equity~~capitalization ~~securities~~of ~~was also~~expenses ~~determined~~incurred to besell ~~other~~and ~~than~~underwrite life ~~temporary~~and atannuity ~~June 30~~policies, ~~2002~~offset ~~due~~by to the ~~length~~ amortization of ~~time~~previously ~~and~~capitalized expenses. ~~extent~~The ~~that~~following ~~the~~table ~~investments~~reflects ~~have~~the ~~traded~~components ~~below~~of ~~cost.~~the ~~The~~net ~~decline~~change in ~~value~~deferred ~~was~~acquisition ~~primarily~~costs ~~the~~reported ~~result~~by ofthe anCompany ~~overall~~for ~~decline~~three inmonths ~~the value of stocks~~ended ~~traded~~December 31, on2002 ~~the~~and ~~NASDAQ.~~2001:

Impairment charges during the nine month period ended June 30, 2002 were partially offset by realized gains on sales of other investment securities of approximately $1.9 million.


	Three Months Ended
	December 31,

	2002			2001

Current period costs capitalized	$	(3,820,950	)	$	(1,879,840	)
Amortization of previously capitalized expenses		2,700,000			2,525,000

Net amortization (capitalization) of deferred policy acquisition costs	$	(1,120,950	)	$	645,160

~~During~~The ~~the~~increase ~~nine~~in ~~month~~current period ~~ended~~costs ~~June 30,~~capitalized ~~2001,~~is ~~the~~due ~~Company~~primarily ~~reported~~to a $62.~~7 million~~1 ~~loss~~increase onin ~~investments.~~commissions ~~Approximately~~paid ~~$3.5 million~~on ~~resulted~~annuity ~~from other~~business, ~~than~~net ~~temporary declines in the fair value~~ of ~~certain~~ceding. ~~interest only~~Annuity ~~certificates~~business ~~retained~~production ~~from~~during ~~securitization~~the ~~activities.~~three-month ~~The~~period ~~declines~~ended inDecember 31, ~~value~~2002 was ~~were~~approximately ~~due~~$87.5 million ~~primarily~~compared to ~~higher~~approximately ~~than expected prepayment rates on the underlying collateral~~$40.0 million ~~Additionally,~~during the ~~Company incurred realized losses on~~ ~~the~~similar ~~sales~~period ofended ~~other investment securities~~December 31, ~~and mark to market losses on equity and other trading securities of approximately $3~~2001.~~2 million.~~

~~Realized~~Unrealized ~~gains~~Losses on ~~sales of receivables. Realized gains on sales of~~Investments ~~receivables were approximately $0.6 million during the nine-month period ended~~ ~~June 30, 2002 compared to approximately $1.2 million during the nine-month~~ period ended June 30, 2001. The $0.6 million gain in the current period is due to the sale of other receivable investments to our affiliates. The Company agreed to sell to Old Standard and Old West a 69.20% undivided beneficial interest in a certain Lottery Trust owned by the Company. The purchase price of $11.2 million was derived from future expected cash flows discounted at a 6.957% market rate. The primary purpose of entering into the lottery trust purchase and sale agreements was to generate additional funds that could be used for commercial lending activities.

~~Provisions~~Temporary ~~for~~declines ~~losses~~in onthe ~~real~~fair ~~estate~~market ~~loans~~value ~~and~~of ~~assets.~~investments Inthat ~~January~~are “available-for-sale” ~~2001,~~are excluded from earnings and presented as accumulated ~~the~~other ~~Company~~comprehensive ~~announced~~income aor ~~change~~loss, innet ~~its~~of ~~investment~~related ~~strategy~~income ~~away~~taxes, ~~from~~as ~~acquiring~~a component ~~residential~~of ~~real~~stockholders’ ~~estate~~equity. ~~loans~~The ~~for~~Company ~~securitization~~continually ~~purposes~~monitors toits ~~acquiring and~~investment ~~holding~~portfolio ~~both~~for ~~residential~~other ~~real~~than ~~estate~~temporary ~~loans~~impairments ~~and~~of ~~commercial~~its ~~loans~~securities. When ~~the~~an ~~Company~~other ~~was~~than ~~investing~~temporary ~~primarily~~decline in ~~residential~~value ~~real~~below ~~estate~~cost ~~loans~~or amortized cost is identified, the ~~allowance for~~investment ~~loss~~is ~~was~~reduced ~~calculated~~to ~~using~~its afair ~~large~~market ~~group~~value, ofwhich becomes ~~homogeneous~~the ~~loans~~new ~~that~~cost ~~were collectively~~basis ~~evaluated~~of ~~for~~the ~~impairment~~investment. ~~However,~~The ~~for~~amount ~~commercial~~of ~~loans,~~reduction ~~the~~is ~~Company~~reported ~~individually~~as ~~evaluates~~a ~~each~~realized ~~loan~~loss ~~for~~in ~~impairment~~the instatement ~~accordance~~of ~~with~~operations. ~~SFAS~~In determining ~~No. 114,~~whether ~~“Accounting~~the bylosses ~~Creditors~~are ~~for~~temporary ~~Impairment~~or ofother athan ~~Loan~~temporary,” asthe ~~amended~~Company ~~by SFAS~~considers ~~No.~~(1) ~~118~~the ~~“Accounting~~length byof ~~Creditors~~time ~~for~~and ~~Impairment~~extent ofto awhich ~~Loan~~the –fair ~~Income~~market ~~Recognition and~~value ~~Disclosure.”~~has ~~According~~been toless than ~~SFAS~~cost, ~~No.~~(2) ~~114,~~the acircumstances ~~loan~~contributing isto ~~impaired~~the ~~when,~~decline ~~based~~in onfair market ~~current~~value ~~information~~(including ~~and~~a ~~events,~~change itin isinterest ~~probable~~rates ~~that~~or aspreads ~~creditor~~to ~~will~~benchmarks), ~~be unable~~(3) torecent ~~collect~~performance ~~all~~of ~~amounts~~the ~~due~~security, ~~according to~~ (4) the ~~contractual~~financial ~~terms~~strength of the ~~loan~~issuer, ~~agreement.~~and ~~Probable~~(5) the isintent ~~defined~~and asability ~~“future~~of ~~events~~the ~~are~~Company ~~likely~~ to ~~occur”.~~retain ~~When~~the investment for a ~~loan~~period ~~has~~of ~~been~~time ~~identified~~sufficient asto ~~impaired~~allow for anticipated recovery. Additionally, for asset-backed investments, the Company ~~determines~~also considers the ~~allowance~~credit ~~for~~rating and ~~loss~~determines ~~based~~the onamount ~~the~~of ~~estimated~~credit ~~fair~~support ~~value~~available offor the ~~collateral,~~security. ~~less estimated~~At ~~liquidation~~December 31, ~~expenses~~2002, ~~compared to~~ the ~~carrying~~Company’s ~~value~~investment ofportfolio ~~the~~had ~~receivable~~approximately $2.5 million Ifin ~~the estimated~~unrealized ~~fair~~losses ~~value~~that ofwere ~~the~~deemed ~~collateral~~to isbe ~~less~~temporary. ~~than~~To the ~~carrying~~extent that ~~value,~~any ~~an allowance~~losses ~~for~~currently ~~loss~~deemed isas ~~recognized.~~temporary ~~Additionally,~~are ~~the~~determined ~~Company~~to ~~established~~be aother ~~0.25%~~than ~~allowance~~temporary ~~for~~in ~~losses~~the ~~that~~future, ~~represent~~the ~~inherent~~unrealized losses ~~within~~will ~~the~~be ~~commercial~~reported ~~loan~~as realized ~~portfolio~~losses atin ~~the~~future ~~balance~~statements ~~sheet~~of ~~date~~operations.

The ~~change~~following intable stratifies the ~~receivable~~unrealized ~~investment~~losses ~~strategy,~~as ~~which has resulted in a change in the mix~~ of receivables being reserved using a specific reserve methodology for commercial loans, versus a homogeneous pool methodology for residential loans, has contributed to the loan loss provisions decreasing to approximately $3.4December ~~million for the nine month period ended June 30~~31, ~~2002~~ ~~compared~~2002 toby ~~approximately~~investment ~~$4.7 million for the nine month period ended June 30,~~category: ~~2001.~~

The provision for losses on other assets decreased from approximately $0.2 million for the nine-month period ended June 30, 2001 to a recovery of approximately $0.7 million for the nine-month period ended June 30, 2002. The $0.7 million recovery for the nine month period ended June 30, 2002 was due to a positive change in the federal tax law effecting structured settlement transfers and the consequential cooperation by certain annuity issuers with respect to the payment of defaulted, and in some cases current, structured settlements.


		Carrying Value		Unrealized Losses

Government-backed bonds		$	9,226,648	$	(15,413	)
Corporate bonds			26,621,865		(26,498	)
Mortgage- and asset-backed securities			128,092,396		(1,712,827	)

	Total fixed income maturities		163,940,909		(1,754,738	)

Common stocks			14,561		(2,851	)
Preferred stocks			5,923,774		(81,719	)
Venture Capital/Limited Partnerships			8,782,357		(612,896	)

	Totals	$	178,661,601	$	(2,452,204	)

The following table ~~summarizes~~stratifies ~~changes in~~ the ~~Company’s~~unrealized ~~allowance for~~ losses onas ~~real~~of ~~estate and other assets for the nine-month periods ended June 30~~December 31, 2002 ~~and~~by ~~2001~~market sector:

		June 30,
				Carrying Value				Unrealized Losses
		2002				2001
Agency				$	9,226,648			$	(15,413	)
Beginning balance		$	11,615,433			$	7,717,525
	Government-backed bonds				9,226,648				(15,413	)
Provision for losses on real estate assets			3,433,942				4,659,506
	Corporate bonds				26,621,865				(26,498	)
Provision for (recovery of) losses on other assets			(704,415	)			191,686
Collateralized mortgage obligation					92,967,586				(475,822	)
Charge-offs, net			(4,522,043	)			(1,926,220	)
Other asset-backed					15,393,448				(1,074,096	)
Ending balance		$	9,822,917			$	10,642,497
Mortgage-backed security					272,041				(682	)
Home equity					13,735,766				(1	)
Manufactured housing					5,723,555				(162,226	)
Mortgage- and asset-backed securities					128,092,396				(1,712,827	)
Common stocks					14,561				(2,851	)
Preferred stocks					5,923,774				(81,719	)
Venture Capital/Limited Partnerships					8,782,357				(612,896	)
		Totals		$	178,661,601			$	(2,452,204	)

~~Three~~ The ~~Months~~following ~~Ended~~table ~~June 30,~~stratifies ~~2002~~the ~~Compared~~unrealized tolosses ~~Three~~as ~~Months~~of ~~Ended June~~September 30, 2002 ~~2001~~by credit rating:

Net income after income taxes for the three-month period ended June 30, 2002 was $6.5 million on $23.6 million in revenues compared to net income of $11.3 million on $15.8 million in revenues for the three-month period ended June 30, 2001. Income before income taxes for the three months ended June 30, 2002 was approximately $9.9 million compared to income of approximately $0.1 million for the three months ended June 30, 2001.


		Carrying Value		Unrealized Losses

AAA		$	115,125,369	$	(611,200	)
AA			11,175,060		(430,455	)
A			6,979,331		(477,498	)
BBB			34,321,423		(99,318	)
Other			2,263,500		(217,986	)
Common stocks			14,561		(2,851	)
Venture Capital/Limited Partnerships			8,782,357		(612,896	)

	Totals	$	178,661,601	$	(2,452,204	)

~~The~~Unrealized ~~increase~~losses relating to the investment grade assets (BBB and higher) are generally due to changes in ~~net~~interest ~~income~~rates ~~before~~that ~~income~~may ~~taxes~~include changes in spreads to benchmarks for a particular sector of the market. To the extent that unrealized losses in the Company’s investment grade portfolio are the result of issues other than interest rate changes, the investments are evaluated for other than temporary impairment. At December 31, 2002, approximately $90.89 million ~~was~~in ~~primarily~~unrealized losses in the Company’s investment grade assets were due to: investments in airline-related asset-backed securities. In determining whether these losses were temporary or other than temporary, the Company considered (1) recent performance of the security, (2) the credit rating of the security, (3) the amount of credit support available for the security, (4) circumstances contributing to the decline in value, (5) the length of time and extent to which the fair value has been less than cost, and (6) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for anticipated recovery.

	•		an increase in net interest sensitive income of $8.3 million, and
	•		a decrease in non interest expense of $3.2 million

The following table stratifies the unrealized losses as of December 31, 2002 by trading class:

These changes were partially offset by:


		Carrying Value		Unrealized Losses

Traded		$	178,661,601	$	(2,452,204	)
Non-Traded			—		—

	Totals	$	178,661,601	$	(2,452,204	)

• The anfollowing ~~increase~~table instratifies ~~losses~~the onunrealized ~~sales~~losses as of ~~investments~~December 31, 2002 by length of ~~$1.7~~time ~~million.~~the securities have continuously been in an unrealized loss position:

Net interest sensitive income


			Carrying Value		Unrealized Losses

Fixed Income Securities:
	Investment Grade
		0-6 months	$	150,948,369	$	(899,840	)
		7-12 months		—		—
		13-18 months		12,992,540		(854,898	)
Preferred Stocks:
		0-6 months		4,255,604		(37,439	)
		7-12 months		1,668,170		(44,280	)
Common Stocks:
		0-6 months		14,561		(2,851	)
Venture Capital/Limited Partnerships
		0-6 months		8,782,357		(612,896	)

		Total	$	178,661,601	$	(2,452,204	)

During the three month period ended June 30, 2002, net interest sensitive income was approximately $14.2 million compared to $5.9 million in the comparable prior year period. The increase between periods was primarily the result of an increase in the Company’s commercial lending activities.

Non-interest expense

Non-interest expense was approximately $0.9 million for the three-month period ended June 30, 2002 compared to approximately $4.1 million for the three-month period ended June 30, 2001. The reduction in non-interest expense during the current period was primarily the result of a reduction in deferred policy acquisition amortization of approximately $3.4 million due primarily to lower than expected surrender rates. In addition, administrative expenses decreased approximately $0.1 million due to a decrease in overhead allocations from Metropolitan.

Net losses on investments

During the three month period ended June 30, 2002, the Company reported a loss on sales of investments of approximately $3.4 million compared to a loss of approximately $1.7 million in the comparable prior year period. The components of net losses on investments during the three-month periods ended June 30, 2002 and 2001 are as follows:

	June 30,
	2002			2001
Net gains on sales of real estate	$	28,194		$	19,490
Net investment securities gains (losses)		(2,385,028	)		321,782
Realized gains on sales of receivables		—			451,082
Provision for losses on real estate loans and assets		(1,037,555	)		(2,507,607	)
Net losses on investments	$	(3,394,389	)	$	(1,715,253	)

Net investment securities gains (losses). During the three month period ended June 30, 2002, the Company reported a $2.4 million loss on investments. At June 30, 2002, it was determined that certain “available-for-sale” interest only certificates retained from securitization activities had other than temporary declines in fair value. Accordingly, the carrying values of the investments were reduced by approximately $1.0 million, representing the amount impaired. The declines in value were due primarily to an increase in the prepayment rates of the underlying collateral. Additionally, the Company recognized an impairment charge of approximately $1.3 million on certain asset-backed fixed income securities due to a deterioration of the underlying collateral.

A $0.8 million decline in the fair value of various equity securities was also determined to be other than temporary at June 30, 2002 due to the length of time and extent that the investments have traded below cost. The decline in value was primarily the result of an overall decline in the value of stocks traded on the NASDAQ.

~~Impairment~~The ~~charges~~maturities ~~during~~of ~~the~~fixed ~~three-month~~income ~~period~~investments ~~ended~~that ~~June 30,~~are ~~2002~~in ~~were partially~~an ~~offset~~unrealized byloss position ~~realized~~at ~~gains~~December 31, on2002 ~~sales~~are ofas ~~other investment securities of~~follows: ~~approximately $0.7 million.~~

During the three month period ended June 30, 2001, the Company reported a $0.3 million gain on investments. The gain reflects realized gains on the sale of other investments and mark to market gains on equity and other trading securities of approximately $0.9 million, offset by other than temporary declines in the fair value of various investments of approximately $0.6 million. The declines in value resulted from downgrades of certain securities and a deterioration of expected future cash flows of a certain interest only certificate due to higher than expected prepayment rates.


		Carrying Value		Unrealized Losses

Due in one year through five years		$	26,621,865	$	(26,498	)
Due after five years through ten years			—		—
Due thereafter			9,226,648		(15,413	)

	Total non-mortgage- and asset-backed securities		35,848,513		(41,911	)
Mortgage- and asset-backed securities			128,092,396		(1,712,827	)

	Total fixed income securities	$	163,940,909	$	(1,754,738	)

~~Provisions~~The ~~for losses on real estate loans and assets. In January 2001, the~~ Company ~~announced~~is aauthorized ~~change~~by in its ~~receivable~~ investment ~~strategy~~policies ~~away~~to ~~from~~use financial ~~acquiring~~futures ~~residential~~instruments ~~real estate loans~~ for ~~securitization~~the ~~purposes~~purpose ~~to acquiring~~of ~~and~~hedging ~~holding~~interest ~~both~~rate ~~residential~~risk ~~real~~relative ~~estate loans and commercial loans.~~to ~~When~~ the ~~Company~~securities ~~was~~portfolio ~~investing~~or ~~primarily~~potential intrading ~~residential~~situations. ~~real~~In ~~estate~~both ~~loans~~cases, the ~~allowance~~futures ~~for~~transactions ~~loss~~are ~~was~~intended ~~calculated~~to ~~using~~reduce athe ~~large~~risk ~~group~~associated ofwith ~~homogeneous loans that~~price ~~were~~movements ~~collectively evaluated~~ for ~~impairment.~~a ~~However,~~balance ~~for~~sheet ~~commercial loans, the Company individually evaluates each loan for impairment in accordance with SFAS No~~asset. ~~114,~~ ~~“Accounting~~Securities bymay ~~Creditors~~be ~~for~~sold ~~Impairment of a Loan~~“short,” asthe ~~amended by SFAS~~sale ~~No. 118, “Accounting by Creditors for Impairment~~ of asecurities ~~Loan~~that –are ~~Income~~not ~~Recognition and~~currently ~~Disclosure.”~~in ~~According~~the toportfolio ~~SFAS No. 114, a loan is impaired when, based on current information~~ and ~~events,~~therefore itmust ~~is probable that a creditor will~~ be ~~unable~~ topurchased ~~collect all amounts due according~~ to ~~the~~close ~~contractual~~out ~~terms of~~ the ~~loan~~ sale agreement., ~~Probable is defined~~ as ~~“future~~another ~~events~~means ~~are likely to occur.” When a loan has been identified as impaired, the Company determines the allowance for loss based on the estimated fair value~~ of ~~the~~hedging ~~collateral, less estimated~~interest ~~liquidation~~rate ~~expenses,~~risk ~~compared~~ to ~~the~~benefit ~~carrying~~from ~~value~~an ofanticipated ~~the~~movement ~~receivable.~~in If the ~~estimated~~ ~~fair~~financial ~~value~~markets. ~~of the collateral is less than the carrying value~~At December 31, ~~an allowance for loss is recognized. Additionally~~2002, the Company ~~established~~had ano ~~0.25% allowance~~open ~~for~~hedging ~~losses~~positions ~~that~~relative ~~represent inherent losses within the commercial loan~~to ~~portfolio~~hedging atits ~~the~~securities ~~balance sheet date~~portfolio.

~~The~~Asset ~~change in the receivable investment strategy, which has resulted in a~~Quality ~~change in the mix of receivables being reserved using a specific reserve~~ methodology for commercial loans, versus a homogeneous pool methodology for residential loans, has contributed to the loan loss provisions decreasing to approximately $1.7 million for the three month period ended June 30, 2002 compared to $2.3 million for the three month period ended June 30, 2001.

~~The~~Servicing provision for losses on other assets decreased from $0.2 million during the three-month period ended June 30, 2001 to a $0.7 million recovery for the three-month period ended June 30, 2002. The $0.7 million recovery for the three-month period ended June 30, 2002 was due to a positive change in the federal tax law effecting structured settlement transfers and ~~the~~Delinquency ~~consequential~~Experience ~~cooperation by certain annuity issuers with respect to the payment of defaulted~~ ~~structured settlements.~~

The ~~following~~principal ~~table~~amount ~~summarizes~~of ~~changes in~~ the Company’s ~~allowance~~Commercial ~~for~~Loans (as a percentage of ~~losses~~total onoutstanding ~~real~~Commercial ~~estate~~Loans) ~~and~~that ~~other~~were ~~assets~~in arrears for ~~the~~more ~~three-month~~than ~~periods~~90 days as ~~ended~~of ~~June 30,~~the ~~2002~~following ~~and~~dates ~~2001~~were as follows:

	June 30,
	Total			Commercial
	2002			2001
	Commercial			Loans			Percentage
Beginning balance	$	10,057,987		$	8,511,087
	Loans			in arrears			in arrears
Provision for losses on real estate assets		1,741,970			2,315,922
December 31, 2002	$	411,240,861		$	45,007,543			10.94	%
Provision for (recovery of) losses on other assets		(704,415	)		191,686
September 30, 2002	$	342,632,510		$	25,240,264			7.37	%
Charge-offs, net		(1,272,625	)		(376,198	)
December 31, 2001	$	145,178,501		$	13,510,631			9.31	%
Ending balance	$	9,822,917		$	10,642,497
September 30, 2001	$	123,259,529		$	5,742,560			4.66	%

In addition to the amounts included in the table above at December 31, 182002, there were approximately $0.3 million in additional delinquent loans that the Company had serious doubts that the borrowers had the ability to comply with present loan repayment terms, and therefore may become 90 days delinquent. As of December 31, 2002, these loans accounted for less than 0.1% of the total outstanding commercial Receivables collateralized by real estate, but were not included in the table above because they were less than 90 days delinquent.

When a payment becomes delinquent on a Commercial Loan, either Ocwen’s or Metropolitan’s collection unit (depending on which entity is acting as servicer) will begin making collection calls immediately. If the defaulted payment is not received by the next payment due date, a notice of default is sent to the borrower and the account is assigned to one of Metropolitan’s workout managers according to the property type, size of loan and complexity of transaction. The workout manager will review the file and related documentation and attempt to contact the borrower to negotiate with the borrower to cure the default. If after the expiration of the notice of default, the default is not cured, counsel begins foreclosure immediately. Concurrent with the notice of default period and the foreclosure process, the assigned workout manager will continue to contact and attempt to negotiate a full reinstatement with the borrower. During this same period, the workout manager will also develop a workout program and make recommendations to Metropolitan’s problem loan review committee for approval. As a part of formulating this workout plan, the workout manager will typically visit the collateral property, talk with local experts and make an assessment of the condition of the collateral and its marketability in the event of a potential foreclosure. The final workout plan is presented to the Company’s problem loan review committee with all relevant information regarding contact with the borrower, condition and marketability of collateral and an assessment of the likelihood of default cure or recovery of the loan balance if the default continues through foreclosure. Any actions undertaken by the workout manager with the borrower that would result in other than full reinstatement are subject to prior approval by the problem loan review committee.

The problem loan review committee is composed of representatives from Metropolitan’s underwriting, risk management, operations, commercial lending, legal and property development departments. The committee meets weekly and reviews all newly defaulted loans, continuing defaulted loans, loans in foreclosure, loans in bankruptcy and all repossessed properties for developments and progress on approved workout plans.

The principal amount of the Company’s residential and other real estate Receivables (as a percentage of total residential and other real estate Receivables) that were in arrears for more than 90 days as of the following dates were as follows:


			Residential and
	Total Residential		Other Real Estate
	and Other Real		Receivables		Percentage
	Estate Receivables		in arrears		in arrears

December 31, 2002	$	247,706,076	$	20,711,785		8.36	%
September 30, 2002	$	247,128,827	$	20,740,753		8.39	%
December 31, 2001	$	268,409,540	$	30,067,991		11.20	%
September 30, 2001	$	283,214,737	$	24,658,860		8.71	%

The real estate Receivables acquired by the Company are generally A-, B and C credit Receivables. Management expects higher delinquency rates because Receivables purchased or originated by the Company are typically not of the same quality as mortgages that are originated for sale to agencies such as the Federal National Mortgage Association (“Fannie Mae”). Management believes that the economic effects of these higher delinquency rates will be generally offset by the higher yields expected to be received on these Receivables than those typically received on the conventional “A” credit lending markets and the value of the underlying collateral.

The carrying amount of the Company’s other receivables not collateralized by real estate (as a percentage of total other receivables) that were in arrears for more than 90 days as of the following dates were as follows:


	Total Other		Other Receivables		Percentage
	Receivables		in arrears		in arrears

December 31, 2002	$	101,841,804	$	1,419,128		1.39	%
September 30, 2002	$	106,040,368	$	2,938,657		2.77	%
December 31, 2001	$	155,481,337	$	6,568,727		4.22	%
September 30, 2001	$	149,852,082	$	2,525,875		1.69	%

Provision and allowance for losses on Receivables

Changes in the allowance for losses on Receivables were as follows:


		December 31,

		2002			2001

Beginning balance		$	8,697,778		$	9,166,763
Provisions			2,000,268			1,061,479
Charge offs:
	Commercial Loans		—			—
	Residential and other real estate loans		(593,692	)		(534,482	)
	Other receivables		—			—

Ending balance		$	10,104,354		$	9,693,760

Charge offs as a percent of average Receivables			0.08	%		0.09	%
Allowance as a percentage of total Receivables			1.33	%		1.70	%

An analysis of the allowance for loss on Receivables was as follows:


			Allocated
			Allowance
	Allocated		as a % of			Loan Category
	Allowance for		Receivable			as a % of
	Receivable Losses		Category			Total Receivables

December 31, 2002
Commercial Loans	$	4,233,130		1.03	%		54.05	%
Residential and other real estate loans		4,037,609		1.63	%		32.56	%
Other receivables		383,932		0.38	%		13.39	%
Unallocated		1,449,683		0.22	%		0.00	%

	$	10,104,354		1.33	%		100.00	%

December 31, 2001
Commercial Loans	$	2,773,767		1.91	%		25.51	%
Residential and other real estate loans		4,831,372		1.80	%		47.17	%
Other receivables		1,178,727		0.76	%		27.32	%
Unallocated		909,894		0.22	%		0.00	%

	$	9,693,760		1.70	%		100.00	%

The allowance for losses on Receivables represents management’s estimate of credit losses inherent in the portfolios as of the balance sheet dates. Management performs regular reviews in order to identify these inherent losses and to assess the overall collection probability of the portfolios. This process provides an allowance that consists of two components: allocated and unallocated. To arrive at the allocated component, the Company combines estimates of the allowance needed for loans that are evaluated collectively and those that are evaluated individually.

Commercial Loans are individually monitored for impairment. When a loan has been identified as impaired, the Company determines the allowance for loss based on the estimated fair market value, less estimated liquidation expenses, of the collateral compared to the carrying value of the Receivable, including accrued interest. The estimated fair value is based on the most recent appraisal of the collateral. If the most recent appraisal is more than one year old, a new appraisal is ordered. In the interim, estimated fair value is established through a review of the most recent appraisal in addition to a review of other relevant market information. When reviewing the most recent appraisal, management considers several factors. Some of those factors include the type of property, changes in regional economic factors, the underlying appraisal assumptions, and any recent communication with local real estate brokers. If the estimated fair market value of the collateral is less than the carrying value, including accrued interest, an allowance for loss is recorded. The increase in the provision and allocated allowance for losses on Commercial Loans at December 31, 2002 compared to December 31, 2001 was primarily due to an increase in the Company’s commercial lending activities. Fluctuations in the provision for losses and/or percentage of allowance to outstanding principal result from using the specific impairment methodology.

The Company establishes an allowance for loss on residential and other real estate Receivables, including accrued interest, inherent in the portfolio at the balance sheet date based primarily on current delinquencies and recent foreclosure and loss experience. The residential and other receivable portfolio is comprised of a large group of smaller-balance homogeneous loans that are collectively evaluated for impairment. The reduction in the allocated allowance for losses on residential and other real estate loans at December 31, 2002 compared to December 31, 2001 was primarily due to the overall seasoning of the loan portfolio. As the Company has recently focused on Commercial Loan originations, the remaining real estate receivable portfolio has been decreasing in size due to payoffs and maturities. The remaining portfolio, which is comprised of production from previous years, contains different loss potential characteristics depending upon the year the loans were produced (production pool years). Not all production pool years will experience the same rate of loss over their respective remaining lives. Pools that have seasoned beyond the four-year mark generally experience lower future losses than pools that are less seasoned.

The reduction in the allocated allowance for losses on other receivables at December 31, 2002 compared to December 31, 2001 was due to a positive change in the federal tax law effecting structured settlement transfers and the consequential cooperation by certain annuity issuers with respect to the payment of defaulted, and in some cases current, structured settlements.

In estimating the amount of credit losses inherent in the Receivable portfolios, management utilizes various judgments and assumptions. For Receivables that are collateral-dependent, the estimated fair market value of the collateral may deviate significantly from the proceeds received when the collateral is sold. To mitigate the imprecision inherent in most estimates of expected credit losses, the allowance has an unallocated component. The unallocated component reflects management’s judgmental assessment of the impact that various quantitative factors have on the overall measurement of credit losses.

Allowance for Losses on Real Estate Held for Sale

The following table summarizes changes in the Company’s allowance for losses on real estate held for sale:


	December 31,

	2002			2001

Beginning balance	$	1,462,966		$	2,448,670
Provisions (recoveries)		1,271,775			(241,993	)
Charge-offs		(609,643	)		(434,823	)

Ending balance	$	2,125,098		$	1,771,854

Real estate held for sale is periodically evaluated for impairment. Loss provisions for real estate held for sale are calculated as the difference between the estimated net realizable value and the carrying value at the measurement date. Any loss on liquidation or subsequent reduction in the carrying value is charged to operations through provision for losses.

Liquidity and Capital Resources

The objective of liquidity management is to provide funds at an acceptable cost to service liabilities as they become due and to meet demands for additional Commercial Loans and Receivable purchases. Managing liquidity also enables the Company to take advantage of opportunities for business expansion. The Company finances its business operations and growth with the proceeds from the sale of annuity and life insurance products, the sale of equity securities to affiliates, a secured line of credit agreement, reverse repurchase agreements, receivable cash flows, the sale of real estate and securities portfolio earnings.

The annuity and life insurance business is highly competitive. The Company competes with other financial institutions, including ones with greater resources and greater name recognition than the Company. Premium rates, annuity yields and commissions to agents are particularly sensitive to competitive forces. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, like annuities, include product flexibility, net return after fees, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels, service rendered to the customer before and after a policy or contract is issued, and service provided to agents. Other factors affecting the annuity business include the benefits, including before tax and after tax investment returns, and guarantees provided to the customer and the commissions paid to the agent. If the Company is unable to effectively price its annuities, offer competitive commissions and effectively compete in general for the sale of its annuity products, its liquidity could be adversely affected.

The state of Washington’s Risk-Based Capital Model law requires an insurance company to maintain specified amounts of capital and surplus based on complex calculations of risk factors that encompass the invested assets and business activities of the insurance company. Compliance with the Risk-Based Capital Model Law requirements is tested annually as of a calendar year-end. At the last annual review at its statutory reporting period ended December 31, 2002, Western Life’s capital and surplus levels exceeded the calculated specified requirements.

Recently, Western Life has maintained adequate levels of capital through capital contributions from Metropolitan. During the three-month period ended December 31, 2002, Metropolitan contributed $41.4 million of capital to Western Life. Additionally, Western Holding, the parent company of Western Life, had registered for sale up to $50.0 million of Series A preferred stock at December 31, 2002. Effective January 2, 2003, the preferred stock sale was completed and Western Holding issued 437,604 shares of preferred stock and received proceeds of approximately $10.9 million. Western Life’s ability to generate capital is dependent on Metropolitan’s ability to maintain adequate levels of liquidity permitting it to make further capital investments in Western Life and Western Holding’s ability to sell preferred stock, allowing Western Holding to make capital contributions to Western Life. To the extent that Metropolitan or Western Holding do not generate sufficient liquidity permitting them to make further capital investments in Western Life, Western Life’s ability to generate capital could be adversely affected, which in turn could negatively affect its ability to increase its investments in higher risk-adjusted assets such as commercial loans, real estate and equity investments.

Western Life has a secured line of credit agreement with the Federal Home Loan Bank of Seattle (FHLB). When an institution becomes a stockholder in the FHLB, it can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At December 31, 2002, Western Life had a stock investment in the FHLB of approximately $7.5 million. The collateral eligible to be used to secure the borrowing is predefined by the FHLB and generally consists of high quality collateralized mortgage obligations. Each type of collateral has a minimum requirement that ranges from 100% to 125% of borrowings. At December 31, 2002, Western Life had $333.6 million in eligible collateral with a market value of $337.1 million and a borrowing capacity of $239.3 million, subject to the purchase of additional stock. Approximately $206.4 million in securities having a market value of $208.5 million were pledged to collateralize the outstanding borrowings to the FHLB at December 31, 2002. At December 31, 2002, Western Life had approximately $148.0 million in outstanding borrowings to the FHLB leaving an unused borrowing capacity of approximately $91.3 million, subject to the purchase of additional stock. During the three months ended December 31, 2002, Western Life’s outstanding borrowings on the secured line of credit increased $45.0 million. This increase accounted for approximately 32% of the Company’s net cash provided by financing activities. In order to increase the unused borrowing capacity, Western Life would be required to purchase approximately $2.2 million in additional FHLB stock.

During the three months ended December 31, 2002, the Company transferred $262.5 million of securities from its available-for-sale portfolio to its held-to-maturity portfolio. The securities transferred included those securities pledged as collateral to secure the FHLB line of credit agreement. The Company has the intent and ability to hold these securities until maturity.

Western Life has entered into a reinsurance agreement with Old Standard Life Insurance Company (“Old Standard”), an affiliate, which became effective July 1, 1998. Under this agreement, Western Life can reinsure with Old Standard 75% of the risk on various annuity products. The reinsurance agreement is an ongoing arrangement with no stated expiration or termination date, although either party may stop and restart at their discretion by providing a 30-day advance written notice. During the three months ended December 31, 2002, no additional annuity premiums were ceded to Old Standard under this agreement.

Another source of liquidity is derived from payments received on Receivables and the sale of real estate. A decrease in the prepayment rate on receivables or in the ability to sell real estate would reduce future cash flows from receivables.

Additionally, to increase liquidity, the Company may occasionally sell securities to a broker-dealer under the provision that the Company will buy them back by a predetermined date for a specific price, often called a reverse repurchase agreement. At December 31, 2002, the Company did not have any reverse repurchase agreements outstanding.

Western Life’s ability to sell available-for-sale investments for liquidity purposes is partially affected by the laws of the state of Washington that limit its investments in real estate related assets to 65% of its statutory assets. Western Life is restricted from selling non-real estate related assets if, after the sale, its real estate assets would exceed 65% of its statutory assets. However, occasionally Western Life may acquire real estate related receivables that qualify as mortgage-related securities under the Secondary Mortgage Market Enhancement Act, or SMMEA. SMMEA generally provides that qualifying loans may be acquired to the same extent that obligations that are issued by or guaranteed as to principal and interest by the United States Government, its agencies and the instrumentalities can be acquired. As a result, Western Life can acquire qualifying real estate loans in amounts in excess of the 65% limitation. At December 31, 2002, Western Life had 46.1% of its statutory admitted assets invested in real estate related assets that did not qualify as SMMEA investments.

For statutory purposes, Western Life performs cash flow testing using seven different rate scenarios. An annual opinion regarding the adequacy of the cash flow testing is filed with the insurance departments in the states where Western Life is licensed as an insurance company. At the end of calendar year 2002, the results of this cash flow testing process were satisfactory.

The Company had approximately $73.1 million of outstanding commitments to extend credit to commercial borrowers at December 31, 2002.

During the three months ended December 31, 2002, $327.0 million in funds provided by the Company’s various liquidity sources were used to (1) invest $308.8 million primarily in Receivables and investments and (2) fund $36.3 million in debt maturities and annuity product withdrawals and surrenders.

During the three month period ended December 31, 2001, $174.8 million in funds provided by the Company’s various liquidity sources were used to (1) invest $159.2 million primarily in Receivables and investments and (2) fund $29.5 million in debt maturities, annuity product withdrawals and surrenders, and the payment of dividends.

New Accounting Rules

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This statement addresses accounting and reporting of long-lived assets, except goodwill, that are either held and used or disposed of through sale or other means. Implementation of this new standard on October 1, 2002 did not have a material impact on the Company financial statements.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Interest~~Management monitors interest sensitive income ~~consists~~and ofexpenses ~~interest~~as onit ~~receivables, earned~~manages ~~discounts~~the onobjectives ~~receivables,~~for ~~insurance~~the ~~revenues~~Company’s ~~and~~results ~~other~~of ~~investment interest~~operations. ~~The~~Interest sensitive ~~related~~income ~~expense~~ consists of ~~salaries,~~interest ~~commissions~~ and ~~other~~earned ~~operating~~discounts ~~expenses incurred~~on asreceivables, ainsurance revenues ~~result~~and ofother ~~owning~~investment ~~the~~ interest. Interest sensitive ~~assets,~~expense consists of interest expense on borrowed money and insurance policy and annuity benefits.

The Company is in a “liability sensitive” position in that its interest sensitive liabilities reprice or mature more quickly than do its interest sensitive assets. Consequently, in a rising interest rate environment, the net return from interest sensitive assets and liabilities will tend to decrease. Conversely, in a falling interest rate environment, the net return from interest sensitive assets and liabilities will tend to improve. The Company believes there has not been a material change in its market risk since the end of its last fiscal year.

During the nine-month period ended June 30, 2002, net interest sensitive income was approximately $35.0 million compared to $16.2 million in the comparable prior year period. The increase between periods was primarily the result of an increase in the Company’s commercial lending activities. During the nine month period ended June 30, 2002, average monthly interest earning assets were approximately $1.0 billion compared to $0.9 billion during the same period the previous year. Additionally, the average net interest margin increased to 4.6% for the nine-month period ended June 30, 2002 compared to 2.8% for the nine-month period ended June 30, 2001.

During the three-month period ended June 30, 2002, net interest sensitive income was approximately $14.2 million compared to $5.9 million in the comparable prior year period. The increase between periods was primarily the result of an increase in the Company’s commercial lending activities, resulting in an overall increase in both interest earning assets and the average net interest margin.


ITEM 4.		CONTROLS AND PROCEDURES

InOur principal executive officer and principal financial officer have evaluated the ~~quarter~~effectiveness ~~ended~~of ~~June 30,~~our ~~2002~~“disclosure controls and procedures,” weas that ~~did~~term ~~not~~is ~~make~~defined ~~any~~in ~~significant~~Rule 15d-14(c) of the Securities Exchange Act of 1934 ~~changes~~(the in“Exchange Act”), ~~nor~~within ~~take~~90 days ~~any~~of ~~corrective~~the ~~actions~~filing ~~regarding~~date of this Quarterly Report on Form 10-Q. Based on their evaluation, the principal executive officer and principal financial officer concluded that our ~~internal~~disclosure controls and procedures are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, ~~other~~processed, ~~factors~~summarized ~~that~~and ~~could~~reported ~~significantly~~within ~~affect~~the ~~these~~time periods specified in the SEC’s rules and forms, and include controls. Weand ~~plan~~procedures designed to ensure ~~conduct~~that aninformation ~~evaluation~~required ofto be disclosed by us in those reports is accumulated and communicated to our ~~disclosure~~management, ~~controls~~including our principal executive officer and ~~procedures~~principal ~~each~~financial ~~quarter~~officer, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

PART II-OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(c) On May 7, 2002, in connection with our formation, we sold 100 shares of our unregistered common stock to our parent, Metropolitan Mortgage & Securities Co., Inc. for $10,000.

This sale and issuance of securities was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving any public offering. Exemption from the registration provisions of the Securities Act of 1933 is claimed on the basis that the purchaser represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, such transactions did not involve any public offering or underwriters and the purchasers were sophisticated and had adequate access to information about us through their relationship with us.


ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K

	(a)		Exhibits
			None
			None.
	(b)		During the quarter ended ~~June~~December 3031, 2002, the Registrant ~~did~~filed ~~not~~the ~~file~~following ~~any~~ reports on Form 8-K.:
			None.

~~SIGNATURES~~ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on this 14th day of February 2003 on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on this 23rd day of September, 2002 on its behalf by the undersigned, thereunto duly authorized.


	WESTERN UNITED HOLDING COMPANY

	/s/ C. PAUL SANDIFUR, JR.

	C. Paul Sandifur, Jr., President and Director

	/s/ ROBERT A. NESS

	Robert A. Ness Principal Accounting Officer

CERTIFICATIONS

I, C. Paul Sandifur, Jr., President (Chief Executive Officer) of Western United ~~Holding~~ Holding Company, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Western United Holding Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

~~Date:~~4. The ~~September~~registrant’s ~~23,~~other ~~2002~~certifying ~~/s/~~officers C.and ~~Paul~~I ~~Sandifur,~~are ~~Jr.~~responsible C.for establishing ~~Paul~~and ~~Sandifur,~~maintaining ~~Jr.~~disclosure ~~Chief~~controls ~~Executive~~and ~~Officer~~procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material 21information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: February 14, 2003

/s/ C. Paul Sandifur, Jr. C. Paul Sandifur, Jr. President (Chief Executive Officer)

I, Robert A. Ness, Principal Accounting Officer (Principal Financial Officer) of Western United Holding Company, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Western United Holding Company;

~~Date:~~4. The ~~September~~registrant’s ~~23,~~other ~~2002~~certifying ~~/s/~~officers ~~Robert~~and A.I ~~Ness~~are ~~Robert~~responsible A.for establishing ~~Ness~~and maintaining disclosure controls and procedures (~~Principal~~as ~~Financial~~defined ~~Officer~~in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material 22information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: February 14, 2003

/s/ Robert A. Ness Robert A. Ness Principal Accounting Officer (Principal Financial Officer)

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Filing Compare · WESTERN UNITED HOLDING CO