SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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


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

		OR

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

ORFor the quarterly period ended June 30, 2003

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

For the quarterly period ended March 31, 2003

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY


Incorporated in Arizona		86-0198983 IRS Employer Identification No.

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS Yes [X] No ~~[ ]~~

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

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON ~~MAY~~ AUGUST 14, 2003 WAS AS FOLLOWS:

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

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

TABLE OF CONTENTS

BALANCE SHEET STATEMENT OF INCOME AND COMPREHENSIVE INCOME STATEMENT OF CASH FLOWS NOTES TO FINANCIAL STATEMENTS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONTROLS & PROCEDURES OTHER INFORMATION SIGNATURES


		BALANCE SHEET
		BALANCE SHEET (Continued)
		STATEMENT OF INCOME AND COMPREHENSIVE INCOME
		STATEMENT OF INCOME AND COMPREHENSIVE INCOME
		STATEMENT OF CASH FLOWS
		NOTES TO FINANCIAL STATEMENTS
	Item 1. Legal Proceedings
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
SIGNATURES
Exhibit Index
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

AIG SUNAMERICA LIFE ASSURANCE COMPANY INDEX

INDEX


		Page
		Number(s)

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

		Page
		Number(s)
Part I — Financial Information
	Balance Sheet (Unaudited) — March 31, 2003 and December 31, 2002		3-4
	Statement of Income and Comprehensive Income (Unaudited) — Three Months Ended March 31, 2003 and 2002		5
	Statement of Cash Flows (Unaudited) - Three Months Ended March 31, 2003 and 2002		6-7
	Notes to Financial Statements (Unaudited)		8-9
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10-29
	Quantitative and Qualitative Disclosures About Market Risk		30
	Controls and Procedures		31
Part II — Other Information			32

AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET
(Unaudited)

		March 31,		December 31,
		June 30,		December 31,
		2003		2002
		(in thousands)
ASSETS
Investments and cash:
	Cash and short-term investments	$	~~305~~280,~~577~~808	$	65,872
	Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: March 31, 2003, $5,845,877; December 31, 2002, $5,492,677)		5,909,993		5,528,569
	Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: June 30, 2003, $5,686,567; December 31, 2002, $5,492,677)		5,861,858		5,528,569
	Mortgage loans		~~727~~754,~~901~~586		738,601
	Policy loans		~~211~~206,~~089~~172		215,846
	Separate account seed money		2528,~~029~~483		25,366
	Common stocks available for sale, at fair value (cost: March 31, 2003, $4,173; December 31, 2002, $4,111)		3,923		2,609
	Common stocks available for sale, at fair value (cost: June 30, 2003 and December 31, 2002, $4,111)		3,291		2,609
	Partnerships		5,714		8,766
	Real estate		22,091		22,315
	Securities lending collateral		~~551~~270,~~025~~648		585,760
	Other invested assets		616,~~607~~652		—8,766
	Total investments and cash		7,~~768~~444,~~949~~589		7,193,704
Variable annuity assets held in separate accounts			1416,~~365~~439,~~805~~908		14,758,642
Accrued investment income			83,~~344~~137		75,326
Deferred acquisition costs			1,~~377~~368,~~253~~587		1,364,748
Income taxes currently receivable from Parent			~~120~~106,~~130~~921		100,123
Due from affiliates			—		26,304
Goodwill			4,603		4,603
Other assets			1813,~~524~~160		15,382
TOTAL ASSETS		$	2325,~~738~~460,~~608~~905	$	23,538,832

See accompanying notes to financial statements

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

			March 31,			December 31,
		June 30,			December 31,
		2003	~~2003~~		2002	~~2002~~
		(in thousands)	~~(in thousands)~~
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
	Reserves for fixed annuity contracts	$	$4,478,965	~~4,532,874~~	$	$4,285,098	~~4,285,098~~
	Reserves for universal life insurance contracts		1,635,684	~~1,656,656~~		1,676,073	~~1,676,073~~
	Reserves for guaranteed investment contracts		357,284	~~356,824~~		359,561	~~359,561~~
	Securities lending payable		270,648	~~551,025~~		585,760	~~585,760~~
	Modified coinsurance deposit liability		20,046	~~26,531~~		31,393	~~31,393~~
	Due to affiliates		5,431	~~5,571~~		—	—
	Payable to brokers		232,852	~~344,897~~		8,529	~~8,529~~
	Other liabilities		172,225	~~172,651~~		160,265	~~160,265~~
Total reserves, payables and accrued liabilities			7,173,135	~~7,647,029~~		7,106,679	~~7,106,679~~
Variable annuity liabilities related to separate accounts			16,439,908	~~14,365,805~~		14,758,642	~~14,758,642~~
Deferred income taxes			426,798	~~380,710~~		351,872	~~351,872~~
Total liabilities			24,039,841	~~22,393,544~~		22,217,193	~~22,217,193~~
Shareholder’s equity:
	Common stock		3,511	~~3,511~~		3,511	~~3,511~~
	Additional paid-in capital		1,125,753	~~1,125,753~~		1,125,753	~~1,125,753~~
	Retained earnings		209,204	~~186,377~~		175,871	~~175,871~~
	Accumulated other comprehensive income		82,596	~~29,423~~		16,504	~~16,504~~
	Total shareholder’s equity		1,421,064	~~1,345,064~~		1,321,639	~~1,321,639~~
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY		$	$25,460,905	~~23,738,608~~	$	$23,538,832	~~23,538,832~~

See accompanying notes to financial statements

AIG SUNAMERICA LIFE ASSURANCE COMPANY STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the three months and six months ended ~~March~~June 3130, 2003 and 2002 (Unaudited)

				2003				2002
			Three Months								Six Months
				(In thousands)
			2003				2002				2003			2002
REVENUES
			(In thousands)
	Fee income:
REVENUES
		Variable annuity policy fees		$	63,956			$	64,723
	Fee income:
		Universal life insurance policy fees			8,970				9,225
	Variable annuity policy fees		$	69,070			$	97,036			$	133,026		$	161,759
		Surrender charges			7,570				6,505
	Universal life insurance policy fees			9,378				9,031				18,348			18,256
		Other fees			—				1,028
	Surrender charges			6,784				8,353				14,354			14,858
	Total fee income				80,496				81,481
	Other fees			—				1,004				—			2,032
	Investment income				98,686				96,334
	Total fee income			85,232				115,424				165,728			196,905
	Net realized investment losses				(3,272	)			(3,035	)
	Investment income			101,585				94,886				200,271			191,220
Total revenues					175,910				174,780
	Net realized investment losses			(5,358	)			(10,679	)			(8,630	)		(13,714	)
BENEFITS AND EXPENSES
	Total revenues			181,459				199,631				357,369			374,411
	Interest expense:
BENEFITS AND EXPENSES
		Interest credited to fixed annuity contracts			38,765				33,969
	Interest expense:
		Interest credited to universal life insurance contracts			19,102				19,586
	Fixed annuity contracts			39,328				33,866				78,093			67,835
		Interest credited to guaranteed investment contracts			2,016				3,025
	Universal life insurance contracts			18,737				20,048				37,839			39,634
		Interest expense on securities lending agreements			1,901				2,618
	Guaranteed investment contracts			2,031				3,072				4,047			6,097
	Total interest expense				61,784				59,198
	Securities lending agreements			1,545				3,417				3,446			6,035
	General and administrative expenses				21,259				18,827
	Total interest expense			61,641				60,403				123,425			119,601
	Amortization of deferred acquisition costs				38,821				46,653
	General and administrative expenses			19,030				19,555				40,289			38,382
	Annual commissions				14,178				15,806
	Amortization of deferred acquisition costs			40,256				60,704				79,077			107,357
	Claims on universal life contracts, net of reinsurance recoveries				5,513				4,462
	Annual commissions			15,995				15,814				30,173			31,620
	Guaranteed minimum death benefits, net of reinsurance recoveries				21,976				7,321
	Claims on universal life contracts, net of reinsurance recoveries			5,720				3,448				11,233			7,910
Total benefits and expenses					163,531				152,267
	Guaranteed minimum death benefits, net of reinsurance recoveries			14,483				10,431				36,459			17,752
PRETAX INCOME					12,379				22,513
Total benefits and expenses				157,125				170,355				320,656			322,622
Income tax expense					1,873				3,395
PRETAX INCOME				24,334				29,276				36,713			51,789
NET INCOME					10,506				19,118
Income tax expense				1,507				4,374				3,380			7,769
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
NET INCOME				22,827				24,902				33,333			44,020
Net unrealized gains (losses) on debt and equity securities available for sale identified in the current period					18,520				(31,412	)
Less reclassification adjustment for net realized losses included in net income					1,355				2,426
Net change related to cash flow hedges					—				(883	)
Income tax (expense) benefit					(6,956	)			10,454
OTHER COMPREHENSIVE INCOME (LOSS)					12,919				(19,415	)
COMPREHENSIVE INCOME (LOSS)				$	23,425			$	(297	)

See accompanying notes to financial statements

AIG SUNAMERICA LIFE ASSURANCE COMPANY STATEMENT OF ~~CASH~~INCOME ~~FLOWS~~AND COMPREHENSIVE INCOME For the three months and six months ended ~~March~~June 3130, 2003 and 2002 (Unaudited)

				2003				2002
		Three Months								Six Months
				(In thousands)
		2003				2002				2003			2002
CASH FLOW FROM OPERATING ACTIVITIES:
		(In thousands)
Net income				$	10,506			$	19,118
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Adjustments to reconcile net income to net cash provided by operating activities:
Net unrealized gains on debt and equity securities available for sale identified in the current period		$	78,406			$	52,200			$	96,926		$	20,788
	Interest credited to:
Less reclassification adjustment for net realized losses included in net income			3,400				8,405				4,755			10,831
		Fixed annuity contracts			38,765				33,969
Change related to cash flow hedges			—				(1,335	)			—			(2,218	)
		Universal life insurance contracts			19,102				19,586
Income tax expense			(28,633	)			(20,745	)			(35,589	)		(10,291	)
		Guaranteed investment contracts			2,016				3,025
OTHER COMPREHENSIVE INCOME			53,173				38,525				66,092			19,110
	Net realized investment losses				3,272				3,035
COMPREHENSIVE INCOME		$	76,000			$	63,427			$	99,425		$	63,130
	Amortization of net discounts on investments				3,473				1,667
	Universal life insurance fees, net				(3,457	)			(4,763	)
	Amortization of deferred acquisition costs				38,821				46,653
	Acquisition costs deferred				(60,926	)			(60,690	)
	Provision for deferred income taxes				21,881				17,073
	Change in:
		Accrued investment income			(8,018	)			(2,512	)
		Other assets			(3,142	)			(2,014	)
		Income taxes currently receivable from Parent			(20,007	)			(13,678	)
		Due from/to affiliates			(18,125	)			(48,246	)
		Other liabilities			281				(3,933	)
	Other, net				9,845				11,834
NET CASH PROVIDED BY OPERATING ACTIVITIES					34,287				20,124
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
	Bonds, notes and redeemable preferred stocks				(855,046	)			(411,588	)
	Mortgage loans				(131	)			(18,217	)
	Other investments, excluding short-term investments				(8,171	)			(3,052	)
Sales of:
	Bonds, notes and redeemable preferred stocks				576,332				267,071
	Other investments, excluding short-term investments				52				1,449
Redemptions and maturities of:
	Bonds, notes and redeemable preferred stocks				259,602				119,163
	Mortgage loans				11,213				36,519
	Other investments, excluding short-term investments				54,973				78,986
NET CASH PROVIDED BY INVESTING ACTIVITIES				$	38,824			$	70,331

See accompanying notes to financial statements

AIG SUNAMERICA LIFE ASSURANCE COMPANY STATEMENT OF CASH FLOWS ~~(Continued)~~ For the ~~three~~six months ended ~~March~~June 3130, 2003 and 2002 (Unaudited)

			2003			2002
			(In thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
CASH FLOW FROM OPERATING ACTIVITIES:
Deposits received on:
Net income			$	33,333		$	44,020
	Annuity contracts		$	428,057		$	359,933
Adjustments to reconcile net income to net cash provided by operating activities:
	Universal life insurance contracts			11,310			12,407
	Interest credited to:
Net exchanges from the fixed accounts of of variable annuity contracts				(58,019	)		(335,111	)
		Fixed annuity contracts		78,093			67,835
Withdrawal payments on:
		Universal life insurance contracts		37,839			39,634
	Fixed annuity contracts			(139,659	)		(86,844	)
		Guaranteed investment contracts		4,047			6,097
	Universal life insurance contracts			(14,100	)		(9,364	)
	Net realized investment losses			8,630			13,714
	Guaranteed investment contracts			(4,753	)		(2,869	)
	Amortization (Accretion) of net discounts (premiums) on investments			2,291			(391	)
Claims and annuity payments on:
	Amortization of deferred acquisition costs			79,077			107,357
	Fixed annuity contracts			(29,313	)		(17,116	)
	Acquisition costs deferred			(121,316	)		(126,019	)
	Universal life insurance contracts			(34,172	)		(40,794	)
	Provision for deferred income taxes			39,337			69,885
Net receipts from (repayments of) other short-term financings				12,105			(20,938	)
	Change in:
Net payment related to a modified coinsurance transaction				(4,862	)		(7,201	)
		Accrued investment income		(7,811	)		(3,628	)
Net cash and short-term investments transferred to the Parent in the distribution of Saamsun Holdings Corp.				—			(82,873	)
		Other assets		2,222			4,881
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES				166,594			(230,770	)
		Income taxes currently receivable from Parent		(6,798	)		(7,566	)
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS				239,705			(140,315	)
		Due from/to affiliates		(18,265	)		(32,492	)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD				65,872			200,064
		Other liabilities		22,303			(9,749	)
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD			$	305,577		$	59,749
	Other, net			10,039			9,197
SUPPLEMENTAL CASH FLOW INFORMATION:
NET CASH PROVIDED BY OPERATING ACTIVITIES				163,021			182,775
Interest paid on indebtedness			$	1,901		$	2,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Net income taxes refunded by (paid to) Parent			$	—		$	—
Purchases of:
	Bonds, notes and redeemable preferred stocks			(1,328,167	)		(921,523	)
	Mortgage loans			(29,883	)		(41,166	)
	Other investments, excluding short-term investments			(14,849	)		(1,514	)
Sales of:
	Bonds, notes and redeemable preferred stocks			858,085			336,574
	Other investments, excluding short-term investments			67			396
Redemptions and maturities of:
	Bonds, notes and redeemable preferred stocks			492,682			255,012
	Mortgage loans			14,560			49,933
	Other investments, excluding short-term investments			59,927			99,999
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			$	52,422		$	(222,289	)

See accompanying notes to financial statements

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~NOTES~~STATEMENT TOOF ~~FINANCIAL~~CASH ~~STATEMENTS~~FLOWS (Continued) For the six months ended June 30, 2003 and 2002 (Unaudited)

1.		BASIS OF PRESENTATION
			2003			2002
		AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company) (the “Company”), is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG SunAmerica Inc. (“SAI”), a wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and retirement services and asset management. The Company is an Arizona-domiciled life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed interest contracts (“GICs”) directed to the institutional marketplace.
			(In thousands)
		The Company changed its name to SunAmerica National Life Insurance Company on October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. The Company continued to do business as Anchor National Life Insurance Company until February 28, 2003, at which time it began doing business under its new name.
CASH FLOW FROM FINANCING ACTIVITIES:
		In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s financial position as of March 31, 2003 and December 31, 2002, the results of its operations and its cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002, contained in the Company’s 2002 Annual Report on Form 10-K. Certain prior period items have been reclassified to conform to the current period’s presentation.
Deposits received on:
2.		CONTINGENT LIABILITIES
	Fixed annuity contracts		$	803,595		$	815,813
		The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees at March 31, 2003 is $794,930,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $345,332,500 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates and related amounts of these commitments are as follows: $249,000,000 in 2004, $387,930,000 in 2005 and $158,000,000 in 2006. Management does not anticipate any material losses with respect to these commitments.
	Universal life insurance contracts			22,573			24,128
		The Company has entered into an agreement whereby it is committed to purchase the remaining principal amount, $21,000,000 as of March 31, 2003, of various mortgage-backed securities at par value in March 2006. As of March 31, 2003,
Net exchanges from the fixed accounts of of variable annuity contracts Net realized investment losses variable annuity contracts				(405,412	)		(463,914	)
Withdrawal payments on:
	Fixed annuity contracts			(242,148	)		(180,037	)
	Universal life insurance contracts			(33,365	)		(36,849	)
	Guaranteed investment contracts			(6,240	)		(5,365	)
Claims and annuity payments on:
	Fixed annuity contracts			(55,667	)		(49,881	)
	Universal life insurance contracts			(62,153	)		(51,712	)
Net repayments of other short-term financings				(10,343	)		(13,660	)
Net payment related to a modified coinsurance transaction				(11,347	)		(15,579	)
Net cash and short-term investments transferred to the Parent in the distribution of Saamsun Holdings Corp.				—			(82,873	)
NET CASH USED IN FINANCING ACTIVITIES				(507	)		(59,929	)
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS				214,936			(99,443	)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD				65,872			200,064
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD AT END OF PERIOD AT END OF PERIOD			$	280,808		$	100,621
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness			$	3,446		$	6,035
Net income taxes refunded by Parent			$	29,159		$	54,550

See accompanying notes to financial statements

		the estimated fair value exceeded the principal amount of the securities. At the present time, management does not anticipate any material losses with respect to this agreement.
		In the third quarter of 2002, the Company began issuing certain variable annuity products which offer an optional Guaranteed Minimum Account Value (“GMAV”) living benefit. As of March 31, 2003, the premiums subject to guarantee totaled approximately $200,000,000, and the estimated fair values of the GMAV were not material.
		Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.
3.		RECENTLY ISSUED ACCOUNTING STANDARDS
		In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The Company believes that the impact of FIN 45 on its results from operations and financial condition will not be significant.

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

1.		BASIS OF PRESENTATION

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

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

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

2.		CONTINGENT LIABILITIES

		The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at June 30, 2003 is $794,930,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $345,333,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates and related amounts of these commitments are as follows: $249,000,000 in 2004, $387,930,000 in 2005 and $158,000,000 in 2006. Management does not anticipate any material losses with respect to these commitments.

		In the third quarter of 2002, the Company began issuing certain variable annuity products which offer an optional Guaranteed Minimum Account Value (“GMAV”) living benefit. As of June 30, 2003, the premiums subject to guarantee totaled approximately $354,658,000, and the estimated fair values of the GMAV benefit were not material.

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

3.		RECENTLY ISSUED ACCOUNTING STANDARDS

		In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The adoption of FIN 45 did not have a significant impact on the Company’s results of operations or financial condition.

		In July 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-01, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts (“SOP-03-01”). This statement is effective for the Company as of January 1, 2004. Under SOP 03-01, variable annuity assets held in separate accounts will continue to be measured at fair value and reported in summary total on the Company’s financial statements, with an equivalent summary total reported for related liabilities, if the separate account arrangement meets certain specified conditions. Assets underlying the Company’s interest in a separate account (separate account seed money) do not qualify for separate account accounting and reporting. The Company will be required to “look through” the separate account for purposes of accounting for its interest therein, and account for and classify separate account seed money based on its nature as if the assets of the separate account underlying the Company’s interest were held directly by the general account rather than through the separate account structure. The adoption of SOP 03-01 will not have a material impact on the Company’s separate accounts or separate account seed money.

		In addition, SOP 03-01 will require the Company to recognize a liability for guaranteed minimum death benefits, guaranteed minimum income benefits and enhanced earnings benefits. The Company is currently evaluating the provisions of SOP 03-01 and does not currently have an estimate of the liability. However, the one-time cumulative accounting charge is expected to have a material effect on the Company’s results of operations, but is not expected to be material to the Company’s financial position.

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

Management’s discussion and analysis of financial condition and results of operations of AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company) (the “Company”) for the three months ~~ended~~and ~~March~~six months ended June 3130, 2003 ~~(“2003”)~~ and ~~March~~June 3130, 2002 ~~(“2002”)~~ follows. Certain prior period amounts ~~have~~ have been ~~restated~~reclassified to conform to the current period’s presentation.

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

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

CRITICAL ACCOUNTING POLICIES

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

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $~~162~~120.47 million at ~~March~~June 3130, 2003. Inand ~~determining~~$170.7 million ifat ~~and~~December 31, ~~when~~2002. When a decline in fair value below amortized cost is deemed to be other-than-temporary, the Company recognizes ~~evaluates~~an atimpairment ~~each~~loss ~~reporting period~~in the ~~market~~current ~~conditions,~~period ~~offering~~operating ~~prices, trends of earnings, price~~results ~~multiples, and other key measures for investments in debt and~~

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~~marketable equity securities. In particular, for debt securities, the Company assesses the probability that all amounts due are collectible according~~ to the ~~contractual~~ ~~terms~~extent of the ~~obligation. When such a~~ decline in(See ~~value~~also isdiscussion ~~deemed~~within ~~to be~~“Capital ~~other-than-temporary,~~Resources ~~the Company recognizes an impairment loss in the~~and ~~current~~Liquidity” ~~period operating results to the extent of the decline~~herein).

Securities in our portfolio with a carrying value of approximately $1.2432 billion at ~~March~~June 3130, 2003 do not have readily determinable market prices. For these securities, we estimate their fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, we use our most recent purchases and sales of similar unquoted securities, independent broker quotes or comparison to similar securities with quoted prices when possible to estimate the fair value of those securities. All such securities are classified as available for sale. Our ability to liquidate our positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner. Although we believe our estimates reasonably reflect the fair value of those securities, our key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral, if any, and other factors may not reflect those of an active market.

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

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

BUSINESS SEGMENTS

OnThe ~~January 1, 2002, the~~ Company ~~declared~~has aone ~~distribution~~business ~~to its Parent~~segment, ~~SunAmerica~~ ~~Life~~annuity ~~Insurance Company (the “Parent”)~~operations, ofwhich ~~100%~~ consists of the ~~outstanding capital~~sale ~~stock~~and administration of ~~its~~deposit-type ~~then~~insurance ~~wholly owned subsidiary~~contracts, ~~Saamsun~~such ~~Holdings Corp.~~as ~~(“Saamsun”).~~fixed ~~Saamsun~~and ~~was~~variable ~~comprised~~annuities ofand ~~the~~universal ~~Company’s~~life ~~asset~~insurance ~~management~~contracts. ~~and~~The ~~broker-dealer~~Company ~~segments.~~focuses ~~This~~primarily ~~distribution~~on ~~was approved by~~ the ~~Arizona Department~~marketing of ~~Insurance.~~fixed ~~The results of 2003~~ and ~~2002~~variable ~~include the impact of~~annuity ~~this distribution.~~

On June 10, 2002, the Company entered into a profit sharing agreement with AIG SunAmerica Asset Management Corp. (“SAAMCO”), whereby SAAMCO will contribute to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement is retroactive to January 1, 2002. Amounts paid to or accrued by the Company under this agreement totaled $13.5 million for 2003.

RESULTS OF OPERATIONS

NET INCOME totaled $10.5 million in 2003, compared to $19.1 million in 2002.

PRETAX INCOME totaled $12.4 million in 2003 and $22.5 million in 2002. The decrease in 2003 primarily resulted from increased guaranteed minimum death benefits and increased general and administrative expenses, offset by decreased amortization of deferred acquisition costs.

INCOME TAX EXPENSE totaled $1.9 million in 2003 and $3.4 million in 2002, representing effective tax rates of 15% in 2003 and 2002.

NET INVESTMENT SPREAD, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and other interest-bearing liabilities, totaled $36.9 million in 2003 and $37.1 million in 2002. These amounts equal 2.04% on average invested assets (computed on a daily basis) of $7.25 billion in 2003 and 2.37% on average invested assets of $6.28 billion in 2002.

Growth in average invested assets resulted from sales of the fixed account options of the Company’s variable annuity products (“Fixed Annuity Deposits”), and renewal deposits on its universal life product (“UL Deposits”), partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts. Fixed Annuity Deposits and UL Deposits totaled $439.4 million in 2003 and $373.3 million in 2002, and are largely deposits for the fixed accounts of variable annuities. On an annualized basis, these deposits represent 29% and 28%, respectively, of the related reserve balances at the beginning of 2003 and 2002.

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

products. The ~~following~~variable ~~table~~annuity ~~shows~~products ~~the~~offer ~~Company’s~~investors a broad spectrum of fund alternatives, with a choice of investment ~~results~~managers, ~~for~~as ~~2003~~well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and ~~2002:~~net investment income on the fixed-rate account options.

	2003			2002
	(In thousands,
	except for percentages)
Average invested assets	$	7,249,465		$	6,278,929
Average annuity reserves and other interest-bearing liabilities	$	6,981,006		$	6,213,052
Average yield on average invested assets		5.45	%		6.14	%
Weighted average rate paid on average annuity reserves and other interest-bearing liabilities		3.54			3.81
Yield spread		1.91	%		2.33	%

On June 10, 2002, the Company entered into a profit sharing agreement with AIG SunAmerica Asset Management Corp. (“SAAMCO”), an affiliate, whereby SAAMCO will contribute to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement was retroactive to January 1, 2002. Amounts paid to or accrued by the Company under this agreement totaled $12.8 million for the second quarter of 2003 and $24.5 million for the six months of 2003. Amounts paid to or accrued by the Company under this agreement totaled $29.8 million for the six months of 2002, approximately half of which related to the first quarter of 2002.

~~Net~~RESULTS ~~investment~~OF ~~spreads include the effect of income earned or interest~~OPERATIONS ~~paid on the difference between average invested assets and average~~ interest-bearing liabilities. Average invested assets exceeded average interest-bearing liabilities by $268.5 million in 2003, compared to $65.9 million in 2002. The increase in 2003 reflected a $200.0 million capital contribution from the Parent in the third quarter of 2002. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities (the “Spread Difference”) was 1.91% in 2003 and 2.33% in 2002.

~~Investment~~NET ~~income~~INCOME ~~(and the related yields on average invested assets)~~ totaled $9822.78 million ~~(5.45%)~~ in ~~2003 and $96.3 million (6.14%) in 2002. The decrease in~~ the ~~investment~~second ~~yield~~quarter inof 2003, compared to ~~2002~~$24.9 million ~~primarily~~in ~~reflects~~the ~~a lower~~second ~~prevailing~~quarter ~~interest~~of ~~rate environment~~2002. ~~Expenses~~For ~~incurred~~the tosix ~~manage~~months, ~~the investment~~net ~~portfolio~~ income amounted to $033.63 million in 2003, ~~and~~compared to $044.50 million in 2002. ~~These expenses are included as a reduction to investment income in the~~ ~~statement of income and comprehensive income.~~

~~Interest~~PRETAX ~~expense~~INCOME totaled $6124.83 million in the second quarter of 2003, compared ~~and~~to $5929.23 million in ~~2002. The~~the ~~average~~second ~~rate~~quarter ~~paid~~of on2002. ~~all~~For ~~interest-bearing~~the ~~liabilities~~six ~~was~~months, pretax 3income totaled $36.~~54%~~7 million in 2003, compared to 3$51.~~81%~~8 million in 2002. The ~~Interest-bearing~~decrease ~~liabilities~~in ~~averaged $6.99 billion during~~ 2003 ~~and~~primarily ~~$6.21 billion~~resulted ~~during~~from ~~2002.~~decreased ~~The~~variable ~~decline~~annuity infee income ~~the~~and ~~overall~~increased ~~rates paid~~guaranteed inminimum ~~2003~~death ~~compared~~benefits, tooffset ~~2002~~by ~~resulted~~decreased amortization ~~primarily~~of ~~from~~deferred ~~the~~acquisition ~~impact~~costs ofand aincreased ~~declining interest~~investment ~~rate environment~~income.

NET ~~REALIZED~~ INVESTMENT ~~LOSSES~~SPREAD, which is the spread between the income earned on invested assets and the interest credited to fixed annuity contracts and paid on other interest-bearing liabilities, totaled $339.39 million in the second quarter of 2003, ~~and~~compared to $334.0 5 million in the second quarter of 2002. These ~~and~~amounts ~~include~~equal ~~impairment~~2.22% ~~writedowns~~on average invested assets (computed on a daily basis) of $57.218 billion in the second quarter of 2003 and $52.115% on average ~~million~~invested assets of $6.42 billion in the second quarter of 2002 on an annualized basis. ~~Thus~~For the six months, net ~~realized~~investment ~~gains~~spread increased to $76.8 million in 2003 from ~~sales~~$71.6 million ~~and~~in ~~redemptions~~2002, representing 2.12% of ~~investments~~ ~~totaled~~average invested assets of $17.922 ~~million~~billion in 2003 and $2.~~1 million~~26% of average invested assets of $6.35 billion in 2002 on an annualized basis.

~~The~~Growth in average invested assets resulted primarily from sales of the fixed account options of the Company’s ~~sold~~variable orannuity ~~redeemed~~products ~~invested~~(“Fixed Annuity ~~assets~~Deposits”), ~~principally~~and ~~bonds~~renewal ~~and~~deposits ~~notes~~on its universal life product (“UL Deposits”), partially offset by net exchanges from fixed accounts into the ~~aggregating~~separate accounts of variable annuity contracts. Such deposits totaled $~~837~~386.3 7 million in the second quarter of 2003 and $~~426~~467.16 million in ~~2002.~~the ~~Sales~~second ofquarter ~~investments~~of ~~result~~2002, ~~from~~$826.2 million in the ~~active~~six ~~management~~months of ~~the~~2003 ~~Company’s~~and ~~investment portfolio~~$839.9 million ~~Because~~in ~~redemptions~~the six months of ~~investments~~2002, and are ~~generally~~largely ~~involuntary~~deposits ~~and sales~~for ofthe ~~investments~~fixed ~~are~~accounts ~~made~~of invariable annuities. ~~both~~On ~~rising~~an ~~and~~annualized ~~falling~~basis, ~~interest~~these ~~rate~~deposits represent 25%,

~~environments~~36%, ~~net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.10~~28% and ~~0.13~~32% ~~of average invested assets for 2003 and 2002~~, respectively., ~~Active portfolio management involves the ongoing evaluation~~ of ~~asset sectors, individual securities within~~ the ~~investment~~related ~~portfolio~~reserve ~~and~~balances ~~the~~at ~~reallocation of investments~~the ~~from~~beginning ~~sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent~~ of the ~~Company’s~~respective ~~active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk~~periods.

~~Impairment~~Under ~~writedowns~~accounting ~~include~~principles ~~$5.2 million~~generally ofaccepted ~~provisions applied to bonds and partnerships~~ in ~~2003~~the ~~and~~United ~~$5.1 million~~States of ~~provisions applied to bonds and~~ ~~other~~America, ~~invested~~deposits ~~assets~~collected inon ~~2002.~~non-traditional Onlife anand ~~annualized~~annuity ~~basis~~insurance products, ~~impairment~~such ~~writedowns represent~~as ~~0.28%~~those ~~and~~sold ~~0.32%~~by ofthe ~~average~~Company, ~~invested~~are ~~assets~~not ~~for~~reflected ~~2003~~as ~~and~~revenues ~~2002,~~in ~~respectively. For~~ the ~~twenty~~Company’s ~~quarters~~statement ~~ended~~of ~~March 31~~income, ~~2003, impairment writedowns~~ as anthey ~~annualized~~are ~~percentage~~recorded ofdirectly ~~average~~upon ~~invested assets have ranged~~receipt ~~from 0.03%~~ to ~~1.95%~~reserves ~~and~~for ~~have~~fixed ~~averaged~~annuity ~~0.60%. Such writedowns are based upon estimates of the net realizable value of invested assets~~ and ~~recorded~~universal ~~when declines~~life ~~in value of such assets are considered to be other than temporary~~contracts. ~~Actual realization will be dependent upon future events.~~

~~VARIABLE~~Net ~~ANNUITY~~investment ~~POLICY~~spreads ~~FEES~~include ~~are based on~~ the ~~market~~effect ~~value~~ of ~~assets~~income ~~in separate~~earned ~~accounts~~or ~~supporting~~interest paid ~~variable~~on ~~annuity~~the ~~contracts.~~difference ~~Such~~between ~~fees~~average ~~totaled $64.0 million~~invested inassets ~~2003~~and ~~(including~~average interest-bearing ~~$13~~liabilities.~~5 million~~ ~~attributable~~Average toinvested ~~the~~assets ~~SAAMCO~~exceeded average ~~Agreement)~~interest-bearing ~~and~~liabilities by $64245.71 million in ~~2002~~the ~~and~~second ~~are~~quarter ~~net~~ of ~~reinsurance~~2003, ~~premiums~~compared ~~of $6.4 million~~to ~~and~~ $485.49 million in ~~2003~~the ~~and~~second ~~2002,~~quarter ~~respectively~~of 2002. ~~Excluding~~For the ~~impact~~ ofsix ~~the SAAMCO Agreement~~months, average ~~variable~~invested ~~annuity~~assets ~~fees~~exceeded ~~would~~average ~~have~~interest-bearing ~~been~~liabilities by $50256.57 million in 2003., ~~The~~compared ~~decreased~~with ~~fees~~$75.9 million in ~~2003 as compared to~~ 2002. ~~reflect~~The ~~the unfavorable~~increase ~~equity market conditions~~ in ~~2002 and~~ 2003~~, and the resulting~~ ~~unfavorable~~reflected ~~impact~~a on$200.0 million ~~market~~capital ~~values~~contribution offrom ~~assets~~the Parent in the ~~separate accounts. On an~~third ~~annualized~~quarter ~~basis,~~of ~~variable~~2002. ~~annuity~~The ~~fees~~difference ~~represent~~between ~~1.8%~~the ~~and~~Company’s ~~1.4%~~yield ofon average ~~variable~~invested ~~annuity~~ assets ~~in 2003~~ and ~~2002, respectively. Excluding~~ the ~~impact of~~rate ~~the~~paid ~~SAAMCO~~on ~~Agreement,~~average ~~variable~~interest-bearing ~~annuity~~liabilities ~~fees~~(the “Spread ~~would~~Difference”) ~~have~~was ~~represented 1~~2.411% ~~of average variable annuity assets~~ in ~~2003. Variable annuity assets averaged $14.48 billion during 2003 and $18.21 billion during 2002. Variable annuity deposits, which exclude deposits allocated to~~ the ~~fixed~~second ~~accounts~~quarter of ~~variable annuity products~~2003, ~~totaled $328~~2.~~4 million~~10% in ~~2003 and $325.6 million in 2002.~~the Onsecond anquarter ~~annualized~~of ~~basis~~2002, ~~these amounts represent 9~~2.00% ~~and~~in ~~7% of separate account liabilities at~~ the ~~beginning~~six ofmonths ~~the respective periods. Transfers from the fixed accounts~~ of ~~the~~2003 ~~Company’s~~and ~~variable annuity products to the separate accounts are not classified as variable annuity deposits~~2.21% ~~Accordingly, changes~~ in ~~variable annuity deposits are not necessarily indicative of~~ the ~~ultimate~~six ~~allocation~~months ~~by customers among fixed and variable account options~~ of ~~the Company’s variable annuity products~~2002.

~~Sales~~Investment ofincome ~~variable~~(and ~~annuity~~the ~~products~~related ~~(which~~yields ~~include~~on ~~deposits~~average ~~allocated~~invested toassets) ~~the~~totaled ~~fixed~~$101.6 million ~~accounts~~(5.66%) ~~(“Variable~~in ~~Annuity~~the ~~Product~~second ~~Sales”)~~quarter ~~amounted~~of to2003, $~~754~~94.8 9 million (5.91%) in ~~2003~~the ~~and~~second quarter of 2002, $~~685~~200.43 million ~~in 2002~~(5.55%) ~~Such~~in ~~sales~~the ~~primarily~~six ~~reflect those~~months of ~~the~~2003 ~~Company’s~~and ~~Polaris,~~$191.2 million ~~Seasons~~(6.02%) ~~and~~in ~~Diversified~~the ~~Strategies~~six ~~variable~~months ~~annuity product~~of ~~lines~~2002. The ~~Company’s~~decrease ~~variable~~in the ~~annuity~~investment ~~products~~yield ~~are~~in ~~multi-manager variable~~2003 ~~annuities~~compared ~~that~~to ~~offer~~2002 ~~investors~~primarily reflects a ~~choice~~lower prevailing ofinterest ~~several~~rate ~~variable~~environment. ~~funds~~Investment ~~as well~~income ashas abeen ~~number~~reduced ofby expenses ~~guaranteed~~incurred ~~fixed-rate~~to ~~funds.~~manage ~~Investors~~the ~~can~~investment ~~select~~portfolio ~~from~~amounted ato $0.6 million ~~choice~~in ofthe 4second toquarter 41of ~~variable~~2003, ~~funds~~$0.5 million ~~and~~in upthe tosecond 7quarter ~~guaranteed~~of ~~fixed-rate~~2002, ~~funds~~$1.1 ~~depending~~million onin the ~~product.~~six ~~The~~months ~~increase~~of in2003 ~~Variable~~and ~~Annuity~~$1.0 million ~~Product~~in ~~Sales reflected~~the ~~higher~~six ~~sales~~months of ~~the fixed account~~2002.

Interest expense totaled $61.6 million in the second quarter of 2003 and $60.4 million in the second quarter of 2002. For the six months, interest expense aggregated $123.4 million in 2003, compared with $119.6 million in 2002. The average rate paid on all interest-bearing liabilities was 3.55% in the second quarter of 2003, compared to 3.81% in the second quarter of 2002. For the six months, the average rate paid on all interest-bearing liabilities was 3.55% in 2003 and 3.81% in 2002. Interest-bearing liabilities averaged $6.94 billion during the second quarter of 2003 and $6.34 billion during the second quarter of 2002, $6.96 billion during the six months of 2003 and $6.28 billion during the six months of 2002. The decline in the overall rates paid in 2003 compared to 2002 resulted primarily from the impact of a declining interest rate environment.

NET REALIZED INVESTMENT LOSSES totaled $5.4 million in the second quarter of 2003 and $10.7 million in 2002 and include impairment writedowns of $10.4 million and $6.4 million, respectively. For the six months, net realized investment losses totaled $8.6 million in 2003, compared with $13.7 million in 2002 and include impairment writedowns of $15.5 million and $11.4 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $5.0 million in the second quarter of 2003, compared to net realized losses of $4.3 million in the second quarter of 2002. For the six months, net realized gains from sales and redemptions of investments

~~options~~totaled of$6.9 million ~~the~~in ~~Company’s~~2003, ~~variable~~compared ~~annuity~~to ~~products~~net ~~due~~realized tolosses ~~the~~of ~~unfavorable~~$2.3 ~~equity~~million ~~market~~in ~~conditions discussed above~~2002.

The Company ~~has~~sold ~~encountered~~or ~~increased~~redeemed ~~competition~~invested assets, principally bonds and notes, aggregating $517.6 million in the ~~variable~~second ~~annuity~~quarter of 2003, $275.7 million in the ~~marketplace~~second ~~during~~quarter ~~recent~~of ~~years~~2002, $1.35 billion in the six months of 2003 and ~~anticipates~~$701.9 million ~~that~~in the ~~market~~six ~~will~~months ~~remain highly~~of ~~competitive~~2002. ~~for~~Sales of investments result from the ~~foreseeable~~active management ~~future~~of the Company’s investment portfolio. ~~Also~~Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from ~~time~~sales and redemptions of investments fluctuate from period to ~~time~~period, and represent ~~Federal~~on ~~initiatives~~an annualized basis 0.28%, 0.27%, 0.19% and 0.07% of average invested assets in the second quarter of 2003, the second quarter of 2002, the six months of 2003 and the six months of 2002, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are ~~proposed~~perceived to be relatively overvalued to sectors that ~~could~~are ~~affect~~perceived ~~the~~to ~~taxation~~be relatively undervalued. The intent of ~~annuities~~the Company’s active portfolio ~~(See~~management ~~“Regulation”)~~is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk.

~~UNIVERSAL~~Impairment ~~LIFE~~writedowns ~~INSURANCE~~include ~~POLICY~~$10.4 million, ~~FEES amounted to~~ $96.04 million, ~~in 2003 and~~ $915.25 million and ~~in 2002~~$11.4 million ~~Universal~~of ~~life~~provisions ~~insurance~~applied ~~fees~~to ~~consist~~bonds, ofpartnerships ~~mortality~~and other ~~charges,~~invested ~~up-front~~assets ~~fees~~in ~~earned~~the onsecond ~~deposits~~quarter ~~received~~of ~~and~~2003, ~~administrative~~the ~~fees~~second quarter of 2002, ~~net~~the six months of ~~reinsurance~~2003 ~~premiums.~~and ~~The~~the ~~administrative~~six ~~fees~~months ~~are~~of ~~assessed~~2002, ~~based~~respectively. onOn ~~the~~an annualized ~~number~~basis, ofimpairment ~~policies~~writedowns inrepresent ~~force~~0.58%, as0.40%, of0.43% ~~the~~and ~~end~~0.36% of ~~each~~average invested ~~month~~assets in the respective periods. ~~The~~For ~~Company~~the ~~acquired its~~twenty ~~universal~~quarters ~~life~~ended ~~contracts~~June 30, as2003, ~~part~~impairment ofwritedowns ~~the~~as ~~its~~an ~~acquisition~~annualized percentage of ~~business~~average ~~from~~invested ~~MBL~~assets ~~Life~~have ~~Assurance~~ranged ~~Corporation~~from on0.03 ~~December 31,~~to ~~1998~~1.95% and ~~does~~have ~~not~~averaged ~~actively~~0.61%. Such writedowns ~~market~~are ~~such~~based ~~contracts.~~upon ~~Such~~estimates ~~fees~~of ~~annualized~~the ~~represent~~fair ~~2.2%~~value of invested assets and ~~2.1%~~recorded when declines in value of ~~average reserves~~such ~~for~~assets ~~universal~~are ~~life~~considered ~~insurance~~to ~~contracts~~be inother ~~the~~than ~~respective~~temporary. Actual ~~periods~~realization will be dependent upon future events.

~~SURRENDER~~VARIABLE ~~CHARGES~~ANNUITY POLICY FEES are based on ~~fixed~~the ~~annuity,~~market value of assets in separate accounts supporting variable annuity ~~and~~contracts. ~~universal~~Such ~~life contracts~~fees totaled $769.61 million in the second quarter of 2003 and $697.50 million in ~~2002.~~the ~~Surrender~~second ~~charges~~quarter ~~generally~~of 2002 and are ~~assessed~~net onof ~~withdrawals~~reinsurance atpremiums ~~declining~~of ~~rates~~$7.7 million ~~during~~and ~~the~~$5.3 ~~first~~million, ~~seven~~respectively. ~~years~~These ofamounts ainclude ~~contract~~$14.6 million ~~Withdrawal~~attributable ~~payments,~~to ~~which~~the SAAMCO ~~exclude~~Agreement ~~claims~~for ~~and lump-sum~~the ~~annuity~~second ~~benefits~~quarter of 2003. For the six months, variable annuity fees totaled $~~536~~133.30 million in 2003, compared to $~~501~~161.6 8 million in 2002 and are net of reinsurance premiums of $14.1 million ~~Annualized~~and $9.7 million, respectively. ~~these~~These ~~payments~~amounts ~~when~~include ~~expressed~~$28.2 million asand a$33.8 million attributable ~~percentage~~to the SAAMCO Agreement, respectively, with approximately half of ~~average~~the ~~related~~2002 ~~reserves~~amount ~~represent~~relating 10to the first quarter of 2002.6% ~~for~~The decreased fees in the six months of 2003 ~~and~~as ~~8.7%~~compared ~~for~~to the six months of 2002. reflect the ~~Withdrawals~~unfavorable ~~include~~equity ~~variable~~market ~~annuity~~conditions ~~payments~~in ~~from~~2003 and 2002, and the resulting unfavorable impact on market values of assets in the separate accounts. On an ~~totaling~~annualized ~~$384~~basis, variable annuity fees represent 1.~~4 million~~8%, ~~(annualized~~2.2%, ~~representing~~1.8% 10and 1.78% of average variable annuity ~~liabilities)~~assets in ~~2003~~the second quarters and six months of 2003 and 2002, respectively. Variable annuity assets averaged $~~405~~15.467 ~~million~~billion, $17.75 billion, ~~(annualized~~$15.08 billion ~~representing~~and 8$17.~~9% of~~98 billion ~~average~~during ~~variable~~the respective periods. Variable annuity ~~liabilities)~~deposits, inwhich ~~2002.~~exclude ~~The~~deposits ~~percentage~~allocated ~~increase~~to inthe ~~withdrawal~~fixed ~~rates~~accounts inof ~~2003~~variable ~~reflects~~annuity aproducts, ~~decrease~~totaled $394.3 million and $311.1 million in the ~~market~~second ~~value~~quarters of ~~assets~~2003 ~~in separate~~and ~~accounts~~2002, ~~supporting~~respectively. ~~variable~~For ~~annuity~~the ~~contracts~~six months, ~~due~~variable toannuity ~~continual unfavorable~~deposits ~~equity~~totaled ~~market conditions~~$722.7

GENERAL AND ADMINISTRATIVE EXPENSES totaled $21.3 million in 2003 and $18.9 million in 2002. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $38.8 million in 2003, compared to $46.7 million in 2002. The decrease in amortization in 2003 was due to a lower income in 2003 as a result of increased guaranteed minimum death benefits and increased general and administrative expenses.

ANNUAL COMMISSIONS totaled $14.2 million in 2003, compared to $15.8 million in 2002. Annual commissions represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The Company estimates that approximately 55% of the average balances of its variable annuity products is currently subject to such annual commissions. Based on current sales, this percentage is expected to increase in future periods.

GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (“Net GMDB”) totaled $22.0 million in 2003, compared to $7.3 million in 2002 (net

~~of reinsurance recoveries of $3.0~~ million in 2003, ~~and~~compared with $1636.47 million in 2002). ~~Net~~On ~~GMDB~~an ~~consists primarily of guaranteed minimum death benefits as~~annualized ~~well~~basis, asthese ~~immaterial~~ amounts ofrepresent ~~earnings~~11%, ~~enhancement benefits~~7%, ~~guaranteed~~10% ~~minimum income benefits~~ and ~~guaranteed~~7% ~~minimum~~of ~~account~~separate ~~value benefits. These~~account ~~guarantees~~liabilities ~~are~~at ~~described~~the inbeginning ~~more~~of ~~detail in~~ the ~~following~~respective ~~paragraphs~~periods. ~~The increase~~Transfers infrom ~~Net~~the fixed ~~GMDB~~accounts ~~related~~of to the Company’s variable annuity ~~separate~~products ~~account~~to the separate ~~contracts~~accounts inare ~~2003~~not ~~reflects~~classified ~~the~~as ~~downturn~~variable annuity deposits. Accordingly, changes in ~~the~~variable ~~equity~~annuity ~~markets~~deposits inare ~~2002~~not ~~and~~necessarily ~~2003.~~indicative of the ultimate ~~Further~~allocation ~~downturns~~by incustomers ~~the~~among ~~equity~~fixed ~~markets~~and ~~could~~variable ~~increase~~account ~~these~~options ~~expenses~~of the Company’s variable annuity products.

~~CLAIMS~~Sales ONof ~~UNIVERSAL~~variable ~~LIFE~~annuity ~~CONTRACTS,~~products ~~NET~~(which OFinclude ~~REINSURANCE~~deposits ~~RECOVERIES~~allocated ~~totaled~~to the fixed accounts) (“Variable Annuity Product Sales”) amounted to $5769.5 million, $766.8 million, $1.52 billion and $1.45 billion in the second quarters and six months of 2003 and 2002, ~~compared~~respectively. toSuch $sales primarily reflect those of the Company’s Polaris, Seasons and Diversified Strategies variable annuity product lines. The Company’s variable annuity products are multi-manager variable annuities that offer investors a choice of several variable funds as well as a number of guaranteed fixed-rate funds. Investors can select from a choice of 4 to 41 variable funds and up to 7 guaranteed fixed-rate funds depending on the product.~~5 million~~ The increase in ~~2002~~Variable ~~(net~~Annuity Product Sales reflect sales of ~~reinsurance~~the Company’s new products, primarily Polaris ~~recoveries~~Platinum II, offset by decresed demand for variable annuities in general as a result of unfavorable equity market conditions. Introduced in late 2002, Polaris Platinum II product sales totaled $1088.80 million in the second quarter of 2003 and $5156.90 million in ~~2002)~~the six months of 2003.

~~GUARANTEED~~The ~~MINIMUM~~Company ~~DEATH~~has ~~BENEFITS~~encountered ~~(“GMDB”):~~increased Acompetition ~~majority~~in of the ~~Company’s~~ variable annuity marketplace ~~products~~during ~~are~~recent ~~issued~~years ~~with~~and aanticipates ~~death benefit feature which provides~~ that, ~~upon~~ the ~~death~~market ~~of a contractholder, the contractholder’s beneficiary~~ will ~~receive the greater of (1) the contractholder’s account value,~~remain orhighly ~~(2) a~~competitive ~~guaranteed~~for ~~minimum death benefit that varies by product (~~the ~~GMDB). The~~foreseeable Company bears the risk that death claims following a decline in the financial markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be providedfuture. ~~At March 31~~Also, ~~2003,~~from a portion of the GMDB risk on approximately 29% (calculated based on current account value) of the contracts with such features had been reinsured. Approximately half of this reinsurance will cease at the time ~~the modified coinsurance deposit liability is fully paid down, which is presently estimated~~ to ~~occur in early 2004. A substantial majority of all new contracts sold have reinsurance coverage. However~~time, ~~reinsurance~~ ~~coverage~~Federal oninitiatives ~~new~~are ~~contracts~~proposed ~~sold~~that ~~ceases~~could ataffect the ~~end~~taxation of ~~2003. Reinsurance coverage~~annuities ~~is subject to limitations such as caps and deductibles. GMDB-related contractholder benefits incurred, net of related reinsurance, were $22.0 million~~ (~~net~~See ~~of $3.0 million of reinsurance recoveries~~“Regulation”) ~~for 2003 and $7~~.3 ~~million (net of $1.4 million of reinsurance recoveries) for 2002. In~~ ~~accordance with Generally Accepted Accounting Principles, the Company expenses such benefits in the period incurred, and therefore does not provide reserves for future benefits.~~

~~EARNINGS~~UNIVERSAL ~~ENHANCEMENT~~LIFE ~~BENEFIT~~INSURANCE ~~(“EEB”):~~POLICY ~~The~~FEES ~~Company~~amounted ~~issues~~to ~~certain~~$9.4 million ~~variable~~in the ~~annuity~~second ~~products~~quarter ~~that~~of ~~offer~~2003 anand ~~optional~~$9.0 million ~~Earnings~~in ~~Enhancement~~the ~~Benefit~~second ~~(EEB) feature~~quarter of 2002. For ~~contractholders~~the six ~~who~~months, ~~elect~~universal ~~the~~life ~~feature,~~insurance ~~the~~policy ~~EEB~~fees ~~provides~~totaled an$18.3 million in both ~~additional~~2003 ~~death~~and ~~benefit~~2002. ~~amount~~Universal ~~equal~~life toinsurance apolicy ~~fixed~~fees ~~percentage~~consist of ~~earnings in the~~mortality ~~contract~~charges, ~~subject~~up-front tofees ~~certain~~earned ~~maximums.~~on ~~The~~deposits ~~Company~~received ~~bears~~and ~~the~~administrative ~~risk~~fees, ~~that account~~net ~~values~~of ~~following~~reinsurance ~~favorable~~premiums. ~~performance~~The ofadministrative ~~the~~fees ~~financial~~are ~~markets~~assessed ~~will~~based ~~result~~on inthe ~~greater~~number ~~EEB~~of ~~death~~policies ~~claims~~in ~~and~~force ~~that~~as of the ~~fees~~end ~~collected~~of ~~under~~each ~~the~~month. ~~contract~~The ~~are~~Company acquired ~~insufficient~~its touniversal ~~cover~~life ~~the~~contracts ~~costs~~as part of the ~~benefit~~acquisition toof bebusiness ~~provided.~~from AtMBL Life ~~March~~Assurance Corporation on December 31, ~~2003,~~ ~~approximately~~1998 8%and ~~(calculated~~does ~~based~~not onactively ~~current~~market such ~~account~~contracts. ~~value)~~Such offees ~~inforce contracts~~annualized ~~include~~represent ~~EEB~~2.3%, ~~coverage~~2.2%, ~~with~~2.3% 97and 2.2% of average ~~the~~reserves ~~EEB~~for ~~risk~~universal ~~fully~~life ~~reinsured~~insurance contracts in the respective periods.

~~GUARANTEED~~SURRENDER ~~MINIMUM~~CHARGES ~~INCOME~~on ~~BENEFIT~~fixed ~~(“GMIB”):~~annuity, ~~The~~variable ~~Company~~annuity ~~issues~~and ~~certain~~universal life ~~variable~~contracts ~~annuity~~totaled ~~products~~$6.8 million ~~that~~in ~~contain~~the orsecond ~~offer~~quarter aof ~~Guaranteed~~2003 ~~Minimum~~and ~~Income~~$8.4 million ~~Benefit~~in ~~(GMIB)~~the second quarter of 2002. For the six months, such surrender charges totaled $14.4 ~~living~~million ~~benefit~~in ~~feature~~2003 and $14.9 million ~~This~~in ~~feature~~2002. ~~provides~~Surrender charge periods range from zero to nine years from the date a ~~minimum~~deposit ~~annuity~~is received. ~~payment~~Surrender ~~guarantee~~charges ~~for~~generally ~~those~~are ~~contractholders~~assessed ~~who~~on ~~choose~~withdrawals toat ~~receive~~declining ~~fixed~~rates ~~lifetime~~during ~~annuity~~the ~~payments~~first ~~after~~seven years of a ~~seven~~contract. orWithdrawal ~~ten-year~~payments, ~~waiting~~which ~~period~~exclude claims and annuitization benefits, totaled $500.5 million in ~~their~~the second quarter ~~deferred~~of ~~annuity~~2003, ~~contracts.~~compared ~~The~~to ~~Company~~$548.8 million ~~bears~~in the ~~risk~~second ~~that~~quarter of 2002. For the ~~performance~~six months, such withdrawal payments totaled $1.05 billion in 2003 and 2002. Annualized, these payments when expressed as a percentage of average related ~~the~~reserves ~~financial~~represent ~~markets~~9.3%, ~~will~~9.7%, ~~not~~10.0% beand ~~sufficient~~9.2% for ~~accumulated~~the second quarters and six months of 2003 and 2002, respectively. Withdrawals from the

~~policyholder~~variable ~~account~~annuity ~~balances~~separate toaccounts ~~support~~totaled ~~GMIB~~$383.8 million ~~benefits~~(annualized representing ~~and~~9.8% ~~that~~of ~~the~~average ~~fees~~variable annuity liabilities), $428.3 million ~~collected~~(annualized ~~under~~representing ~~the~~9.7% ~~contract~~of ~~are~~average ~~insufficient~~variable toannuity ~~cover~~liabilities) ~~the~~$769.9 million ~~costs~~(annualized representing 10.3% of ~~the~~average ~~benefit to~~variable beannuity ~~provided~~liabilities) and $833.8 million ~~Substantially~~(annualized ~~all~~representing 9.3% of ~~the~~average ~~Company’s~~variable ~~GMIB~~annuity liabilities) ~~risk~~in ~~has~~the ~~been reinsured~~second asquarters and six months of ~~March 31~~2003 and 2002, respectively. The increase in withdrawal rates in 2003. ~~However,~~as compared to 2002 reflects a decrease in the ~~Company~~market ~~will~~value ~~not~~of ~~have~~assets ~~reinsurance~~in separate accounts ~~coverage~~supporting onvariable annuity contracts ~~sold~~due ~~subsequent~~ to ~~June~~continual ~~2003~~unfavorable equity market conditions.

~~GUARANTEED~~GENERAL ~~MINIMUM~~AND ~~ACCOUNT~~ADMINISTRATIVE ~~VALUE~~EXPENSES ~~(“GMAV”):~~totaled In$19.0 million in the ~~third~~ second quarter of ~~2002, the~~2003 ~~Company~~and ~~began issuing certain variable annuity products which offer an optional Guaranteed Minimum Account Value (GMAV)~~$19.6 ~~living~~million ~~benefit.~~in ~~If elected by~~ the ~~policyholder~~second atquarter ~~the time~~ of ~~contract~~2002. ~~issuance,~~For ~~this feature guarantees that~~ the ~~account value under the contract will equal or exceed the amount of the~~six ~~initial principal invested~~months, ~~adjusted~~general ~~for~~and ~~withdrawals,~~administrative atexpenses ~~the~~totaled ~~end~~$40.3 million ofin a2003 ~~ten-year~~and ~~waiting period~~$38.4 million ~~The Company bears the risk that protracted under-performance of the financial markets could result~~ in ~~GMAV~~2002. ~~guarantees~~General ~~being higher than the underlying contractholder account balance~~ and ~~that~~administrative ~~the~~expenses ~~fees~~remain ~~collected under the~~closely ~~contract~~controlled ~~are~~through ~~insufficient~~a tocompany-wide ~~cover~~cost ~~the~~containment ~~costs~~program ofand ~~the~~continue ~~benefit~~ to ~~be provided. As~~ ofrepresent ~~March 31,~~less ~~2003,~~than ~~the~~1% ~~premiums subject to guarantee totaled approximately $200 million, and the estimated fair values~~ of ~~the~~average ~~GMAV~~total ~~were not material~~assets.

~~With~~AMORTIZATION ~~respect~~OF toDEFERRED ~~its~~ACQUISITION ~~reinsurance~~COSTS ~~agreements,~~totaled ~~the~~$40.3 million ~~Company~~in ~~could become~~the ~~liable~~second ~~for~~quarter ~~all obligations~~ of ~~the~~2003, ~~reinsured~~compared ~~policies~~to if$60.7 million in the ~~reinsurers~~second ~~were~~quarter toof ~~become~~2002. ~~unable~~For ~~to meet~~ the ~~obligations~~six ~~assumed~~months, ~~under~~such ~~the~~amortization ~~respective~~totaled ~~reinsurance agreements~~$79.1 million ~~The~~in ~~Company~~2003, compared ~~monitors~~to ~~its~~$107.4 million ~~credit~~in ~~exposure~~2002. ~~with~~The ~~respect~~decrease toin ~~these agreements.~~amortization ~~However,~~in 2003 was due to ~~the~~lower ~~high~~income ~~credit~~in ~~ratings~~2003 ~~and~~as ~~continuous~~a ~~monitoring~~ result of ~~these~~decreased ~~ratings~~variable ofannuity ~~the~~policy fee ~~reinsurers,~~income ~~such~~and ~~risks~~increased ~~are~~guaranteed ~~considered~~minimum todeath ~~be minimal~~benefits.

~~CAPITAL~~ ANNUAL ~~RESOURCES~~COMMISSIONS ~~AND~~totaled ~~LIQUIDITY~~$16.0 million in the second quarter of 2003, compared to $15.8 million in the second quarter of 2002. For the six months, annual commissions amounted to $30.2 million in 2003 and $31.6 million in 2002. Annual commissions represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The vast majority of the Company’s average balances of its variable annuity products are currently subject to such annual commissions. These commissions are expected to increase in future periods.

~~SHAREHOLDER’S~~CLAIMS ~~EQUITY~~ON ~~increased~~UNIVERSAL toLIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled $15.357 ~~billion~~million atin ~~March 31,~~the second quarter of 2003, ~~from~~ compared to $13.324 ~~billion~~million atin ~~December~~the second quarter of 2002 (net of reinsurance recoveries of $7.0 ~~31,~~million and $4.8 million in 2002, ~~due~~respectively). toFor ~~net~~the ~~income~~six months, claims on universal life contracts, net of reinsurance recoveries amounted to $1011.52 million in 2003 and ~~other~~$7.9 million ~~comprehensive~~in ~~income~~2002 (net of reinsurance recoveries of $1217.98 million and $10.7 million, respectively). The increase in such claims in 2003 resulted principally from increased mortality experience, which fluctuates and cannot necessarily be expected to continue in future periods.

~~INVESTED~~GUARANTEED ~~ASSETS~~MINIMUM atDEATH ~~March 31~~BENEFITS, ~~2003~~NET OF REINSURANCE RECOVERIES (“Net GMDB”) totaled $714.775 ~~billion~~million in the second quarter of 2003, compared ~~with~~to $10.4 million in the second quarter of 2002 (net of reinsurance recoveries of $72.~~19 billion~~8 million atand ~~December~~$1.2 31million, ~~2002~~respectively). ~~The~~For ~~following~~the ~~table~~six ~~summarizes~~months, ~~the Company’s~~Net ~~portfolio~~GMDB ofamounted to ~~bonds,~~$36.5 million ~~notes~~in 2003 and ~~redeemable~~$17.8 million ~~preferred~~in ~~stocks~~2002 (~~the~~net ~~“Bond~~of reinsurance ~~Portfolio”)~~recoveries atof ~~March~~$5.7 ~~31,~~million ~~2003~~ and ~~December~~$2.7 31million, ~~2002:~~respectively). Net GMDB consists primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits, guaranteed minimum income benefits and guaranteed minimum account value benefits. These guarantees are described in more detail in the following paragraphs. The

	March 31, 2003					December 31, 2002
	Carrying		Percent of			Carrying		Percent of
	Value		Portfolio			Value		Portfolio
	(In thousands, except for percentages)
BOND PORTFOLIO:
U.S. government securities	$	16,717		0.2	%	$	32,820		0.5	%
Mortgage-backed securities		1,468,998		18.9			1,547,568		21.5
Other bonds, notes and redeemable preferred stocks		4,424,278		57.0			3,948,181		54.9
Total Bond Portfolio		5,909,993		76.1			5,528,569		76.9
Mortgage loans		727,901		9.4			738,601		10.3
Common stocks		3,923		0.0			2,609		0.0
Cash and short-term investments		305,577		3.9			65,872		0.9
Partnerships		5,714		0.1			8,766		0.1
Other		815,841		10.5			849,287		11.8
Total investments and cash	$	7,768,949		100.0	%	$	7,193,704		100.0	%

increase in Net GMDB, which is related to the Company’s variable annuity contracts in 2003 reflects the downturn in the equity markets in 2002 and 2003. Further downturns in the equity markets could increase these expenses.

~~The~~A majority of the Company’s ~~invested~~variable ~~assets~~annuity products are ~~managed~~issued bywith ana death ~~affiliate.~~benefit feature which provides that, upon the death of a contractholder, ~~The~~the ~~Company~~contractholder’s ~~general~~beneficiary ~~investment~~will ~~philosophy~~receive isthe togreater ~~hold~~of ~~fixed-rate~~(1) the contractholder’s ~~assets~~account ~~for~~value, or (2) a guaranteed minimum death benefit that ~~long-term~~varies ~~investment~~by product (the GMDB). ~~Thus,~~The itCompany ~~does~~bears ~~not~~the ~~have~~risk that death claims following a ~~trading~~decline ~~portfolio~~in the equity markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. ~~However~~At June 30, 2003, a portion of the ~~Company~~GMDB ~~has~~risk ~~determined~~on ~~that~~approximately ~~all~~38% of the ~~Bond~~account ~~Portfolio~~value with such features had been reinsured. Approximately half of this reinsurance will cease at the time the modified coinsurance deposit liability is ~~available~~fully paid down, which is presently estimated to beoccur in early 2004. A substantial majority of all new contracts sold inhave ~~response~~reinsurance coverage. However, the Company does not currently have reinsurance coverage on contracts sold after 2003. Reinsurance coverage is subject to ~~changes~~limitations insuch ~~market~~as ~~interest~~caps ~~rates~~and deductibles. GMDB-related contractholder benefits incurred, ~~changes~~net inof ~~relative~~related ~~value~~reinsurance, were $14.5 million (net of ~~asset~~reinsurance ~~sectors~~recoveries of $2.8 million) for the second quarter of 2003 and ~~individual~~$10.4 million ~~securities~~(net of reinsurance recoveries of $1.2 million ) for the second quarter of 2002. GMDB-related contractholder benefits incurred, ~~changes~~net inof ~~prepayment~~related ~~risk~~reinsurance, ~~changes~~were $36.5 million (net of reinsurance inrecoveries of $5.7 million) for the ~~credit~~six ~~quality~~months ~~outlook~~of 2003 and $17.8 million (net of reinsurance recoveries of $2.7 million) for ~~certain~~the ~~securities~~six months of 2002. In accordance with Generally Accepted Accounting Principles, the Company’s ~~need~~expenses such benefits in the period incurred, and therefore does not provide reserves for future benefits. However, effective January 1, 2004, the Company will be ~~liquidity~~required ~~and~~to ~~other~~record ~~similar~~a ~~factors~~liability for GMDBs (See Note 3 of Notes to Financial Statements).

~~THE~~EARNINGS ~~BOND~~ENHANCEMENT ~~PORTFOLIO,~~BENEFIT ~~which~~(“EEB”): ~~constituted~~The ~~76%~~Company ofissues ~~the~~certain ~~Company’s total~~variable ~~investment~~annuity ~~portfolio~~products atthat ~~March 31,~~offer ~~2003, had~~ an ~~aggregate~~optional ~~fair~~Earnings ~~value~~Enhancement ~~that~~Benefit ~~was~~(EEB) ~~$64~~feature.~~1 million~~ ~~greater~~For ~~than~~contractholders ~~its~~who ~~amortized~~elect ~~cost~~the ~~at March 31~~feature, the EEB provides an ~~2003~~additional ~~and~~death ~~$35.9 million~~benefit atamount ~~December 31,~~equal ~~2002.~~to ~~The~~a ~~increase~~fixed percentage of earnings in ~~net~~the contract, ~~unrealized~~subject ~~gains~~to oncertain maximums. The Company bears the ~~Bond~~risk that account ~~Portfolio~~values ~~during~~following ~~2003~~favorable ~~principally~~performance ~~reflects~~of the ~~impact~~financial ofmarkets ~~impairment~~will ~~writedowns~~ result in greater ~~2003~~EEB asdeath ~~well~~claims asand that the ~~decrease~~fees incollected ~~prevailing~~under ~~interest~~the ~~rates~~contract ~~and~~are insufficient to cover the costs of the benefit to be provided. At June 30, ~~corresponding~~2003, ~~effect~~approximately 8% (calculated based on ~~the~~current ~~fair~~account value) of ~~the~~inforce contracts ~~Bond~~include ~~Portfolio~~EEB ~~at March 31~~coverage, ~~2003~~with 97% of the EEB risk fully reinsured.

AtGUARANTEED ~~March 31,~~MINIMUM ~~2003,~~INCOME ~~the~~BENEFIT ~~Bond~~(“GMIB”): ~~Portfolio~~The ~~(excluding~~Company ~~$21.4 million~~issues ofcertain ~~redeemable~~variable ~~preferred~~annuity ~~stocks~~products that contain or offer a Guaranteed Minimum Income Benefit (GMIB) living ~~included~~benefit $5feature.~~65 billion~~ ofThis ~~bonds~~feature ~~rated~~provides bya ~~Standard~~minimum annuity &payment ~~Poor’s~~guarantee ~~(“S&P”),~~for ~~Moody’s~~those ~~Investors~~contractholders ~~Service~~who ~~(“Moody’s”),~~choose ~~Fitch~~to ~~(“Fitch”)~~receive fixed lifetime annuity payments after a seven or ~~the~~ten-year waiting period in their ~~Securities~~deferred ~~Valuation~~annuity ~~Office~~contracts. ofThe Company bears the ~~National~~risk ~~Association~~that ofthe ~~Insurance~~performance of ~~Commissioners~~the ~~(“NAIC”),~~financial ~~and~~markets ~~$235.7 million~~will ofnot ~~bonds~~be ~~rated~~sufficient byfor ~~the~~accumulated ~~Company~~policyholder ~~pursuant~~account balances to ~~statutory~~support ~~ratings~~GMIB ~~guidelines~~benefits ~~established~~and bythat the ~~NAIC.~~fees Atcollected ~~March 31,~~under the ~~2003,~~contract ~~approximately~~are ~~$5.53 billion~~insufficient ofto cover the ~~Bond~~costs ~~Portfolio~~of ~~was~~the ~~investment~~benefit ~~grade, including~~to ~~$929~~be provided.~~8 billion~~ Substantially all of ~~mortgage-backed~~the ~~securities~~Company’s ~~(“MBS”)~~GMIB ~~and~~risk ~~U.S.~~on contracts sold prior to June ~~government/agency~~30, ~~securities~~2003 has been reinsured.

At March 31, 2003, the Bond Portfolio included $358.2 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1.5% of the Company’s total assets and approximately 4.6% of its invested assets. Non-investment-grade securities generally provide

~~higher~~ GUARANTEED ~~yields~~MINIMUM ~~and~~ACCOUNT ~~involve~~VALUE ~~greater~~(“GMAV”): ~~risks~~In ~~than~~the ~~investment-grade~~third ~~securities~~quarter of 2002, ~~because~~the ~~their~~Company ~~issuers~~began ~~typically~~issuing ~~are~~certain ~~more~~variable ~~highly~~annuity ~~leveraged~~products ~~and~~which ~~more~~offer ~~vulnerable~~an tooptional ~~adverse~~Guaranteed ~~economic~~Minimum ~~conditions~~Account ~~than~~Value ~~investment-grade~~(GMAV) living ~~issuers~~benefit. InIf ~~addition,~~elected by the policyholder at the time of contract issuance, this feature guarantees that ~~trading~~the ~~market~~account ~~for~~value ~~these~~under ~~securities~~the iscontract ~~usually~~will ~~more~~equal ~~limited~~or ~~than~~exceed ~~for~~the amount of the ~~investment~~initial principal invested, adjusted for withdrawals, at the end of a ten-~~grade~~year waiting ~~securities~~period. ~~These~~The ~~non-investment-grade~~Company ~~securities~~bears ~~are comprised~~the risk that protracted under-performance of ~~bonds~~the ~~spanning~~financial 24markets ~~industries~~could ~~with~~result ~~20%~~in ofGMAV ~~these~~guarantees ~~assets~~being ~~concentrated~~higher than the inunderlying ~~financial~~contractholder ~~institutions~~account balance and ~~13%~~that ~~concentrated~~the infees ~~telecommunications~~collected under the contract are insufficient to cover the costs of the benefit to be provided. NoAs of ~~other~~June 30, 2003, the premiums subject to guarantee totaled approximately $355 ~~industry~~million, ~~concentration~~and ~~constituted~~the ~~more~~estimated ~~than~~fair ~~10%~~values of ~~these~~the ~~assets~~GMAV were not material.

~~The~~With ~~table~~respect onto its reinsurance agreements, the ~~next~~Company ~~page~~could ~~summarizes~~become liable for all obligations of the reinsured policies if the reinsurers were to become unable to meet the obligations assumed under the respective reinsurance agreements. The Company’s ~~rated~~monitors ~~bonds~~its bycredit ~~rating~~exposure with respect to these ~~classification~~agreements. asHowever, due to the credit ratings and continuous monitoring of the ~~March 31~~ratings of these reinsurers, ~~2003~~such risks are considered to be minimal.

INCOME TAX EXPENSE totaled $1.5 million in the second quarter of 2003, $4.4 million in the second quarter of 2002, $3.4 million in the six months of 2003 and $7.8 million in the six months of 2002, representing effective annualized tax rates of 6%, 15%, 9% and 15%, respectively. The decreases in the effective tax rates for 2003 are due primarily to the lower relative pretax income without corresponding reductions in permanent tax differences.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDER’S EQUITY increased to $1.42 billion at June 30, 2003 from $1.32 billion at December 31, 2002. The increase reflected net income of $33.3 million and other comprehensive income of $66.1 million.

INVESTMENTS AND CASH at June 30, 2003 totaled $7.44 billion, compared to $7.19 billion at December 31, 2002. The Company’s invested assets are managed by its affiliates. The following table summarizes the Company’s portfolio of bonds, notes and redeemable preferred stocks (the “Bond Portfolio”) and other investments and cash at June 30, 2003 and December 31, 2002:

RATED BONDS BY RATING CLASSIFICATION (Dollars in thousands)


	June 30, 2003					December 31, 2002

	Carrying		Percent of			Carrying		Percent of
	Value		Portfolio			Value		Portfolio

	(In thousands, except for percentages)
Bond Portfolio:
U.S. government securities	$	16,661		0.2	%	$	32,820		0.5	%
Mortgage-backed securities		1,348,518		18.1			1,547,568		21.5
Other bonds, notes and redeemable preferred stocks		4,496,679		60.4			3,948,181		54.9

Total Bond Portfolio		5,861,858		78.7			5,528,569		76.9
Mortgage loans		754,586		10.1			738,601		10.3
Common stocks		3,291		0.0			2,609		0.0
Cash and short-term investments		280,808		3.8			65,872		0.9
Other		544,046		7.4			858,053		11.9

Total investments and cash	$	7,444,589		100.0	%	$	7,193,704		100.0	%

					Issues not rated by S&P/Moody's/
Issues rated by S&P/Moody's/Fitch					Fitch, by NAIC category						Total
															Percent
			Estimated		NAIC				Estimated				Estimated		of total
S&P/Moody's/Fitch	Amortized		fair		category		Amortized		fair		Amortized		fair		invested
Category (1)	cost		value		(2)		cost		value		cost		value		assets
AAA+ to A- (Aaa to A3) [AAA to A-]	$	3,278,735	$	3,371,889		1	$	534,949	$	556,557	$	3,813,684	$	3,928,446		50.57	%
BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-]		1,284,175		1,295,770		2		305,040		306,181		1,589,215		1,601,951		20.62	%
BB+ to BB- (Ba1 to Ba3) [BB+ to BB-]		171,239		160,079		3		14,514		14,207		185,753		174,286		2.24	%
B+ to B- (B1 to B3) [B+ to B-]		99,838		82,075		4		4,101		4,089		103,939		86,164		1.11	%
CCC+ to C (Caa to C) [CCC]		67,755		34,756		5		63,861		62,885		131,616		97,641		1.26	%
C1 to D [DD] {D}		—		—		6		154		131		154		131		0.00	%
TOTAL RATED ISSUES	$	4,901,742	$	4,944,569			$	922,619	$	944,050	$	5,824,361	$	5,888,619

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

~~Footnotes~~ THE ~~appear~~BOND PORTFOLIO, which constituted 79% of the Company’s total investment portfolio at June 30, 2003, had an aggregate fair value that was $175.3 million greater than its amortized cost at June 30, 2003, compared with $35.9 million at December 31, 2002. The increase in net unrealized gains on the Bond Portfolio during 2003 principally reflected the ~~following~~impact ~~page~~of impairment writedowns in 2003 as well as the decrease in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at June 30, 2003.

At June 30, 2003, the Bond Portfolio had an aggregate carrying value (i.e. fair value) of $5.86 billion and an aggregate amortized cost of $5.69 billion. At June 30, 2003, the Bond Portfolio (excluding $1.4 million of redeemable preferred stocks) included $5.53 billion of bonds rated by Standard & Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”), Fitch (“Fitch”) or the National Association of Insurance Commissioners (“NAIC”), and $332.7 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At June 30, 2003, approximately $5.54 billion of the Bond Portfolio was investment grade, including $1.09 billion of mortgage-backed securities (“MBS”) and U.S. government/agency securities.

At June 30, 2003, the Bond Portfolio included $322.9 million of bonds that were not rated investment grade. These non-investment-grade bonds accounted for approximately 1.3% of the Company’s total assets and approximately 4.3% of its invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-

		Footnotes to the table of Rated Bonds by Rating Classification
(1)		S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.
(2)		Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $235.7 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. An economic downturn could produce higher than average issuer defaults on the non-investment-grade securities, which could cause the Company’s investment returns and net income to decline. At June 30, 2003, the Company’s non-investment-grade portfolio consisted of 100 issues with no single issuer representing more than 5.5% of the total Bond Portfolio. These non-investment-grade securities are comprised of bonds spanning 11 industries with 17% of these assets concentrated in financial institutions, 17% concentrated in utilities, 16% concentrated in consumer goods, 15% concentrated in communications and 14% concentrated in transportation. No other industry concentration constituted more than 10% of these assets.

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

AtRATED ~~March 31,~~BONDS ~~2003,~~BY ~~approximately~~RATING ~~$1.13 billion of the Company’s Bond~~CLASSIFICATION ~~Portfolio~~(Dollars ~~had an aggregate unrealized loss of $160.4 million. The gross unrealized losses~~ in ~~the Bond Portfolio included the following concentrations:~~thousands)

		Gross
							Issues not rated by S&P/Moody's/
		Unrealized
Issues rated by S&P/Moody's/Fitch							Fitch, by NAIC category						Total
Concentration		Losses
																	Percent
		(In thousands)
					Estimated		NAIC				Estimated				Estimated		of total
Investment Grade:
S&P/Moody's/Fitch			Amortized		fair		category		Amortized		fair		Amortized		fair		invested
Collateralized bond/debt obligations		$	38,950
Category (1)			cost		value		(2)		cost		value		cost		value		assets
Airlines			21,442
AAA+ to A-
Securitizations			20,744
	(Aaa to A3) [AAA to A-]		$	3,045,323	$	3,174,786		1	$	659,278	$	683,573	$	3,704,601	$	3,858,359		51.83	%
Finance companies			3,323
BBB+ to BBB-
Not Rated and Below Investment Grade:
	(Baa1 to Baa3) [BBB+ to BBB-]			1,294,069		1,353,580		2		322,386		325,666		1,616,455		1,679,246		22.56	%
Collateralized bond/debt obligations			4,435
BB+ to BB-
Airlines			22,664
	(Ba1 to Ba3) [BB+ to BB-]			170,216		161,758		3		14,224		15,126		184,440		176,884		2.38	%
Securitizations			402
B+ to B-
Finance companies			7,466
	(B1 to B3) [B+ to B-]			99,587		86,471		4		3,083		3,108		102,670		89,579		1.20	%
CCC+ to C
	(Caa to C) [CCC]			58,105		38,864		5		16,350		15,208		74,455		54,072		0.73	%
C1 to D
	[DD] {D}			—		—		6		2,571		2,343		2,571		2,343		0.03	%
TOTAL RATED ISSUES			$	4,667,300	$	4,815,459			$	1,017,892	$	1,045,024	$	5,685,192	$	5,860,483

~~The~~Footnotes ~~amortized~~appear ~~cost~~on of the ~~Bond~~following ~~Portfolio in an unrealized loss position at~~page. ~~March 31, 2003, by contractual maturity, is shown below:~~

	Amortized
	Cost
	(In thousands)
Due in one year or less	$	65,407
Due after one year through five years		490,762
Due after five years through ten years		539,223
Due after ten years		190,820
Total	$	1,286,212

~~The~~Footnotes ~~aging~~to of the ~~Bond~~table ~~Portfolio~~of inRated anBonds ~~unrealized~~by ~~loss~~Rating ~~position at March~~Classification ~~31, 2003, is shown below:~~

	Amortized		Unrealized		Number
(1)	S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories range from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.
	Cost		Losses		Of Items
(2)	Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $332.7 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.
Investment Grade:
0-6 months	$	455,733	$	13,920		67
7-12 months		105,936		11,483		28
>12 months		428,832		68,735		66
Below Investment Grade:
0-6 months	$	64,466	$	6,540		9
7-12 months		45,083		11,804		8
>12 months		186,162		47,930		44
Total:
0-6 months	$	520,199	$	20,460		76
7-12 months		151,019		23,287		36
>12 months		614,994		116,665		110

Senior secured loans (“Secured Loans”) are included in the Bond Portfolio and aggregated $300.6 million at March 31, 2003. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At March 31, 2003, Secured Loans consisted of $39.0 million of publicly traded securities and $261.6 million of privately traded securities. These Secured Loans are composed of loans to 62 borrowers spanning 18 industries, with 18% of these assets concentrated in energy and 11% concentrated in food. No other industry constituted more than 10% of these assets.

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

MORTGAGE LOANS aggregated $727.9 million at March 31, 2003 and consisted of 114 commercial first mortgage loans with an average loan balance of approximately $6.4 million, collateralized by properties located in 27 states. Approximately 35% of this portfolio was office, 19% was multifamily residential, 16% was manufactured housing, 10% was industrial, 9% was hotels, 4% was retail, and 7% was other types. At March 31, 2003, approximately 29% and 11% of this portfolio were secured by properties located in California and New York, respectively, and no more than 10% of this portfolio was secured by properties located in any other single state. At March 31, 2003, 16 mortgage loans have an outstanding balances of $10 million or more, which collectively aggregated approximately 49% of this portfolio. At March 31, 2003, approximately 28% of the mortgage loan portfolio consisted of loans with balloon payments due before April 1, 2006. During 2003 and 2002, loans

~~delinquent~~ The byvaluation ~~more~~of ~~than~~invested ~~90 days,~~assets ~~foreclosed~~involves ~~loans~~obtaining ~~and~~a ~~restructured~~market ~~loans~~value for ~~have~~each ~~not~~security. ~~been~~The ~~significant~~source infor ~~relation~~the tomarket value is generally from market exchanges, with the ~~total~~exception ~~mortgage~~of ~~loan~~non-traded ~~portfolio~~securities.

~~Substantially~~Another ~~all~~aspect of ~~the~~valuation ~~mortgage~~pertains ~~loan~~to ~~portfolio has been originated by the Company under strict underwriting standards~~impairment. ~~Commercial~~As ~~mortgage~~a ~~loans~~matter onof ~~properties such as offices~~policy, ~~hotels~~the ~~and~~determination ~~shopping~~that ~~centers generally represent~~ a ~~higher~~ ~~level~~security ofhas ~~risk~~incurred an other-than ~~do mortgage loans secured by multifamily residences.~~temporary ~~This~~decline ~~greater~~in ~~risk~~value isand ~~due to several factors, including~~ the ~~larger~~amount ~~size~~ of ~~such loans~~any ~~and~~loss ~~the~~recognition ~~more~~requires ~~immediate~~the ~~effects~~ judgment of ~~general economic conditions on these commercial property types. However, due to~~ the Company’s ~~strict~~management ~~underwriting standards,~~and ~~the~~a ~~Company~~continual ~~believes~~review ~~that~~of ~~it has prudently managed the risk attributable to~~ its ~~mortgage loan portfolio while maintaining attractive yields~~investments.

~~POLICY~~In ~~LOANS totaled $211.1 million at March 31~~general, ~~2003,~~a ~~compared~~security tois ~~$215.8 million~~considered ata ~~December 31,~~candidate ~~2002,~~for ~~and~~impairment ~~primarily~~if ~~represent~~it meets ~~loans~~any ~~taken~~of ~~against universal~~the ~~life~~following ~~insurance policies.~~criteria:

~~SEPARATE~~• ~~ACCOUNT~~Trading ~~SEED~~at ~~MONEY~~a ~~totaled~~significant ~~$25.0 million~~discount atto ~~March 31~~par, ~~2003, compared~~amortized tocost ~~$25.4 million~~(if atlower) ~~December 31,~~or ~~2002,~~cost ~~and~~for ~~consists~~an ~~principally~~extended period of ~~seed~~ ~~money~~time; • The occurrence of a discrete credit event resulting in (i) the issuer defaulting on a material outstanding obligation; or (ii) the issuer seeking protection from creditors under the bankruptcy laws or similar laws intended for ~~mutual~~the ~~funds~~court ~~used~~supervised asreorganization ~~investment~~of ~~vehicles~~insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or • In the opinion of the Company’s ~~variable~~ ~~annuity~~management, ~~separate~~it ~~accounts~~is unlikely the Company will realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

~~SECURITIES~~Once ~~LENDING~~a ~~COLLATERAL~~security ~~totaled~~has ~~$551.0 million~~been atidentified ~~March 31,~~as ~~2003, compared~~potentially ~~to $585.8 million at December 31~~impaired, ~~2002,~~the ~~and~~amount ~~consists~~ of ~~collateral~~ ~~held~~such ~~under~~impairment ais ~~securities~~determined ~~lending~~by ~~agreement~~reference ~~with~~to anthat ~~affiliated~~security’s ~~agent. The~~contemporaneous ~~Company~~market ~~has~~price. ~~entered into a securities lending agreement with an affiliated lending agent~~However, ~~which authorizes~~ the ~~agent~~market toprice ~~lend~~following ~~securities~~a ~~held~~significant incredit ~~the~~event ~~Company’s portfolio to a list~~ of ~~authorized~~any ~~borrowers.~~issuer ~~The~~may ~~Company~~be ~~receives primarily~~volatile ~~cash~~after ~~collateral~~such in an ~~amount~~event. inFactors ~~excess~~such ofas ~~the~~ market ~~value of the~~ ~~securities~~liquidity, ~~loaned.~~hedge ~~The~~fund ~~affiliated~~activity, ~~lending~~sensitivity ~~agent~~to ~~monitors~~“headline” ~~the~~risk, ~~daily~~and ~~market~~the ~~value~~widening of ~~securities~~bid/ask ~~loaned~~spreads ~~with~~contribute ~~respect~~ to ~~the~~price ~~collateral~~volatility. ~~value~~Because ~~and~~of ~~obtains~~such ~~additional~~volatility, ~~collateral~~the ~~when~~market ~~necessary~~price tomay ~~ensure~~not ~~that~~be ~~collateral~~indicative ~~is maintained at a minimum~~ of ~~102% of~~ the fair value ofor ~~the loaned securities. Such collateral is~~a ~~not~~reasonable ~~available~~estimate ~~for the general use~~ of ~~the~~realizable ~~Company~~value.

~~ASSET-LIABILITY~~The ~~MATCHING~~Company ishas ~~utilized by~~ the ~~Company~~ability to ~~minimize~~hold ~~the~~any ~~risks of~~security ~~interest~~to ~~rate~~its ~~fluctuations~~stated ~~and disintermediation (i~~maturity.e. Therefore, the ~~risk~~decision ~~of being forced~~ to sell ~~investments~~reflects ~~during~~the ~~unfavorable~~judgment ~~market~~of ~~conditions).~~the ~~The~~ Company’s ~~believes~~management that ~~its~~the ~~fixed-rate~~security ~~liabilities~~sold ~~should~~is beunlikely ~~backed~~to byprovide, aon ~~portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have~~ a ~~specific~~relative ~~target rate of return.~~value ~~Instead~~basis, ~~its~~as ~~rates~~attractive ofa return ~~vary~~in ~~over~~the ~~time~~future ~~depending~~as onalternative ~~the~~securities ~~current interest~~entailing ~~rate~~comparable ~~environment,~~risks. ~~the~~With ~~slope~~respect ofto ~~the~~distressed ~~yield curve~~securities, the ~~spread~~sale ~~at which fixed-rate~~decision ~~investments~~reflects ~~are~~management’s ~~priced~~judgment ~~over~~that the ~~yield curve, default rates and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate~~ risk-~~adjusted~~discounted ~~returns~~anticipated ~~consistent with its investment objectives of~~ultimate ~~effective~~recovery ~~asset-liability~~is ~~matching,~~less ~~liquidity~~than ~~and safety. The Company’s fixed-rate products incorporate surrender charges or other restrictions in order to encourage persistency. Approximately 83% of~~ the ~~Company’s~~value ~~fixed annuity,~~achieved ~~universal~~on ~~life and GIC reserves had surrender penalties or other restrictions at March 31, 2003~~sale.

As ~~part~~a result of ~~its~~these ~~asset-liability matching discipline~~policies, the Company ~~conducts detailed~~recorded ~~computer~~pretax ~~simulations~~impairment writedowns ~~that~~of ~~model~~$12.3 million ~~its fixed-rate assets~~ and ~~liabilities under commonly used stress-test interest rate scenarios~~$11.4 million ~~With~~in the ~~results~~six months of ~~these~~ ~~computer~~2003 ~~simulations~~and 2002, ~~the Company can measure the~~respectively.

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

potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed-rate products and conducting its investment operations to closely match the duration of the fixed-rate assets to that of its fixed-rate liabilities. The Company’s fixed-rate assets include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At ~~March~~June 3130, 2003, ~~these~~the ~~assets had an aggregate fair value of $7.77 billion with a duration of 3.7. The~~ Company’s ~~fixed-rate~~ ~~liabilities~~Bond ~~include~~Portfolio ~~fixed annuity, universal life and GIC contracts. At March 31, 2003, these liabilities~~ had angross ~~aggregate~~unrealized ~~fair value (determined~~gains ~~by discounting future contractual cash flows by related market rates~~ of ~~interest)~~ of $6295.740 ~~billion~~million ~~with~~and agross ~~duration~~unrealized oflosses ~~3.8. The Company’s potential exposure due to a relative 10% decrease in prevailing interest rates from its March 31, 2003 levels is a loss~~ of ~~approximately~~ $8119.57 million,. ~~representing~~One anissuer ~~increase~~accounted infor ~~fair~~11% ~~value~~ of ~~its~~unrealized ~~fixed-rate liabilities that is not offset by a increase in fair value of its fixed-rate assets~~losses. ~~Because~~No ~~the~~other ~~Company~~single ~~actively manages~~issuer ~~its~~accounted ~~assets and liabilities and has strategies in place to minimize its~~for ~~exposure~~more ~~to loss as interest rate changes occur, it expects that actual losses would be less~~ than ~~the~~10% ~~estimated~~of ~~potential~~unrealized ~~loss~~losses.

~~Duration~~At isJune 30, a2003, ~~common~~the ~~option-adjusted~~fair ~~measure~~value ~~for~~of the ~~price~~Company’s ~~sensitivity~~Bond ofPortfolio aaggregated ~~fixed-maturity portfolio to changes in interest rates~~$5.86 billion. ItOf ~~measures~~this ~~the approximate~~aggregate ~~percentage~~fair ~~change in the market~~ value, ofapproximately ~~a portfolio if interest rates change by 100 basis points (i.e.~~ 1.6%~~), recognizing the changes in cash~~ ~~flows~~represented ~~resulting~~securities ~~from~~trading ~~embedded~~at ~~options~~or ~~such~~below as75% ~~policy~~of ~~surrenders,~~amortized ~~investment prepayments and bond calls~~cost. ItThe ~~also incorporates the assumption that the~~impact ~~Company will continue to utilize its existing strategies~~ of ~~pricing~~unrealized ~~its~~losses ~~fixed annuity,~~on ~~universal~~net ~~life~~income ~~and~~will ~~GIC~~be ~~products,~~further ~~allocating~~mitigated ~~its~~upon ~~available cash flow~~realization ~~amongst~~by ~~its various investment portfolio sectors and maintaining sufficient levels of liquidity. Because~~ the ~~calculation~~impact of ~~duration involves estimation and incorporates assumptions, potential changes in portfolio value indicated by~~ the ~~portfolio’s~~realized ~~duration~~losses ~~will~~on ~~likely~~DAC beamortization ~~different from the actual changes experienced under given interest rate scenarios,~~ and ~~the~~income ~~differences may be material~~taxes.

AsAt aJune 30, ~~component~~2003, ofapproximately ~~its~~$794.1 million ~~asset~~of ~~and liability management strategy,~~ the Company ~~utilizes~~’s ~~interest rate swap agreements (“Swap Agreements”) to match assets more~~Bond ~~closely~~Portfolio tohad ~~liabilities.~~gross ~~Swap~~unrealized ~~Agreements~~losses ~~are agreements to exchange with a counterparty interest rate payments~~ of ~~differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes~~$119.7 million. The ~~Company~~gross ~~typically utilizes Swap Agreements to create a hedge~~unrealized ~~that~~losses ~~effectively~~in ~~converts~~the ~~floating-rate~~Bond ~~assets~~Portfolio ~~and~~included ~~liabilities~~the ~~into~~following ~~fixed-rate~~concentrations: ~~instruments.~~

The Company seeks to enhance its spread income with reverse repurchase agreements (“Reverse Repos”). Reverse Repos involve a sale of securities and an agreement to repurchase the same securities at a later date at an agreed upon price and are generally over-collateralized. The Company also seeks to provide liquidity by investing in MBSs. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans.


	Gross
	Unrealized
Concentration	Losses

	(In thousands)
Investment Grade:
Finance companies	$	41,681
Transportation		7,354
Non-corporate		15,748
Other		4,256
Not Rated and Below Investment Grade:
Finance companies		9,288
Transportation		23,453
Non-corporate		4,230
Other		13,683

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


	Amortized
	Cost

	(In thousands)
Due in one year or less	$	11,910
Due after one year through five years		322,089
Due after five years through ten years		392,482
Due after ten years		187,356

Total	$	913,837

In the six months ended June 30, 2003, the pretax realized losses incurred with respect to the sale of fixed securities in the Bond Portfolio were $7.0 million. The aggregate fair value of securities sold was $230.7 million, which was approximately 97.1% of amortized cost. The average period of time that securities sold at a loss during 2003 were trading continuously at a price below amortized cost was approximately 6 months.

~~There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities.~~ The ~~primary~~aging risk associated with the Company’s Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Reverse Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company’s policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody’s. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the ~~Company’s~~Bond ~~Swap~~Portfolio ~~Agreements~~in ~~typically~~an ~~hedge variable-rate~~unrealized ~~assets~~loss orposition liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a Swap Agreement would be offset by increased interest income earned on the variable-rate assets or reduced interest expense paid on the variable-rate liabilities. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at ~~speeds~~June 30, ~~slower or faster than anticipated at the time of their purchase. As part of its decision to purchase an MBS~~2003, ~~the Company assesses the risk of prepayment by analyzing the security’s projected performance over an array of interest-rate scenarios. Once an MBS~~ is ~~purchased,~~shown ~~the Company monitors its actual~~below: ~~prepayment experience monthly to reassess the relative attractiveness of the~~ ~~security with the intent to maximize total return.~~

INVESTED ASSETS EVALUATION is routinely conducted by the Company. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower’s recent financial performance, news reports and other externally generated information concerning the creditor’s affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners.


	Amortized		Unrealized			Number
	Cost		Losses		Of Items

	(In thousands)
Investment Grade:
0-6 months	$	753,040	$	104,893			135
7-12 months		21,011		1,362			9
>12 months		84,035		13,032			17
Below Investment Grade:
0-6 months	$	4,242	$	185			4
7-12 months		26,301		136			3
>12 months		25,208		85			3
Total:
0-6 months	$	757,282	$	105,078			139
7-12 months		47,312		1,498			12
>12 months		109,243		13,117			20

~~The~~As ~~carrying~~stated ~~values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and~~previously, in the ~~case~~valuation ~~of bonds, no further accruals of interest are made. The provisions~~ for ~~impairment~~the onCompany’s ~~mortgage~~Bond ~~loans~~Portfolio ~~are based on losses expected by management to~~comes befrom ~~realized~~market onexchanges ~~transfers~~or ofdealer ~~mortgage loans to real estate~~quotations, onwith the ~~disposition and~~exception ~~settlement~~ of ~~mortgage loans and on mortgage loans that management believes~~non-traded ~~may~~securities. ~~not~~The beCompany ~~collectible~~considers innon-traded ~~full.~~securities ~~Accrual~~to ofmean ~~interest~~certain ~~is suspended when principal~~fixed ~~and~~income ~~interest~~investments, ~~payments~~certain onstructured ~~mortgage~~securities ~~loans~~and ~~are~~limited ~~past due more than 90 days~~partnerships. ~~Impairment~~The ~~losses~~aggregate oncarrying ~~securitized assets are recognized if the fair~~ value of ~~the security~~these issecurities ~~less~~at ~~than its book value~~June 30, ~~and~~2003 ~~the net present value of expected~~was ~~future~~approximately ~~cash flows is less than the net present value of expected future cash flows at the most recent (prior)~~$1.32 ~~estimation date~~billion.

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

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

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

Senior secured loans (“Secured Loans”) are included in the Bond Portfolio and aggregated $320.8 million at June 30, 2003. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At June 30, 2003, Secured Loans consisted of $69.5 million of publicly traded securities and $251.3 million of privately traded securities. These Secured Loans are composed of loans to 66 borrowers spanning 19 industries, with 14% of these assets concentrated in energy and 10% concentrated in food. No other industry constituted more than 10% of these assets.

~~DEFAULTED~~While ~~INVESTMENTS,~~the ~~comprising~~trading ~~all~~market ~~investments~~for ~~that~~the ~~are~~Company’s inprivately ~~default~~traded asSecured Loans tois ~~the~~more ~~payment~~limited ofthan ~~principal~~for orpublicly ~~interest~~traded issues, ~~totaled~~management ~~$21.1 million~~believes ~~($14.4 million~~that ofparticipation ~~bonds~~in ~~and~~these ~~$6.7 million~~transactions ofhas ~~mortgage~~enabled ~~loans)~~the atCompany ~~March 31,~~to ~~2003,~~improve ~~and constituted~~its ~~approximately~~investment 0yield.3% ofAs ~~total~~a ~~invested~~result ~~assets.~~of Atrestrictive ~~December 31,~~financial ~~2002~~covenants, ~~defaulted~~these ~~investments~~Secured ~~totaled~~Loans ~~$15.6 million~~involve ~~($8.9 million~~greater risk of ~~bonds~~technical ~~and~~default $6than do publicly traded investment-grade securities.~~7 million~~ However, management believes that the risk of ~~mortgage~~loss ~~loans),~~upon default for these Secured Loans is mitigated by such financial covenants and ~~constituted~~the ~~approximately~~collateral 0values underlying the Secured Loans.2% ofThe ~~total~~Company’s Secured ~~invested~~Loans ~~assets~~are rated by S&P, Moody’s, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC.

~~SOURCES~~MORTGAGE OFLOANS ~~LIQUIDITY~~aggregated ~~are~~$754.6 million ~~readily~~at ~~available~~June 30, to2003 ~~the~~and ~~Company~~consisted inof 125 ~~the~~commercial ~~form~~first ~~of the~~mortgage ~~Company’s~~loans ~~existing~~with ~~portfolio~~an ofaverage ~~cash~~loan ~~and~~balance ~~short-term~~of approximately ~~investments~~$6.0 million, ~~Reverse~~collateralized by properties located in 32 states. ~~Repo~~The ~~capacity~~properties oncollateralizing ~~invested~~the ~~assets~~portfolios ~~and,~~were ifapproximately ~~required~~33% office, 19% ~~proceeds~~multifamily ~~from~~residential, ~~invested~~15% ~~asset sales.~~manufactured ~~The~~housing, ~~Company’s~~10% ~~liquidity~~industrial, is9% hotels, ~~primarily~~5% ~~derived~~retail, ~~from~~and ~~operating~~9% ~~cash~~other ~~flows~~types. At ~~March~~June 3130, 2003, approximately ~~$4.78 billion~~29% and 11% of ~~the~~this ~~Company’s~~portfolio ~~Bond~~were ~~Portfolio~~secured by properties located in California and New ~~had~~York, anrespectively, ~~aggregate~~and ~~unrealized~~no ~~gain~~more than 10% of ~~$224~~this portfolio was secured by properties located in any other single state.5 At June ~~million~~30, ~~while~~2003, ~~approximately~~there ~~$1.13~~were 16 ~~billion~~mortgage ofloans ~~the~~with ~~Bond~~outstanding ~~Portfolio~~balances ~~had~~of an$10 million ~~aggregate~~or ~~unrealized~~more, ~~loss~~which collectively aggregated approximately 47% of ~~$160~~the portfolio.4 At the time of ~~million.~~their Inorigination ~~addition,~~or purchase by the Company’s, ~~investment~~virtually ~~portfolio~~all ~~currently~~mortgage ~~provides~~loans had ~~approximately~~loan-to-value ~~$53.0 million~~ratios of ~~monthly~~75% ~~cash~~or ~~flow~~less. ~~from~~At ~~scheduled~~June 30, ~~principal~~2003, ~~and~~approximately 28% of ~~interest~~the ~~payments.~~mortgage ~~Historically,~~loan ~~cash~~portfolio ~~flows~~consisted ~~from~~of ~~operations~~loans ~~and~~with ~~from~~balloon ~~the~~payments ~~sale~~due before ofJuly 1, ~~the~~2006. ~~Company’s~~During ~~annuity~~2003 and ~~GIC~~2002, ~~products~~loans ~~have~~delinquent ~~been~~by more than ~~sufficient~~90 days, foreclosed loans and restructured loans have not been significant in ~~amount~~ relation to ~~satisfy~~ the ~~Company’s~~total ~~liquidity~~mortgage ~~needs~~loan portfolio.

~~Management~~Substantially isall ~~aware~~of ~~that~~the ~~prevailing~~mortgage ~~market~~loan ~~interest~~portfolio ~~rates may shift significantly and~~ has ~~strategies~~been inoriginated ~~place~~by the toCompany ~~manage~~under ~~either~~its anunderwriting ~~increase or decrease in prevailing rates~~standards. InCommercial amortgage ~~rising~~loans ~~interest rate environment, the~~on ~~Company’s~~properties ~~average~~such ~~cost of funds would increase over time~~ as itoffices, ~~prices~~hotels ~~its new~~ and ~~renewing~~shopping ~~annuities~~centers ~~and GICs to maintain a~~ generally ~~competitive~~represent ~~market~~a ~~rate.~~higher ~~Management~~level ~~would~~of ~~seek~~risk tothan ~~place~~do ~~new~~mortgage ~~funds~~loans insecured ~~investments~~by ~~that~~multifamily ~~were~~residences. ~~matched~~This ingreater ~~duration~~risk ~~to,~~is ~~and~~due ~~higher~~to ~~yielding~~several ~~than~~factors, including the ~~liabilities~~larger ~~assumed.~~size ~~The~~of such ~~Company~~loans ~~believes~~and ~~that~~the ~~liquidity~~more toimmediate ~~fund~~effects ~~withdrawals~~of ~~would~~general beeconomic ~~available~~conditions ~~through~~on these ~~incoming~~commercial ~~cash~~property ~~flow~~types. However, ~~the~~due ~~sale~~to ~~of short-term or floating-rate instruments or Reverse Repos on~~ the Company’s ~~substantial~~underwriting standards, ~~MBS~~the ~~segment~~Company ofbelieves ~~the~~that ~~Bond~~it ~~Portfolio, thereby~~has ~~avoiding~~prudently managed the ~~sale~~risk attributable ofto ~~fixed-rate~~its ~~assets~~mortgage inloan anportfolio ~~unfavorable~~while ~~bond~~maintaining ~~market~~attractive yields.

InPOLICY aLOANS ~~declining~~totaled ~~rate~~$206.2 million ~~environment~~at June 30, ~~the~~2003, ~~Company’s~~compared ~~cost~~to ~~of funds would~~$215.8 ~~decrease~~million ~~over~~at ~~time~~December 31, ~~reflecting~~2002, ~~lower interest crediting rates on its fixed annuities~~ and ~~GICs.~~primarily ~~Should~~represent ~~increased~~loans ~~liquidity~~taken ~~be required for withdrawals,~~against ~~the~~universal ~~Company~~life ~~believes~~insurance ~~that a significant portion of its investments could be sold without adverse consequences in light of the general strengthening that would be expected in the bond market~~policies.

IfSEPARATE aACCOUNT ~~substantial~~SEED ~~portion~~MONEY oftotaled ~~the~~$28.5 million ~~Company’s~~at ~~Bond~~June 30, ~~Portfolio diminished~~2003, ~~significantly~~compared into ~~value~~$25.4 million ~~and/or~~at ~~defaulted~~December 31, ~~the~~2002, ~~Company would need to liquidate other portions of its investment portfolio~~ and~~/or~~ ~~arrange~~consists ~~financing.~~principally ~~Such~~of ~~events~~seed ~~that~~money ~~may~~for ~~cause~~mutual ~~such~~funds aused ~~liquidity~~as ~~strain~~investment ~~could~~vehicles befor the ~~result of economic~~Company’s ~~collapse~~variable orannuity ~~terrorist~~separate ~~acts~~accounts.

~~The~~SECURITIES ~~Company~~LENDING ~~has~~COLLATERAL ~~entered~~totaled ~~into~~$270.6 million ~~eight~~at ~~agreements~~June 30, ~~in which it has provided~~2003, ~~liquidity~~compared ~~support~~to ~~for~~$585.8 million ~~certain~~at ~~short-term~~December 31, ~~securities~~2002, ~~of municipalities~~ and ~~non-profit~~ ~~organizations~~consisted byof ~~agreeing to purchase such securities in the event~~cash ~~there~~collateral isinvested ~~no other buyer~~ in ~~the~~highly rated short-term ~~marketplace.~~securities Inreceived ~~return the Company~~in ~~receives~~connection ~~a fee. The maximum liability under these guarantees at March 31, 2003 is $794.9 million. Related to each of these agreements are participation agreements~~ with the Company’s ~~Parent,~~securities ~~under~~lending ~~which~~program. Although the ~~Parent will share in~~cash ~~$345.3 million~~collateral ofis ~~these~~currently ~~liabilities~~invested in ~~exchange~~highly ~~for~~rated ashort-term ~~proportionate~~securities, ~~percentage~~the ofapplicable collateral agreements permit the ~~fees~~cash ~~received~~collateral ~~under~~to ~~these~~be ~~agreements.~~invested ~~The~~in

~~expiration~~highly ~~dates~~liquid short and long-term investment portfolios. At least 75% of the ~~these~~portfolio’s ~~commitments~~short-term ~~are~~investments asmust ~~follows:~~have ~~$249.0 million~~external inissue ratings of ~~2004~~A-1/P-1, ~~$387~~one of the highest ratings for short-term credit quality.~~9 million~~ inLong-term investments ~~2005~~include corporate notes with maturities of five years or less and ~~$158.0 million~~a credit inrating ~~2006~~by at least two nationally recognized statistical rating organizations (NRSRO), with no less than a S&P rating of A or equivalent by any other NRSRO.

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

~~The~~As ~~Company,~~part inof ~~common~~its ~~with~~asset-liability ~~other~~matching ~~insurers~~discipline, isthe ~~subject~~Company toconducts detailed ~~regulation~~computer ~~and supervision~~simulations bythat ~~the~~model ~~states~~its ~~and~~fixed-rate ~~other~~assets ~~jurisdictions~~and inliabilities under ~~which~~commonly itused ~~does~~interest ~~business~~rate scenarios. ~~Within~~ With the ~~United~~results ~~States~~of these computer simulations, the ~~method~~Company ofcan ~~such~~measure ~~regulation~~the ~~varies~~potential ~~but~~gain ~~generally~~or loss in ~~has~~fair value of its ~~source~~interest-rate insensitive ~~statutes~~instruments ~~that~~and ~~delegate~~seek ~~regulatory~~to protect its economic value and ~~supervisory~~achieve ~~powers~~a ~~to an~~predictable ~~insurance~~spread ~~official.~~between ~~The~~what ~~regulation~~it earns on its invested assets and ~~supervision~~what ~~relate~~it ~~primarily~~pays ~~to approval~~on ofits ~~policy~~liabilities ~~forms~~by designing its fixed-rate products and ~~rates,~~conducting ~~the~~its ~~standards~~investment ofoperations ~~solvency~~to ~~that~~closely ~~must~~match bethe ~~met~~duration and ~~maintained,~~cash ~~including~~flows ~~risk~~of ~~based~~the ~~capital~~fixed-rate ~~measurements,~~assets ~~the~~to ~~licensing~~that of its fixed-rate liabilities. ~~insurers~~The ~~and~~fixed-rate ~~their~~assets ~~agents,~~in the ~~nature~~Company’s ofasset-liability ~~and~~modeling ~~limitations~~included: oncash and short-term investments; bonds, notes and redeemable preferred stocks; ~~restrictions~~mortgage onloans; ~~the~~policy ~~size~~loans; ofand ~~risks~~investments ~~which~~in ~~may~~limited bepartnerships ~~insured~~that invest ~~under~~primarily ain ~~single~~fixed-rate ~~policy~~securities. At June 30, 2003, these assets had ~~deposits~~an onaggregate ~~securities~~fair ~~for~~value ~~the~~of ~~benefit~~$7.44 billion with an option-adjusted duration of 3.9. ~~policyholders~~The Company’s fixed-rate liabilities included fixed annuity, ~~methods~~universal life ofand ~~accounting~~GIC contracts. At June 30, 2003, these liabilities had an aggregate ~~periodic~~fair ~~examinations~~value of(determined ~~the~~by ~~affairs~~discounting offuture ~~insurance~~contractual ~~companies,~~cash ~~the~~flows ~~form~~by ~~and~~related ~~content~~market rates of ~~reports~~interest) of ~~financial~~$6.69 billion ~~condition~~with ~~required~~an option-adjusted duration of 3.9. The Company’s potential exposure due to bea ~~filed,~~relative ~~and~~10% ~~reserves~~decrease in ~~for~~prevailing ~~unearned~~interest ~~premiums~~rates from its June 30, ~~losses~~2003 ~~and~~levels ~~other~~is ~~purposes.~~a Inloss ~~general~~of approximately $8.6 million, ~~such~~representing ~~regulation~~an increase in fair value of its fixed-rate liabilities that is ~~for~~not ~~the~~offset ~~protection~~by a increase in fair value of ~~policyholders~~its fixed-rate ~~rather~~assets. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the ~~security~~estimated ~~holders~~potential loss.

~~Risk~~Option-adjusted ~~based~~duration ~~capital~~is ~~(“RBC”)~~a ~~standards~~common ~~are designed to~~ measure ~~the~~for ~~adequacy of an insurer’s statutory capital and surplus in relation to~~ the ~~risks~~price ~~inherent in~~sensitivity ~~its business. The standards are intended to help identify inadequately~~of ~~capitalized companies and require specific regulatory actions in the event an insurer’s RBC is deficient. The RBC formula develops~~ a ~~risk~~fixed-~~adjusted~~maturity ~~target level~~portfolio ~~of adjusted statutory capital and surplus by applying certain factors~~ to ~~various~~ ~~asset,~~changes ~~premium~~in ~~and~~interest ~~reserve items~~rates. ~~Higher~~For ~~factors~~example, ~~are applied to more~~if ~~risky~~interest ~~items~~rates ~~and~~increase ~~lower factors are applied to less risky items. Thus~~1%, the ~~target~~ ~~level~~fair value of ~~statutory~~an ~~surplus~~asset ~~varies~~with ~~not only as~~ a ~~result~~duration of ~~the insurer’s size, but also on the risk profile of the insurer’s operations~~5. ~~The RBC Model~~0 ~~Law provides four incremental levels of regulatory attention for insurers whose surplus~~ is ~~below~~expected ~~the~~to ~~calculated~~decrease ~~RBC target. These levels of attention range~~ in ~~severity~~ ~~from~~value ~~requiring~~by ~~the~~approximately ~~insurer to submit a plan for corrective action to actually placing the insurer under regulatory control~~5%. The ~~statutory capital and surplus of the~~ Company ~~exceeded its RBC requirements as of March 31, 2003.~~

In 1998, the NAIC adopted the codification of statutory accounting principles (“Codification”) which replaced the NAIC’s previous primary guidance on statutory accounting, which became effective January 1, 2001. Codification changed prescribed statutory accounting practices and has resulted in changes to the accounting practices that the Company uses to prepare its statutory basis financial statements. Codification has been adopted by all fifty states as the prescribed basis of accounting, including Arizona. The adoption of Codification resulted in an increase to the Company’s statutory surplus of approximately $92.4 million and was recorded as a cumulative effect of changes in accounting principles in 2001.

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in 2001 and establish new consumer protections regarding the security, confidentiality, and uses of nonpublic personal information of individuals. The law also requires financial institutions to fully disclose their privacy policies to their customers. Additional privacy legislation pending in the United States Congress and several states is designed to provide further privacy protections to consumers of financial products and services. These statutes and regulations may result in additional regulatory compliance

~~costs,~~estimates ~~may limit~~ the ~~Company’s~~option-adjusted ~~ability~~duration toof ~~market~~ its ~~products,~~assets and ~~may otherwise~~liabilities ~~constrain~~using ~~the~~a number ~~nature or scope~~ of ~~the~~different ~~Company’s~~interest ~~insurance~~rate ~~and financial~~scenarios, ~~services~~assuming ~~operations.~~continuation ~~The~~of ~~Gramm-Leach-Bliley Act also allows~~existing ~~combinations~~investment ~~between insurance companies, banks~~ and ~~other~~interest ~~entities.~~crediting ~~In addition~~strategies, ~~from~~including ~~time~~maintaining ~~to time, Federal initiatives are proposed that could affect~~an ~~the~~appropriate ~~Company’s~~level ~~businesses~~of liquidity. ~~Such~~Actual ~~initiatives~~company ~~include employee benefit plan regulations~~ and ~~tax~~contract ~~law~~owner ~~changes affecting the taxation of insurance companies~~behaviors ~~and~~may ~~the~~be ~~tax~~different ~~treatment~~than ofwas ~~insurance~~assumed ~~and other investment products. Proposals made~~ in ~~recent years to limit~~ the ~~tax~~estimate ~~deferral~~ of ~~annuities~~option-adjusted ~~or otherwise modify~~duration ~~the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company’s sales of affected products,~~ and, ~~consequently, on its results of operations, the Company believes~~ these ~~proposals~~differences ~~have~~may abe ~~small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them~~material.

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

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

The Company seeks to enhance its spread income with reverse repurchase agreements (“Reverse Repos”). Reverse Repos involve a sale of securities by the Company and an agreement to repurchase the same securities at a later date at an agreed upon price and are generally over-collateralized. The Company also seeks to provide liquidity by investing in MBSs. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans.

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

~~QUANTITATIVE~~least ~~AND~~quarterly ~~QUALITATIVE~~to ~~DISCLOSURES~~determine ~~ABOUT~~whether ~~MARKET~~specific ~~RISK~~investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In conducting these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower’s recent financial performance, news reports and other externally generated information concerning the creditor’s affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners.

The ~~quantitative~~carrying ~~and~~values ~~qualitative~~of ~~disclosures~~investments ~~about~~that ~~market~~are ~~risk~~determined to have declines in value that are other than temporary are reduced to fair value. The provisions ~~contained~~for inimpairment ~~the~~on ~~Asset-Liability~~mortgage ~~Matching~~loans ~~section~~are based on losses expected by management to be realized on transfers of ~~Management’s~~mortgage ~~Discussion~~loans to real estate, on the disposition and ~~Analysis~~settlement of ~~Financial~~mortgage ~~Condition~~loans and ~~Results~~on mortgage loans that management believes may not be collectible in full. Accrual of ~~Operations~~interest is suspended when principal and interest payments on ~~pages~~mortgage 24loans toare 25past due more than 90 days. ~~herein~~Impairment losses on securitized assets are recognized if the fair value of the security is less than its book value, and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date.

DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $26.4 million ($19.7 million of bonds and $6.7 million of mortgage loans) at June 30, 2003, which constituted approximately 0.3% of total invested assets. At December 31, 2002, defaulted investments totaled $15.6 million ($8.9 million of bonds and $6.7 million of mortgage loans), which constituted approximately 0.2% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company’s existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. The Company’s liquidity is primarily derived from operating cash flows. At June 30, 2003, approximately $5.07 billion of the Company’s Bond Portfolio had an aggregate unrealized gain of $295.0 million, while approximately $794.1 million of the Bond Portfolio had an aggregate unrealized loss of $119.7 million. In addition, the Company’s investment portfolio currently provides approximately $52.0 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company’s annuity products have been more than sufficient in amount to satisfy the Company’s liquidity needs.

Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company’s average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or

~~CONTROLS~~Reverse &Repos ~~PROCEDURES~~on the Company’s substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.

~~The~~In ~~Company’s disclosure~~a ~~controls~~declining ~~and~~rate ~~procedures~~environment, ~~are designed to ensure that information required to be disclosed in~~ the ~~reports that the~~ Company ~~files~~’s orcost ~~submits under the Securities Exchange Act~~ of ~~1934,~~funds aswould ~~amended~~decrease ~~(Exchange~~over ~~Act)~~time, isreflecting ~~recorded,~~lower ~~processed,~~interest ~~summarized~~crediting ~~and reported~~rates ~~within~~on ~~the~~its ~~time periods specified in the rules and forms of~~fixed ~~the Securities and Exchange Commission~~annuities. ~~Disclosure~~Should ~~controls~~increased ~~and procedures~~liquidity ~~include~~be ~~controls and procedures designed to ensure that information~~ required tofor ~~be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management~~withdrawals, ~~including~~ the Company~~’s Chief Executive Officer and Principal~~ ~~Financial~~believes ~~Officer,~~that asa ~~appropriate~~significant toportion ~~allow~~of ~~timely~~its ~~decisions~~investments ~~regarding required~~could ~~disclosure.~~be ~~The~~sold ~~Company’s Chief Executive Officer and~~without ~~Principal~~adverse ~~Financial~~consequences ~~Officer~~in ~~have~~light ~~reviewed the effectiveness~~ of the ~~Company’s~~ ~~disclosure~~general ~~controls~~strengthening ~~and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q and have concluded~~ that ~~the~~would ~~disclosure controls and procedures are effective.~~be ~~There~~expected ~~were no significant changes~~ in the ~~Company’s~~bond internal controls or in other factors that could significantly affect these controls subsequent to the most recent date of evaluation by the Company’s Chief Executive Officer and Principal Financial Officermarket.

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

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

GUARANTEES AND OTHER COMMITMENTS

The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at June 30, 2003 is $794.9 million. Related to each of these agreements are participation agreements with the Company’s Parent, under which the Parent will share in $345.3 million of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $249.0 million in 2004, $387.9 million in 2005 and $158.0 million in 2006.

RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The adoption of FIN 45 did not have a significant impact on the Company’s results of operations or financial condition.

In July 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-01, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts (“SOP-03-1”). This statement is effective for the Company as of January 1, 2004. Under SOP 03-01, variable annuity assets held in separate accounts will continue to be measured at fair value and reported in summary total on the Company’s financial statements, with an equivalent summary total reported for related liabilities, if the separate account arrangement meets certain specified conditions. Assets underlying the Company’s interest in a separate account (separate account seed money) do not

qualify for separate account accounting and reporting. The Company will be required to “look through” the separate account for purposes of accounting for its interest therein, and account for and classify separate account seed money based on its nature as if the assets of the separate account underlying the Company’s interest were held directly by the general account rather than through the separate account structure. The adoption of SOP 03-01 will not have a material impact on the Company's separate accounts or separate account seed money.

In addition, SOP 03-01 will require the Company to recognize a liability for guaranteed minimum death benefits, guaranteed minimum income benefits and enhanced earnings benefits. The Company is currently evaluating the provisions of SOP 03-01 and does not currently have an estimate of the liability. However, the one-time cumulative accounting charge is expected to have a material effect on the Company’s results of operations, but is not expected to be material to the Company’s financial position.

REGULATION

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

Risk based capital (“RBC”) standards are designed to measure the adequacy of an insurer’s statutory capital and surplus in relation to the risks inherent in its business. The standards are intended to help identify inadequately capitalized companies and require specific regulatory actions in the event an insurer’s RBC is deficient. The RBC formula develops a risk-adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer’s size, but also on the risk profile of the insurer’s operations. The RBC Model Law provides four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The statutory capital and surplus of the Company exceeded its RBC requirements as of June 30, 2003.

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in 2001 and established new consumer protections regarding the security, confidentiality, and uses of nonpublic personal information of individuals. The law also requires financial institutions to fully disclose their privacy policies to their customers. Additional privacy legislation pending in the United States Congress and several states is designed to provide further privacy protections to consumers of financial products and services. These

statutes and regulations may result in additional regulatory compliance costs, may limit the Company’s ability to market its products, and may otherwise constrain the nature or scope of the Company’s insurance and financial services operations. The Gramm-Leach-Bliley Act also allows combinations between insurance companies, banks and other entities. In addition, from time to time, Federal initiatives are proposed that could affect the Company’s businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company’s sales of affected products, and, consequently, on its results of operations, the Company believes these proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

CONTROLS & PROCEDURES

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

AIG SUNAMERICA LIFE ASSURANCE COMPANY
OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

~~None~~Exhibits are listed in the Exhibit Index beginning on page 38 herein.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended ~~March~~June 3130, 2003.

3236

SIGNATURES

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

		ANCHOR NATIONAL LIFE INSURANCE COMPANY Registrant
		AIG SUNAMERICA LIFE ASSURANCE COMPANYRegistrant
Date: May 14, 2003		/s/ N. SCOTT GILLIS
Date: August 14, 2003		/s/ N. SCOTT GILLIS
		N. Scott Gillis Senior Vice President and Director (Principal Financial Officer)
Date: May 14, 2003		/s/ MAURICE S. HEBERT
Date: August 14, 2003		/s/ MAURICE S. HEBERT
		Maurice S. Hebert Vice President and Controller (Principal Accounting Officer)

3337

~~CERTIFICATIONS~~Exhibit Index

I, Jay S. Wintrob, Chief Executive Officer of AIG SunAmerica Life Assurance Company, certify that:


Exhibit

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

1. I have reviewed this quarterly report on Form 10-Q of AIG SunAmerica Life Assurance 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 in order 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; 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; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:38

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the entity, 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 officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of registrant’s board of directors (or persons performing the equivalent function):

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 officer 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: May 14, 2003 /s/ JAY S. WINTROB Jay S. Wintrob Chief Executive Officer

CERTIFICATIONS

I, N. Scott Gillis, Senior Vice President (Principal Financial Officer) of AIG SunAmerica Life Assurance Company, certify that:

Date: May 14, 2003 /s/ N. Scott Gillis N. Scott Gillis, Senior Vice President (Principal Financial Officer)

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Filing Compare · SUNAMERICA ANNUITY & LIFE ASSURANCE CO