UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

Commission file number 0-5486

Presidential Life Corporation

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:  

Securities registered pursuant to Section 12(g) of the Act:  None.

 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  þ

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  þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o    No  þ

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the Registrant as of the close of business on June 30, 2010 was approximately $189,181,465 based on the closing sale price of the common stock on the NASDAQ Global Select on that date.  The company does not have any non-voting common equity.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement relating to its 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report where indicated.

Part I

Page

Item 1.

Business

5

Item 1A.

Risk Factors

22

Item 1B.

Unresolved Staff Comments

27

Item 2.

Properties

27

Item 3.

Legal Proceedings

27

Item 4.

Removed and Reserved

27

Part II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

 Securities

28

Item 6.

Selected Financial Data

30

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 8.

Financial Statements and Supplementary Data

55

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55

Item 9A.

Controls and Procedures

55

Item 9B.

Other Information

58

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

58

Item 11.

Executive Compensation

58

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

58

Item 13.

Certain Relationships and Related Transactions, and Director Independence

58

Item 14.

Principal Accounting Fees and Services

58

Part IV

Item 15.

Exhibits and Financial Statement Schedules

59

Signatures

61

Consolidated Financial Statements and Schedules

F-1

Exhibit Index

2

PART 1

Note on Forward-Looking Statements

This Annual Report on Form 10-K/A (“Form 10-K/A”) contains forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Sections of this Form 10-K/A.   Forward-looking statements reflect management's current expectations of future events, trends or results based on certain assumptions and include any statement that does not directly relate to any historical or current fact.  Forward-looking statements can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in “Risk Factors” under Part I, Item 1A of this Form 10-K/A, which are incorporated herein by reference. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Explanatory Note

This Form 10-K/A reflects the Original Restatement and the OTTI Restatement of the Company’s Consolidated Financial Statements (as such terms are defined below), as discussed in note 15 to the Company’s Consolidated Financial Statements included herein.  

 As previously disclosed in a Current Report on Form 8-K filed with the SEC on March 10, 2011, the Board of Directors of the Company determined on March 7, 2011 that the Company’s financial statements for the years ended December 31, 2009 and 2008 (the “Annual Financial Statements”) and for the quarterly periods ended March 31, 2010, June 30, 2010 and September 30, 2010 (the “Quarterly Financial Statements” and, together with the Annual Financial Statements, collectively, the “Previously Issued Financial Statements”) should no longer be relied upon because they contained an error as addressed in FASB ASC Topic 250.  The error in the Previously Issued Financial Statements related to the application of the equity method of accounting for the Company’s limited partnership investments.  The Company sought to correct the error with respect to the Annual Financial Statements by restating (“Original Restatement”) such financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2011 (the “Original 2010 Form 10-K”).   The Original Restatement incorporated a change in the way we accounted for certain of our investments.  Approximately 5% of our overall investment portfolio is invested in private limited partnerships, with respect to which we had historically applied the equity method of accounting.  After extensive discussions with the staff of the SEC, we determined that we should not have applied the equity method to many of the partnerships because we did not exert any influence over them.  As a result, we now apply the fair value method of accounting for investments in limited partnerships in which we have less than a 5% interest and do not have more than virtually no influence over the operating and financial policies of the partnership, and apply the equity method of accounting where we have either a 5% or greater interest or less than a 5% interest, but with respect to which partnership we have more than virtually no influence over the operating and financial policies of the partnership.  The Original Restatement primarily impacts the net investment income, change in deferred policy acquisition costs and provision (benefit) for income taxes amounts in the statement of income and the limited partnerships investments, deferred policy acquisition costs, deferred income tax asset and shareholders' equity amounts in the balance sheet.  

As previously disclosed in a Current Report on Form 8-K filed with the SEC on May 10, 2011, the Board of Directors of the Company determined that the Company’s financial statements for the years ended December 31, 2009 and 2008, as previously restated in the Original 2010 Form 10-K, the financial statements for the year ended December 31, 2010 included in the Original 2010 Form 10-K and the financial statements for each of the first three quarters of the year ended December 31, 2010 (such financial statements, the “Subject Financial Statements”), should no longer be relied upon because they contain an error as addressed in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections.  In the process of preparing the Subject Financial Statements, the Company made an error in failing to analyze other-than-temporary-impairment (“OTTI”) related to its limited partnership investments. Management has determined that this error resulted in an understatement of net loss for the year ended December 31, 2008 and an overstatement of net income for the year ended December 31, 2009 in the Subject Financial Statements.  The error resulted in an understatement of accumulated other comprehensive income and an overstatement of retained earnings as of December 31, 2010, 2009 and 2008.  There was no change in total

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stockholder’s equity as a result of the error.  Because the components of stockholder’s equity are being restated, accumulated other comprehensive income and retained earnings will change in each of the first three quarters of 2010 from that previously reported.   This error is being corrected herein by restating (the “OTTI Restatement”) the Company’s financial statements for the years ended December 31, 2008, 2009 and 2010.

The Company intends to correct the error in the Quarterly Financial Statements as a result of the Original Restatement and the OTTI Restatement through the filing of amendments to its Quarterly Reports on Form 10-Q for the periods ended March 31, 2010, June 30, 2010 and September 30, 2010.

For a more detailed discussion of the Original Restatement and the OTTI Restatement including its impact on the Company’s Consolidated Financial Statements, see Note 15 to the Consolidated Financial Statements.  

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ITEM 1.

BUSINESS

Introduction

Presidential Life Corporation is an insurance holding company that, through its wholly owned subsidiary, Presidential Life Insurance Company (the “Insurance Company”), markets and sells a variety of fixed annuity, life insurance and accident and health insurance products.  We manage our business and report as a single business segment.  We are a Delaware corporation founded in 1965. Through the Insurance Company, we are licensed to market our products in all 50 states and the District of Columbia.  Approximately 36.3% of our 2010 sales of annuity, life insurance and accident and health products were made to individuals residing in the State of New York.  Headquartered in Nyack, New York, we had 108 full-time employees as of December 31, 2010.  Unless the context otherwise requires, the “Company,” “we,” “us,” “our” and similar references shall mean Presidential Life Corporation and the Insurance Company, collectively.

Business Strategy

Our core business strategy is to expand our individual annuity business and to increase our risk-adjusted returns on invested capital by prudently managing investment spreads and investment risk.

Key elements to our multiyear strategy include the following:

·

Expand Regional Platform into National Platform.  Our annuity business is concentrated in the New York area primarily due to our having a New York domiciled life insurance operating company.  We are planning to expand this platform by adding a broadly licensed, non-NY life insurance operating company, to be domiciled outside of New York State.  We believe that such an expansion will increase our ability to more effectively compete nationwide and enable us to offer more innovative annuity products with a competitive speed to market approach.

·

Broaden Annuity Product Offerings to Include All Four Major Product Types.  Currently our annuity product line includes guaranteed traditional fixed book value deferred and immediate annuity offerings.  We intend to increase product offerings to include indexed and market value adjusted annuities.  Specifically, the increasing popularity of fixed index annuity products that allow equity and bond market participation without the risk of loss of the premium deposit presents a significant long-term opportunity to grow our annuity business.

·

Build on our Distribution Channels.  PPGAs (Personal Producing General Agents) are currently the major distributor of our annuity products.  Due to our planned national expansion and broader range of annuity products, we believe that an opportunity exists to build on our distribution channels to include the larger Brokerage General Agents and to enhance our Independent Producer Channel.  We also plan on recruiting mid-size Independent Marketing Organizations that will be required to meet certain specific minimum volume amounts and quality standards.

·

Enhance Investment Spread Capabilities.  We intend to build on our experience and expertise in managing the investment spread over a range of interest rate environments to achieve our targeted spreads and increase our risk adjusted returns on invested capital. We intend to continue to reduce risk in the investment portfolio by reducing exposure to limited partnerships.  We redeemed a substantial amount of our hedge fund investments at year end and plan additional hedge fund redemptions. We expect that the proceeds from these redemptions along with capital returned to the Company from remaining limited partnership investments will be redeployed into more liquid securities with more predictable revenue streams and with lower capital requirements.

·

Focus of High-Quality Service to Agents and Policyholders.  We strive to continually improve the timeliness and accuracy of our service.  Our internal business processes and technology platform are undergoing an extensive review with the objective being to further enhance our commitment to high-quality service to our agents and policyholders.  

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Products

We offer a range of fixed annuity, life insurance and accident and health insurance products.  During 2010, our product mix was approximately 82% annuities, 12% life insurance and 6% accident and health insurance.  Due to the competitive nature of the traditional term, whole life and universal life insurance business and the negative impact of that competition on our profitability, in 2004, management decided to stop offering those traditional life insurance products. We continue to service the in-force policies and continue to issue the more profitable Graded Benefit Life and Simplified Issue Whole Life products.  

For financial statement purposes, revenues from the sale of ordinary life insurance, annuity contracts with life contingencies and accident and health insurance are treated as revenues whereas the sale of annuity contracts without life contingencies, deferred annuities and universal life insurance products are reported as additions to policyholders’ account balances on our balance sheet.  

Annuities

We sell a variety of fixed annuity products including single and flexible premium deferred annuities, single premium immediate annuities and a selection of special annuities.  Each of these products is designed to meet the needs of increasingly sophisticated consumers for supplemental retirement income and estate planning.   Annuities currently enjoy an advantage over certain other savings mechanisms because the annuitant receives a tax-deferred accrual of interest on his or her investment.  Due to the prevailing low interest rate environment, industry-wide demand for fixed annuity products was weak in 2010 and the first quarter of 2011.

Single Premium Deferred Annuities.  Single Premium Deferred Annuities (“SPDAs”) provide for a single, lump sum premium at time of issue, an accumulation period and an annuity payout period beginning at some future date.  During the accumulation period, the account value of the annuitant is credited with earnings at a current interest rate that is guaranteed for periods ranging from one to six years, at the annuitant’s option, and thereafter is subject to change based on market and other conditions.  Each contract also has a minimum guaranteed rate.  The accrual of interest during the accumulation period is on a tax-deferred basis to the annuitant.  After the number of years specified in the annuity contract, the annuitant may elect to take the proceeds of the annuity as a single payment, a specified income for life, or a specified income for a fixed number of years.  The annuitant is permitted at any time during the accumulation period to withdraw all or part of the single premium paid plus the amount credited to his or her account.  Any such withdrawal, however, typically is subject to a surrender charge during the early years of the annuity contract.

Flexible Premium Deferred Annuities.  Flexible premium deferred annuities provide similar benefits to those provided by single premium products, but instead permit periodic premium payments in such amounts as the holder deems appropriate.  Flexible premium deferred annuities are not available in every state.  

All of our deferred annuity products provide minimum interest rate guarantees.  These minimum guaranteed rates range from 1.1% to 5.5% annually and the contracts (except for immediate contracts discussed below) are designed to permit us to change the crediting rates annually after the initial guarantee period subject to the minimum guaranteed rate.  In determining the frequency and extent of changes to the interest-crediting rate, we take into account the profitability of our annuity business and its relative competitive position in the marketplace.

Our deferred annuity products are designed to encourage persistency by incorporating surrender charges that exceed the cost of issuing the policy.  An annuitant may not terminate or withdraw substantial funds for periods generally ranging from one to seven years after purchase of the annuity without incurring significant penalties in the form of surrender charges.  As of December 31, 2010 and 2009, approximately 42.5% and 43.7%, respectively, of our deferred annuity contracts in force (measured by reserves) are subject to surrender charges.

Single Premium Immediate Annuities.  Our single premium immediate products guarantee a stream of payments, which begin within the first contract year (as opposed to being deferred) and continue for the life of the annuitant or for a specified period of time. In an immediate annuity, the payment may be guaranteed for a period of time (typically five to twenty years).  If the annuitant dies during the guarantee period, payments will continue to be made to the annuitant’s beneficiary for the balance of the guarantee period.  Immediate annuities differ from deferred annuities in that they generally provide for fixed payments that are not subject to surrender or loan.  The implicit interest rate on immediate annuities is based on market conditions that exist at the time the annuity is issued and is guaranteed for the term of the annuity.

A deferred immediate annuity (“Sentinel”) was approved by the New York State Insurance Department (“NYSID”) and was introduced in 2010.

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The following table summarizes annuity products in force measured by reserves, as well as certain statistical data for each of the years in the five fiscal year period ended December 31, 2010, in each case, as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

ANNUITIES IN FORCE AS OF DECEMBER 31,

*See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Interest Rate Risk”

The reduction in annuity surrenders since 2007 is attributable to a reduction in policies coming off surrender charges, when compared to prior years when large blocks of policies came off their surrender charge period.

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Annuity Considerations – The following table sets forth certain information with respect to our annuity considerations for each of the five fiscal years ended December 31, 2010, as determined in accordance with statutory accounting principles, which include as revenue the consideration from policyholders in such years other than consideration from immediate annuities without life contingencies.  The information below differs from the premiums shown on the Company’s consolidated financial statements in accordance with GAAP in that, under GAAP, consideration from single premium annuity contracts without life contingencies, universal life insurance products and deferred annuities are not reported as premium revenues, but are reported as additions to policyholder account balances, which are liabilities on the Company’s consolidated balance sheet.  

Distribution of Products – By Gross Annuity Considerations

Life Insurance

We offer the following life insurance products:

Graded Benefit Whole Life.  Graded benefit life policies are designed for the upper age (i.e., ages 40-80 in most states), substandard applicant.  Depending upon age, these policies provide for a limited death benefit of the return of premium plus 5% interest for either two or three years.  Thereafter, the death benefit is limited to the face amount of the policy.  This product typically is offered with a maximum face value of $50,000.

Simplified Issue Whole Life.  In 2009, we introduced a simplified issue whole life policy for customers who would not qualify for standard risk rates, but who want immediate coverage as opposed to graded benefit life, which has a modified face amount for two to three years. The rates are substandard based on the impairments that are deemed acceptable by the Company for that risk classification. The maximum face amount available is $20,000 and underwriting is required to approve for issue.  Field underwriting by the agent is required at the time of the application. The applicant is required to disclose medical information, which is then verified by the Company to ascertain if the risk is acceptable or greater than the impairments that qualify for the product.  If the applicant is not eligible by underwriting standards, we can offer a graded benefit life policy. Underwriting rules for reinstatement of a simplified issue whole life policy must meet the same risk classification it was at issue, or the policyholder is declined reinstatement.  

Group Life: Group term life insurance provided through the workplace provides financial coverage in the event of premature death. Accidental death and dismemberment (“AD&D”) insurance, as well as coverage for spouses, children or domestic partners, are also available. Insurance consists primarily of renewable term life insurance with the amount of coverage provided being either a flat amount, a multiple of the employee’s earnings, or a combination of the two.

Other.  Other life insurance products in force, but no longer being issued, include universal life, whole life and term life.  Universal life policies, both flexible premium and single premium, are interest-sensitive products, which typically provide the insured with “non-participating” (i.e., non-dividend paying) life insurance with a cash value.  Current interest is credited to the policy’s cash value based primarily upon prevailing interest rates but not less than the guaranteed rate specified in the policy.  Whole life policies are products that provide the insured with life insurance with a guaranteed cash value.  Typically, a fixed premium, which costs more than comparable term coverage when the policyholder is younger, but less than comparable term coverage as the policyholder grows older, is paid over a period of years.  Whole life insurance products combine insurance protection with a savings plan that gradually increases over a period of time, which the policyholder may borrow against.  Term life policies are products that provide insurance protection if the insured dies during the time period specified in the policy.  No cash value is built up.  Term life products provide the maximum benefit for the lowest initial premium outlay.

The Company continues to maintain its life insurance in force business and this may require additional underwriting (i.e., reinstatements, re-entries and conversions).  In that regard, the Insurance has adopted and follows detailed, uniform underwriting procedures designed to assess and quantify insurance risks.  To the extent that a policyholder eligible for reinstatement, reentry or conversion does not meet the Company’s underwriting standards at the standard risk classifications, the Company may offer to issue a classified, substandard or impaired risk policy for a risk adjusted premium amount rather than declining the application.  The amount of the Insurance Company’s impaired risk insurance in force in proportion to the total amount of its individual life insurance in force was approximately 4.9% at December 31, 2010.

8

Insurance Policies In-force – The following table sets forth universal, whole and term life insurance policies in-force, as well as certain statistical data for each of the five years ended December 31, 2010.

¹ Includes graded benefit life insurance products

9

Accident and Health Insurance

New York Statutory Disability Benefits (“DBL”) are short-term disability contracts issued to employers of one or more employees in New York State.  The benefit must be equal or better, in every respect, to the minimum benefits defined in the New York Disability Benefits Law.  The minimum benefit allowed is 50% of the weekly earnings to a maximum of $170 commencing on the 8^th day of non-occupation disabilities for a maximum of 26 weeks in any 52 week period for any one disability.  With few exceptions, employers are required to provide this coverage to their New York employees.

Ancillary Products

We offer ancillary accident and health lines designed to further protect against risks to which our core customer is typically exposed.  These products combined contributed only 3.4% to our total premiums in 2010; however, we are expecting this percentage to increase in 2011.  The majority of these products, excluding group dental insurance, is reinsured and the administration of these products is handled by a third- party administrator.  Our ancillary product offerings include the following:

§

Medical Stop Loss:  Medical stop loss coverage is sold to employers (not individual employees) to cover their liabilities as incurred in the administration of self-funded medical plans. These are plans that are governed by ERISA. The employer does not buy a fully-insured plan from a carrier, but instead opts to pay the benefits for its medical plan itself.  The parameters of these benefits are spelled out in a plan document that is disseminated to employees.  The employer then purchases stop loss coverage to insure it against claims in excess of contractually designated amounts. The coverage purchased by the employer will typically cover the risk that a claim on an individual employee exceeds a certain level and the risk that the overall claims for the plan (less whatever amount is covered under the specific deductible) exceeds a given level. Both types of plans generally have a maximum reimbursement level and are reinsured at approximately 85-90%.

§

Group dental:  In the third quarter of 2009, the Company began providing group dental insurance.  Dental benefit plans provide funding for necessary or elective dental care.  This policy provides dental coverage and is available only in New York to employer groups.  Coverage is provided through a preferred provider organization (“PPO”) or out of network arrangement in which this coverage is subject to deductibles, coinsurance and annual or lifetime maximums.

§

Individual impaired risk disability:  The individual substandard disability product provides disability income insurance.  Individually underwritten policy for the substandard risk market, this was designed for individuals that may have been declined for normal disability coverage with another carrier.

§

Hospital indemnity products:  This is a limited benefit policy that provides a combination of hospital indemnity and limited medical-surgical benefits, available to persons and their dependents.   Optional AD&D insurance, dental and vision benefits are offered.  Our hospital indemnity products provide a daily benefit (ranging from $100 to $2,000 per day) for medically necessary inpatient confinements up to a maximum number of days and a limited dollar benefits for treatment of medical conditions.  The policy does not cover all medical expenses.

§

Accident products:  This is a limited benefit policy not intended to cover all medical expenses. Our accident emergency room policy provides accident-only benefits for accident/dental medical and AD&D with an accident/sickness emergency room benefit.  Subject to deductibles, limits and maximums, the policy will pay the selected benefit amount (ranging from $1,000 to $10,000 per injury/sickness).  

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Marketing and Distribution

The Insurance Company is licensed to market insurance products in all 50 states and the District of Columbia.  The Insurance Company distributes our annuity and life insurance products through 1,273 independent general agents (376 of which are located in New York State).  These general agents, in turn, distribute the Insurance Company’s products through their 14,081 licensed insurance agents or brokers, most of whom also distribute similar products marketed by other insurance companies.  We believe that we offer innovative products and quality service and that our product commission rates are competitive.  The NYSID regulates general agent commission rates.

The independent general agent system is our primary product distribution system.  Management believes that the general agent distribution system provides cost advantages to us because we incur minimal fixed costs associated with recruiting, training and maintaining agents via our general agents.  Therefore, a substantial portion of the costs normally associated with product distribution is variable.  Distribution costs rise and fall with the level of business.

We utilize many general agents to distribute our products and therefore we are not dependent on any one general agent for a substantial amount of our business.  On the other hand, independent general agents and their licensed agents and brokers are not captive to the Company.  Management believes that interest crediting rates, general agent product commission levels, annuity and life product features, company support services and perceived company financial stability help determine our competitive position at any given point in time and influence general agents and their licensed agents and brokers to distribute our products.  Generally, we issue annuity contracts along with the general agent’s commission within two business days after application receipt.  We also provide general agent support by providing direct access to the Insurance Company’s senior executives.  Annuity contract and life insurance policyholders may access information regarding their individual holdings via the Company’s website or toll-free telephone number.

Our top ten general agents, as measured by combined 2010 annuity and life premiums, accounted for approximately 27% of our sales in 2010.  No single general agent accounted for more than 4.4%.  Management does not believe that the loss of any single distribution source would have a material adverse impact on our business.  However, the simultaneous loss of several distribution sources would diminish our product distribution and reduce sales unless these sources were timely replaced.  To guard against this contingency, we continuously recruit new independent general agents.

Policy Claims

Individual life claims are received and reviewed by claims examiners at our home office.  The initial review of claims includes verification that coverage is in force and that the claim is not subject to exclusion under the policy.  Birth and death certificates are basic requirements.  Medical records and investigative reports are ordered for contestable claims.

Reinsurance

We follow the usual industry practice of reinsuring (“ceding”) portions of our life insurance and medical stop loss risks with other companies, a practice that permits us to write policies in amounts larger than the risk we are willing to retain and to obtain commissions on the insurance ceded and thereby reduce our net commission expense.  The maximum amount of individual life insurance we normally retain on any one life is $50,000 per policy and $100,000 per life.  We cede primarily on an “automatic” basis, under which risks are ceded to a reinsurer on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a “facultative” basis, under which the reinsurer’s prior approval is required on each risk reinsured.  The maximum retention of the group medical stop loss business varies, but typically we cede 85% to 90% on a quota share basis.

Use of reinsurance does not discharge an insurer from liability on the insurance ceded.  An insurer is required to pay the full amount of its insurance obligations regardless of whether it is entitled or able to receive payments from the reinsurer.  At December 31, 2010, of the approximately $1.1 billion of the Company’s individual life insurance in force, we had ceded to reinsurer’s approximately $577 million.  The principal reinsurance companies of individual life policies with whom we did business at December 31, 2010 were Transamerica International Re, Ltd. (not rated by A.M. Best) and Swiss Re Life and Health America, Inc. (A.M. Best rating of “A (Excellent)”).

Competition

We operate in a highly competitive environment.  There are numerous insurance companies, banks, securities brokerage firms and other financial intermediaries marketing insurance products, annuities and other investments that compete with us, and many of these companies are more highly rated and have substantially greater resources than we do.  Management believes that the principal competitive factors in the sale of annuity and life insurance products are product features, commission structure, perceived

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stability of the insurer, claims paying rating and service.  Many other insurance and financial services companies are capable of competing for sales in our target markets.  

Management believes that our ability to compete is dependent upon, among other things, our ability to retain and attract independent General Agents to market our products and our ability to successfully develop competitive, profitable products.  Management believes that we have good relationships with our agents, that we have an adequate variety of products approved for issuance and that we generally are competitive within the industry in all applicable areas.

Investments and Investment Policy

Investment Portfolio Summary

The following table summarizes the Company's investment portfolio at December 31, 2010.  This table consists primarily of fixed maturity investments available for sale, which are carried at fair value.

_______________________________________________________________________________

¹All fixed maturity and equity securities are classified as available for sale; accordingly total carrying value equals estimated fair value.  Quoted market prices for most publicly traded securities are available.  Where quoted prices are unavailable, prices are obtained from securities dealers and valuation methodologies.  

²Consists of investments in limited partnerships, which are accounted for under the fair value and equity methods.  See Note 1D to the Notes to the Consolidated Financial Statements for an explanation of the methodology used to value limited partnerships.

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Investment Grade Securities

As of December 31, 2010, approximately 89% or $3.31 billion of our investment portfolio consisted of investment grade securities (according to the designations of the National Association of Insurance Commissioners (“NAIC”)) and investment grade short-term commercial paper.  Of that amount, approximately $2.1 billion consisted of investment grade corporate bonds and preferred stock and $113.9 million consisted of short term securities and commercial paper rated A1/P1 or higher.  The remaining $1.1 billion, consisting of U.S. Government bonds and government agency securities, public utility bonds and commercial mortgage backed securities, are discussed below.  Included in the investment grade portfolio, the Company has $433.1 million of securities designated as Rule 144A Investments that have not been registered under the Securities Act of 1933.  These securities are freely tradable amongst institutions that are qualified institutional buyers under Rule 144A.  Many of these securities may be exchanged for fully registered securities at the option of the issuer at a future date.

Below Investment Grade Securities

As of December 31, 2010, the Company held approximately $195.3 million in below investment grade securities, according to NAIC designations, representing approximately 5.2% of our investment portfolio.  This compares to $224.6 million, or 6.2% of our investment portfolio at December 31, 2009.  Of the 2010 amount, $111.7 million consisted of corporate bonds, $42.9 million of preferred stock, $32.4 million of public utility bonds, $6.4 million of commercial mortgage-backed obligations and $1.9 million of local governmental authority bonds.  Of these, approximately $144.8 million (74.1%) were rated at the highest below-grade investment level.  Approximately 99.9% of the Company’s holdings of below grade bonds were originally purchased at investment grade levels.  Included in the below-grade bond portfolios are non-performing assets totaling $1.9 million at current fair value, or 0.05% of total invested assets.

Government Bonds and Agency Securities

As of December 31, 2010, the Company held approximately $167.5 million in U.S. Treasury or other government agency bonds consisting primarily of U.S. Treasury and GNMA, FNMA, FHLMC and FHLB obligations.

States, Municipalities and Political Subdivisions

As of December 31, 2010, the Company held $288.7 million in municipal bonds of states, political subdivisions, and special revenue and tax assessment bonds. 100% of these bonds are considered investment grade. As a result of the Economic Recovery Act of 2009, the Federal Government provided a 35% subsidy of municipal interest to 2009 and 2010 municipal issuers that funded infrastructure projects, including elementary and secondary schools, college housing and related projects, highways and various road projects, water and wastewater improvements, and a variety of building projects. In return, the municipal issuers agreed to issue municipal bonds where the interest is subject to Federal income tax. Known as “Build-America Bonds”, this program created a new money investment opportunity for us in 2009 and 2010.  Most of the bonds purchased carry ratings higher than AA3 by Moody’s, AA- by Standard and Poor’s or AA- by Fitch Investor Services and provide yields on 12-20 year maturity bonds that exceed yields on 10-year BBB-rated corporate bonds. All of these bonds are rated NAIC “1”.  During 2010, we invested $183.3 million in Build-America bonds at an average yield of 5.20%. This represented approximately 42% of new money purchases in 2010.

Public Utility Bonds

As of December 31, 2010, the Company held $474.3 million in public utility bonds, representing 12.7% of the investment portfolio.  Of that amount, 93% or $441.9 million consisted of investment grade securities.  Approximately 82% of the holdings represented bonds issued by the operating companies of electric and gas utilities, with the balance consisting of an assortment of electric utility holding company bonds, capital trust securities and U.S. dollar holdings in foreign electric and water utilities.  The portfolio is diversified, with 121 individual holdings of primarily investment-grade companies.  Given their large and continuing need for additional capital, public utilities are sensitive to a general rise in overall interest rates.  However, regulatory agencies generally provide regulatory support in increasing interest rate environments because of the nature of utility service.  A number of these public utilities own and operate nuclear facilities and are exposed to the risks related thereto.  

Mortgage Backed Securities

As of December 31, 2010, approximately $158.5 million (4.2%) of the Company’s investment portfolio was invested in commercial mortgage-backed obligations (“CMBS”), purchased as mezzanine level debt, between 1995 and 2001.  This compares to $197.2 million, or 5.4% of the Company’s portfolio at December 31, 2009.  A significant portion of this CMBS portfolio is scheduled to mature over the next three years, although expected maturities could be extended based upon the slowdown of prepayments.  Of the CMBS portfolio, approximately 73% have an A rating or better and 23% are rated Baa. The remaining 4% are considered non-investment grade.  The Company has not made any direct investments in residential mortgage backed securities (“RMBS”) since

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2003.  The Company’s total RMBS exposure is approximately $2.0 million or 0.05% of invested assets.  These securities are all investment-grade rated.

Collateralized Debt Obligations

The Company has a small portfolio (approximately $0.9 million or 0.02% of invested assets at December 31, 2010) of collateralized debt obligations (“CDO”) that were purchased between 1997 and 1999.  These securities are collateralized with high yield bank loans and high yield bonds.  These positions have unrealized gains.  The CDO portfolio was responsible for generating approximately $0.4 million of income in 2010.  

Limited Partnerships

As of December 31, 2010, approximately $195.5 million (5.2%) of the Company’s investment portfolio consisted of interests in approximately 70 limited partnerships, which are engaged in a variety of investment strategies, including debt restructurings, real estate, international opportunities, merchant banking, oil and gas, infrastructure and multi-strategy hedge funds.  In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity, which except for hedge fund investments, may be mitigated by our ability to receive quarterly distributions of partnership earnings.

The carrying value of the Company’s investments in limited partnerships as of December 31, 2010, 2009 and 2008 was approximately $195.5 million, $212.7 million and $253.8 million respectively.  Net realized investment gains (losses), including OTTI losses derived from the Company’s interests in limited partnership investments under the fair value method, aggregated approximately $26.1 million $(7.9) million and $15.3 million in fiscal 2010, 2009 and 2008 respectively.  Equity in earnings (loss) derived from the limited partnerships under the equity method, totaled approximately ($5.5 million), ($66 thousand) and ($8.3 million) in fiscal 2010, 2009 and 2008 respectively.

Pursuant to the terms of certain limited partnership agreements to which we are a party, we are committed to contribute, if called upon, an aggregate of approximately $58.3 million of additional capital to such limited partnerships.  Commitments of $31.6 million are expected to expire in 2011, $25.5 million in 2012 and $1.2 million in 2013.

Dividends paid by the limited partnerships totaled approximately $7.2 million and $5.4 million in fiscal years 2010 and 2009, respectively.  

At December 31, 2010, the private equity fund investments included above are not redeemable (except for hedge funds) during the lives of the funds and have expected remaining lives that extend in some cases 10 years.  At that date, 32% of the total above had expected remaining lives of less than three years, 43% between 3 and 7 years and 25% between 7 and 10 years.  Expected lives are based upon legal maturity, which can be extended typically in one-year increments.

The Company is invested in three hedge fund limited partnerships with a carrying value of $43.5 million as of December 31, 2010.  Two of these partnerships each contain liquidity provisions that allow the Company to withdraw amounts equal to the total capital account balance, annually, with notice requirements of 30-90 days.  These withdrawals are subject to a holdback of 5-10%, with final distributions pending the completion of the partnership’s annual audit.  One of these partnerships contains private special investments, which equal approximately 22% of its carrying value, that may also be excluded from the withdrawal process and subject to liquidation at a later date.  One of the hedge funds had its assets located at the prime brokerage unit of Lehman Brothers International (Europe) (“LBIE”), located in the United Kingdom.  Since September 2008, when Lehman Brothers filed for bankruptcy, the assets were frozen and the claims to such assets are subject to the resolution of the bankruptcy proceedings.  Due to the complexities surrounding the LBIE proceedings, the Company cannot forecast with any certainty when it will be resolved. On December 31, 2010, the Company liquidated four hedge fund investments at market value except for approximately $430,000 of private special investments held by one of the liquidated funds.  

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Approximately 22% of the Company’s investment portfolio in limited partnerships is involved in distressed asset investments. These limited partnerships take positions in debt and equity securities, loans originated by banks and other liabilities of financially troubled companies.  Investments in companies undergoing debt restructurings, which by their nature have a high degree of financial uncertainty, may be senior, unsecured or subordinated indebtedness.  This makes such underlying investments particularly sensitive to interest rate increases, which could affect the ability of the borrower to generate sufficient cash flow to meet its fixed charges.

Approximately 13% of the Company’s limited partnership portfolio generally invests in real estate assets, real estate joint ventures and real estate operating companies.  These partnerships seek to achieve significant rates of return by targeting investments that provide a strategic or competitive advantage and are priced at levels that the general partner believes to be attractive.

The limited partnerships that are involved in merchant banking activities generally seek to achieve significant rates of return (including capital gains) through a wide variety of investment strategies, including leveraged acquisitions, bridge financing, and other private equity investments in existing businesses.

Despite earning positive returns on its limited partnership investments and their substantial contributions to the Company’s profits in the years prior to the very significant market and economic downturn from 2008 to 2010, the Company’s limited partnership investments have performed poorly since late 2008, contributing significant pressure on our net investment income and net income.  In addition, the ratings agencies that evaluate the Company’s claims paying ability generally have an unfavorable view of such investments, which the Company believes has had a negative effect on the Insurance Company’s A.M. Best ratings.  As such, although the limited partnership investments have historically contributed substantially to the Company’s profits, they have not enabled the Company to achieve the ratings upgrades that might be expected to accompany our profitable performance.  This factor is continually monitored by Company’s management in determining whether and to what extent the Company will continue to invest in limited partnerships at current, reduced or increased levels.  The Company has not made any new commitments to limited partnership investments since April 2008.  Such decisions will be subject to the approval of the Chief Investment Officer and the Investment Committee and the review and approval by the Board of Directors of the Insurance Company and the Company, as the case may be.  

There can be no assurance that we will again achieve the same level of positive returns on our investments in limited partnerships that we achieved in years prior to the downturn or that we will achieve any returns on such investments at all.  In addition, there can be no assurance that we will receive a return of all or any portion of our current or future capital investments in limited partnerships.  The failure to receive the return of a material portion of our capital investments in limited partnerships would have a material adverse effect on our financial condition and results of operations.

Other Investments

As of December 31, 2010, the Company’s investment portfolio included approximately $102.9 million (2.8%) invested in preferred stock, and approximately $1.3 million (0.03%) invested in common stock.  The Company’s only direct real estate investments are two buildings in Nyack, New York, which are used as our home office, and two acres of undeveloped land in Nyack, New York.

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Scheduled Maturities, NAIC Designations and Credit Ratings

The following table sets forth the scheduled maturities for the Company’s investments in bonds and notes as of December 31, 2010.

   ¹ This table is based upon stated maturity dates and does not reflect the effect of prepayments, which would shorten the average life of these securities.  All securities are classified as available for sale; accordingly total carrying value equals estimated fair value.

      ² Quoted market prices for most publicly traded securities are available.  Where quoted prices are unavailable, prices are obtained from securities dealers and valuation methodologies.

      ³ Excludes commercial paper of ninety days or less.

The NAIC assigns securities quality ratings and uniform prices called “NAIC Designation”, which are used by insurers when preparing their statutory annual statements.  The NAIC annually assigns designations at December 31 to publicly traded as well as privately placed securities.  These designations range from class 1 to class 6, with a designation in class 1 being of the highest quality.  Of the bonds and notes in the Company’s investment portfolio, approximately 95.4% were in one of the highest two NAIC Designations at December 31, 2010.

The following table sets forth the carrying value and estimated fair value of the securities in the table above according to NAIC Designations at December 31, 2010.

¹ Comparison between NAIC Designations and Moody’s rating is as published by the NAIC.  NAIC class 1 is considered equivalent to an A or higher rating by Moody’s; class 2, Baa; class 3, Ba; class 4, B; class 5, Caa and Ca; and class 6, C.  All securities are classified as available for sale; accordingly total carrying value equals estimated fair value.

² Quoted market prices for most publicly traded securities are available.  Where quoted prices are unavailable, prices are obtained from securities dealers and valuation methodologies.

³ Approximately 99.93% of the non-investment grade bonds represent bonds that experienced credit migration from investment grade status.      

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The following table sets forth the composition of the Company’s bond and notes portfolio by rating as of December 31, 2010.

¹ Ratings are those assigned primarily by Moody’s when available, with remaining ratings assigned by Standard & Poor’s and converted to a generally comparable Moody’s rating.  Bonds not rated by any such organization (e.g., private placement securities) are included based on the rating prescribed by the Securities Valuation Office of the NAIC.  NAIC class 1 is considered equivalent to an A or higher rating; class 2, Baa; class 3, Ba, and classes 4-6, B and below.  All securities are classified as available for sale; accordingly total carrying value equals estimated fair value

² Quoted market prices for most publicly traded securities are available.  Where quoted prices are unavailable, prices are obtained from securities dealers and valuation methodologies.

³ Approximately 5.4% consists of U.S government and agency bonds.  

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New York State Insurance Department Regulation 130

The Insurance Company is subject to Regulation 130 adopted and promulgated by the NYSID.  Under this Regulation, the Insurance Company’s ownership of below investment grade debt securities is limited to 20% of total admitted assets, as calculated under statutory accounting.  As of December 31, 2010, approximately 4.0% of the Insurance Company’s total admitted assets were invested in below investment grade debt securities.  Included in the below investment grade debt securities were 6 bond holdings in the Insurance Company’s investment portfolio that were in or near default, with an estimated fair value totaling $1.7 million (0.05%) at December 31, 2010.  For a detailed discussion concerning below investment grade debt securities, including the risks inherent in such investments, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”  Also see “Note 2 to the Notes to Consolidated Financial Statements” for certain other information concerning the Company’s investment portfolio.  

Insurance Regulation

General

Life insurance companies and their parent holding companies are subject to extensive regulation and supervision, primarily by the states in which they transact business.  Most states require insurance companies and their holding companies to register with the insurance regulatory authority of the state of domicile and to furnish to it financial and other information that may materially affect the operations, management or financial condition of the insurer.  State insurance laws establish regulatory agencies with broad administrative and supervisory powers.  Principal among these powers are granting and revoking licenses to transact business; regulating marketing and other trade practices; operating guaranty associations; licensing agents; approving policy forms; regulating premium rates; regulating insurance holding company systems; establishing reserve requirements; prescribing the form and content of required financial statements and reports; performing financial, market conduct and other examinations; determining the reasonableness and adequacy of statutory capital and surplus; defining acceptable accounting principles; regulating the type, valuation and amount of investments permitted; and limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval.

The Insurance Company is domiciled in and subject to regulation by the State of New York, as well as the other states in which it transacts business.  The laws and regulations of New York applicable to insurance holding companies require, among other things, that all transactions within a holding company system be fair and equitable.  In addition, many transactions require prior notification to or approval of the Superintendent of Insurance of the State of New York (the “Superintendent”).  In addition, insurance regulators periodically examine the Insurance Company’s financial condition, adherence to statutory accounting practices and compliance with the insurance department’s rules and regulations.  As part of their routine regulatory oversight process, the NYSID conducts detailed examinations of the books, records and accounts of the Insurance Company every three years.  The Insurance Company’s most recently completed examination covered the three-year period ending December 31, 2006 and the NYSID issued its final report on March 14, 2008.  The NYSID’s review did not reveal any issues that materially affected the Company’s financial condition or that deviated from the New York Insurance Law, NYSID regulations and circular letters or the operating rules of the Company.  The NYSID indicated that it would continue to review the pricing methodologies and assumptions of our products in light of New York’s Self-Support regulations, which state that life insurance companies domiciled or conducting business in the State of New York are prohibited from selling insurance products that are priced with an expected loss based on reasonable actuarial assumptions.  The NYSID is currently conducting an examination of the Insurance Company for the three-year period ending December 31, 2009 and a final report is expected in 2011.

Statutory Reporting Practices

The Insurance Company prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the NYSID.  The NYSID has adopted the provisions of the NAIC’s Statutory Accounting Practices (“SAP”) as the basis for its statutory reporting practices.  SAP is used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ in certain instances from GAAP.  The following are some of the major differences between SAP and GAAP:

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SAP, unlike GAAP, utilizes asset valuation reserves and interest maintenance reserves, which are intended to stabilize surplus from fluctuations in the value of the investment portfolio.

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Future policy benefits and policyholders' account balances under SAP differ from GAAP due to differences between actuarial assumptions and reserving methodologies.

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Certain policy acquisition costs, such as commissions, sales inducements and certain expenses related to policy issuance and underwriting are expensed as incurred under SAP, but are deferred under GAAP and amortized over the premium-paying period of the related policies or based on past and projected profits to achieve a matching of revenues and expenses.

§

Under GAAP, deferred Federal income taxes provide for temporary differences which are recognized in the consolidated financial

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statements in a different period than for Federal income tax purposes. Deferred taxes are also recognized under SAP; however, there are limitations as to the amount of deferred tax assets that may be reported as admitted assets. Under SAP, the change in the deferred taxes is recorded in surplus, rather than as a component of income tax expense.

§

Under SAP, the Company’s portfolio of debt securities are recorded at amortized cost, except for securities that are in or near default, that are reported at fair value. Under GAAP, debt securities are carried at amortized cost or fair value based on their classification as either held to maturity or available for sale.

§

Certain assets, such as furniture and equipment, agents’ debit balances, and prepaid expenses, are not admissible under SAP but are recognized under GAAP.

§

Under SAP, premiums from Universal Life and deferred annuities are recognized as premiums when received.  Under GAAP, the premiums received are recorded as an increase in liability for policyholder account balances and revenues are recognized primarily when the policy administration fee portion of premiums and surrender charges are received.

Regulation of Dividends and Other Payments from the Insurance Company

The Company is a legal entity separate and distinct from its subsidiaries.  As a holding company with no other business operations, its primary sources of cash needed to meet its obligations, including dividend payments on its common stock, are rent from its real estate, income from its investments and dividends from the Insurance Company.

The Insurance Company is subject to various regulatory restrictions on the maximum amount of payments, including loans or cash advances, that it may make to the Company without obtaining prior regulatory approval.  Under New York law, the Insurance Company is permitted, without prior regulatory clearance, to pay a dividend to the Company as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of (i) 10% of its statutory surplus as of the end of the immediately preceding calendar year, or (ii) its statutory net gain (after tax) from operations for the immediately preceding calendar year.  Any dividend in excess of such amount is subject to approval by the Superintendent.  The Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders.  The NYSID has established informal guidelines for such determinations.  The guidelines focus on, among other things, an insurer’s overall financial condition and profitability under statutory accounting practices, which, as discussed above, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP.

In 2010, the Insurance Company paid $23 million in dividends to the Company.  In 2011, the Insurance Company will be permitted to pay a stockholder dividend of up to $26.9 million to the Company without prior regulatory clearance.  However, there can be no assurance that this level of dividend payments will continue to be permitted in future periods.  Accordingly, the Company cannot provide assurance that the Insurance Company will have adequate statutory earnings to support payment of dividends to the Company in an amount sufficient to fund the Company’s cash requirements, including the payment of dividends to our shareholders, or that the Superintendent will not disapprove any dividends that the Insurance Company must submit for the Superintendent’s consideration.

Investment Reserves

Asset Valuation Reserve.  Statutory accounting practices require a life insurance company to maintain an Asset Valuation Reserve (“AVR”) to absorb realized and unrealized capital gains and losses on a portion of an insurer’s fixed income securities and equity securities.  The AVR is required to stabilize statutory surplus from fluctuations in the market value of bonds, stocks, mortgages, real estate and other long-term investments.  The maximum AVR is calculated based on the application of various factors that are applied to the assets in the insurer’s portfolio.  The AVR captures credit-related realized and unrealized capital gains and losses on such assets.  Each year the amount of an insurer’s AVR will fluctuate as the investment portfolio changes and capital gains and losses are absorbed by the AVR.  To adjust for such changes over time, contributions must be made to the AVR in an aggregate amount equal to 20% of the difference between the maximum AVR as calculated and the actual AVR.  These contributions may slow the rate of growth in or reduce the Insurance Company’s surplus.  The impact of the AVR on the Insurance Company’s surplus depends in part on the future composition of the Insurance Company’s investment portfolio.  

Interest Maintenance Reserve.  The Interest Maintenance Reserve (“IMR”) captures capital gains and losses (net of taxes) on fixed income investments (primarily bonds and mortgage loans) resulting from interest rate changes, which are amortized into net income over the estimated remaining periods to maturity of the investments sold.  The extent of the impact of the IMR depends on the amount of future capital gains and losses on fixed maturity investments resulting from interest rate changes.

NAIC-IRIS Ratios

The NAIC’s Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators and primarily is intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states.  IRIS identifies 12 industry ratios and specifies “normal ranges” for each

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ratio.  The IRIS ratios were designed to advise state insurance regulators of significant changes in an insurance company’s product mix, large reinsurance transactions, increases or decreases in premiums received and certain other changes in operations.  These changes need not result from any problems with an insurance company, but merely indicate changes in certain ratios outside ranges defined as normal by the NAIC.  When an insurance company has four or more ratios falling outside “normal ranges,” state regulators may, but are not obligated to, inquire of the company regarding the nature of the company’s business to determine the reasons for the ratios being outside the “normal range.”  No regulatory significance results from being out of the normal range on fewer than four of the ratios.  For the year ended December 31, 2010, the Insurance Company had one ratio that fell outside the normal range.  The “Change in Premium” ratio fell outside of the normal range due to the significant decrease in our annuity premiums.  Annuity sales decreased by over $100 million as a direct result of the low interest rate environment.

Risk-Based Capital

Under the NAIC's risk-based capital (“RBC”) formula, insurance companies must calculate and report information under a risk-based capital formula.  The standards require the computation of a risk-based capital amount which is compared to a company’s actual total adjusted capital.  The computation involves applying factors to various financial data to address four primary risks: asset default, adverse insurance experience, disintermediation and external events.  This information is intended to permit insurance regulators to identify and require remedial action for inadequately capitalized insurance companies, but is not designed to rank adequately capitalized companies.  The NAIC formula provides for four levels of potential involvement by state regulators for inadequately capitalized insurance companies, ranging from a requirement for an insurance company to submit a plan to improve its capital (Company Action Level) to regulatory control of the insurance company (Mandatory Control Level).  At December 31, 2010, the Insurance Company’s Company Action Level was $69.4 million and the Mandatory Control Level was $24.3 million.  The Insurance Company’s adjusted capital at December 31, 2010 and 2009 was $312.1 million and $280.5 million, respectively, which exceeds all four action levels.  The Company’s RBC ratio as of December 31, 2010 and 2009 was 449% and 388%, respectively.

Assessments against Insurers

Most jurisdictions require insurance companies transacting business in that jurisdiction to participate in guaranty funds that compensate policyholders of insolvent insurance companies.  Insurers authorized to transact business in these jurisdictions generally are subject to assessments based on annual direct premiums written in that jurisdiction.  These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s insolvency and, in certain instances, may be offset against future state premium taxes.  

The amount of these assessments against the Insurance Company in 2010 and prior years have not been material.  However, the amount and timing of any future assessment against the Insurance Company under these laws cannot be reasonably estimated and are beyond the control of the Company and the Insurance Company.  As such, no reasonable estimate of such assessments can be made.

Federal Regulation

Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways.  Current and any future federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements, and the removal of barriers restricting banks from engaging in the insurance and mutual fund business.  In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), among other things, established the Federal Insurance Office (“FIO”) within the U.S. Treasury.  Under this law, regulations will need to be created for the FIO to fulfill its mandate to focus on systemic risk oversight.  The FIO is required to gather information regarding the insurance industry and report to Congress a plan to modernize and improve insurance regulation in the U.S.  At this time, it is difficult to predict the extent the Dodd-Frank Act, or any resulting regulations, will impact the Company’s operations.

Environmental Considerations

As an owner and operator of real property, the Company is subject to extensive federal, state and local environmental laws and regulations.  Inherent in such ownership and operation is also the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties.  We cannot provide assurance that unexpected environmental liabilities will not arise.  However, based on information currently available to management, we believe that any costs associated with environmental regulations will not have a material adverse effect on our business or financial condition.

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Enterprise Risk Management

§

Under the current economic environment, the Company’s Enterprise Risk Management ("ERM") program has become more critical in supporting executive decision-making regarding capital management, investment decisions and other key decisions, contributing to the preservation and enhancement of shareholder value.   In 2007, the Company adopted an ERM policy as a methodology and process for the Company to actively manage risks. Management adopted the use of robust capital modeling to help optimize executives’ key decisions. Management has developed a structured ERM framework in order to identify, monitor and mitigate major risks.  Status on key risk management initiatives, as well as risk dashboard reports, is provided to the Board of Directors quarterly.  The framework also allows the Company to clarify corporate governance structure, ensure clear accountability and identify any potential gaps that may emerge in current risk management practices.

Ratings

Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance. In June 2011, the A.M. Best Company upgraded the financial strength rating to “B++” (Good) from “B+” (Good) and upgraded issuer credit rating (“ICR”) to “bbb” (Good) from “bbb-“for the Insurance Company and upgraded the ICR to “bb”  from “bb-“ for Presidential Life Corporation.  The ratings have been assigned a stable outlook.  These ratings were derived from an in-depth evaluation of our balance sheets, operating performance and business profile.  A.M. Best evaluates, among other factors, the Company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. A.M. Best ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors.

Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace.  There can be no assurance that the Company’s or the Insurance Company’s ratings will continue for any given period of time or that they will not be changed.  In the event the ratings are downgraded, the level of revenues or the prospects of the Insurance Company’s business may be adversely impacted.

Affiliates

The Company’s principal subsidiary is the Insurance Company. The Company has three additional subsidiaries, Presidential Securities Corporation, P.L. Assigned Services Corporation and Presidential Asset Management Company, Inc.  In aggregate, these three additional subsidiaries are not material to the Company’s consolidated financial condition or results of operations.

Available Information

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at www.presidentiallife.com when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

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ITEM 1A.

RISK FACTORS

The following are certain risk factors that could affect the Company’s business, financial condition, results of operations and the trading price of our common stock.  These risk factors should also be considered in connection with evaluating the forward-looking statements contained in this Form 10-K/A.

Our business has been, and may continue to be, negatively impacted by recent adverse economic and market conditions.

Our business has been adversely affected by the economic and capital markets downturns over the past two years. These downturns have been characterized by higher unemployment, lower family income, lower consumer spending and generally poor investment returns.  Until the U.S. economy improves, our business will continue to be negatively impacted.  In this type of economic environment, among other things, consumers may refrain from purchasing our annuity products; we may experience a higher incidence of claims and lapses or surrender of policies; and our policyholders may choose to defer or stop paying insurance premiums.  Each of these occurrences, and the occurrence of other negative effects which we may not anticipate resulting from the economic downturn or from slow economic growth, would have a material adverse effect on our financial condition and results of operations.

Because our financial condition and operating results are significantly affected by the performance of our investment portfolio, we may be adversely affected by changes in bond yields and interest rates.

Our financial condition and operating results are heavily affected by the performance of our investment portfolio. Most of our portfolio is invested in fixed income securities which are valued on our balance sheet at market value. The market value of fixed income securities generally moves in the opposite direction of the market yields of bonds (bond prices decline when their yields rise). Bond yields may rise or fall in response to market expectations of future interest rates and as a result of changes in the market valuation of the credit worthiness of the relevant issuers. Bond yields were volatile during 2010, which impacted our financial results. Changes in bond yields also affect the rate at which funds are reinvested and this may have an adverse effect on investment income and consequently on our results of operations.

Significant increases or decreases in market interest rates can materially and adversely affect the profitability of our products, our ability to earn predictable returns, the fair value of our investments and the reported value of shareholders’ equity.  A rise in interest rates generally will result in a decrease in the value of our investment portfolio and an increase in its unrealized loss position.  The value of long duration bonds in our investment portfolio is also sensitive to interest rate changes.

Bond yields and interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. Our interest rate strategy includes maintaining a diversified investment portfolio emphasizing higher-rated securities. Despite our mitigation efforts, a significant increase in interest rates could have a material adverse effect on the returns of our investment portfolio and our results of operations.

Deterioration in the public debt and equity markets would likely lead to losses in our investment portfolio, which would negatively impact our financial results.

Although our investment policies stress diversification of risks, conservation of principal and liquidity through conservative investment guidelines, our investments are subject to general economic conditions, market risks and fluctuations, as well as to risks inherent in particular securities. Prolonged and severe disruptions in the public debt and equity markets, including, among other things, widening of credit spreads, bankruptcies, defaults, and significant ratings downgrades, may put our investments at risk. Market volatility can make it difficult to value certain of our securities if trading becomes less frequent. Depending on market conditions, we could incur substantial additional realized and unrealized investment losses in future periods. Separately, the occurrence of large claims may force us to liquidate securities at an inopportune time, which may cause us to realize capital losses. Large investment losses could decrease our asset base, thereby affecting our ability to underwrite new business. Additionally, such losses would have a material adverse impact on our equity, business and financial strength.

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Our investment portfolio includes below investment-grade or unrated securities that have a higher degree of credit or default risk.  Default losses could adversely affect our results of operations and financial condition.

Our investment portfolio is primarily invested in high-quality, investment-grade securities. However, a small portion of the portfolio is invested in below investment-grade or unrated securities. At December 31, 2010, below investment-grade or unrated securities comprised approximately 5.2% of our investment portfolio.  These securities have a higher degree of credit or default risk and are much less liquid than the rest of our portfolio. These securities may also be less liquid in times of economic weakness or market disruptions. While we have in place investment guidelines to monitor the credit risk and liquidity of our invested assets, it is possible that, in periods of prolonged economic weakness, we may experience default losses in our portfolio. This may result in a reduction of net income and capital, adversely affecting our financial condition and results of operations.

Our investments in limited partnerships have a significant impact on our results of operations.

As of December 31, 2010, approximately $195.5 million (5.2%) of the Company’s investment portfolio consisted of interests in over 70 limited partnerships managed by various general partners, which are engaged in a variety of investment strategies, including real estate, infrastructure, debt restructurings, oil and gas and merchant banking.  Historically, the returns on these limited partnership investments, although representing a small percentage of our investment assets, have had a disproportionately large impact on our results of operations.  Given the significant impact of our limited partnership investments on our total revenues, the performance of our limited partnership investments has a significant impact on our results of operations.  In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity.

There can be no assurance that we will achieve the same level of returns on our investments in limited partnerships that we achieved in the years prior to the downturn or that we will achieve any returns on such investments at all.  In addition, there can be no assurance that we will receive a return of all or any portion of our current or future capital investments in limited partnerships.  The failure to receive the return of a material portion of our investments in limited partnerships could have a material adverse effect on our financial condition and results of operations.

We face competition from companies that have greater financial resources, a broader array of products, higher ratings and stronger financial performance than us, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.

We operate in a highly competitive environment.  There are numerous insurance companies, banks, securities brokerage firms and other financial intermediaries marketing insurance products, annuities, and other investments that compete with us.  Management believes that our ability to compete is dependent upon, among other things, our ability to retain and attract independent General Agents to market our products and our ability to successfully develop competitive, profitable products, which includes paying competitive interest rates on our products.  If our competitors are more successful than we are at offering compelling products and paying competitive rates, our results of operations could be negatively impacted.

Because we are a holding company with no direct operations, the inability of our principal subsidiary, the Insurance Company, to pay dividends to us in sufficient amounts would harm our ability to meet our obligations.

We are a holding company and we have no direct operations. Our principal asset is the capital stock of the Insurance Company. Our ability to fund overall operations, pay dividends to shareholders and pay corporate expenses depends primarily on the ability of the Insurance Company to pay dividends or to advance or repay funds to us. Under New York laws and regulations, the Insurance Company may pay dividends to us without prior approval of NYSID up to a certain threshold, or must receive prior approval of NYSID to pay a dividend if such dividends, along with all other dividends paid within the preceding 12 consecutive months exceed the statutory limitation. The current statutory limitation is the lesser of 10% of the statutory surplus, as shown on its last annual statement on file with the Commissioner or the insurer’s statutory net gain from operations for the prior calendar year.

In addition, the ability of the Insurance Company to pay dividends and advances or repayment of funds to us is restricted by laws requiring insurance companies to hold a specified amount of minimum reserves in order to meet future obligations on their outstanding policies. These regulations specify that the minimum reserves shall be calculated to be sufficient to meet future obligations, after giving consideration to future required premiums to be received, and are based on certain specified mortality and morbidity tables, interest rates and methods of valuation, which are subject to change. In order to meet its claims-paying obligations, the Insurance Company regularly monitors its reserves to ensure that it holds sufficient amounts to cover actual or expected contract and claims payments. At times, we may determine that reserves in excess of the minimum may be needed to ensure sufficiency.

Changes in these laws can constrain the ability of the Insurance Company to pay dividends or to advance or repay funds to us

23

in sufficient amounts and at times necessary to meet our corporate expenses.

Regulatory, accounting or tax changes may affect the cost of, or demand for, our products or services.

Our insurance business is subject to comprehensive regulation and supervision throughout the United States by both state and federal regulators.  The primary purpose of state regulation of the insurance business is to protect contract owners, and not necessarily to protect other constituencies such as creditors or shareholders. State insurance regulators, state attorneys general, the National Association of Insurance Commissioners, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) continually reexamine existing laws and regulations and may impose changes in the future. Changes in federal legislation and administrative policies in areas such as employee benefit plan regulation, financial services regulation, and federal taxation could lessen the advantages of certain of our products as compared to competing products, or possibly result in the surrender of some existing contracts and policies or reduced sales of new products and, therefore, could reduce our profitability.

The adoption of new laws or regulations, enforcement actions or litigation, whether or not involving the Company, could influence the manner in which we distribute our insurance products, which could have an adverse effect on us.

Different interpretations of accounting principles could have a material adverse effect on our results of operations or financial condition.  Generally accepted accounting principles are complex, continually evolving and may be subject to varied interpretation by us, our independent registered public accounting firm and the SEC. Such varied interpretations could result from differing views related to specific facts and circumstances. Differences in interpretation of generally accepted accounting principles could have a material adverse effect on our results of operations or financial condition.

Downgrades in our claims paying ability, financial strength or credit ratings may increase our future cost of capital and reduce new sales and increase policy surrenders and withdrawals.

Financial strength ratings are important factors in establishing the competitive position of insurance companies. A downgrade, or the potential for such a downgrade, of any of the ratings for the Company could have a number of adverse effects on our business, including:

§

materially increase the number of annuity contract surrenders and withdrawals;

§

result in the termination of relationships with broker-dealers, banks, agents, wholesalers, and other distributors of the Company's products and services; and

§

reduce new sales of annuity contracts or increase the minimum interest rate the Company may be required to pay under new annuity contracts.

Any of these consequences could adversely affect the Company's profitability and financial condition.

If our estimated gross profits change significantly from initial expectations we may be required to expense our deferred policy acquisition costs in an accelerated manner, which would reduce our profitability.

Deferred policy acquisition costs represent costs that vary with and primarily relate to the acquisition of new business. These costs are capitalized when incurred and are amortized over the life of the contracts. Current amortization of these costs is generally in proportion to expected gross profits from interest margins and, to a lesser extent, from surrender charges. Unfavorable experience with regard to expected expenses, investment returns, mortality or withdrawals may cause acceleration of the amortization of these costs resulting in an increase of expenses and lower profitability.

Changes in rating agency policies or practices could result in ratings changes unrelated to the Company’s business.

Rating organizations assign ratings based upon numerous factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions, and circumstances outside the rated company's control. In addition, rating organizations may employ different models and formulas to assess financial strength of a rated company, and from time to time rating organizations have, in their discretion, altered the models. Changes to the models, general economic conditions, or circumstances outside the Company's control could impact a rating organization's judgment and the subsequent rating it assigns the Company. The Company cannot predict what actions rating organizations may take, or what actions it may be required to take in response to the actions of rating organizations, which could adversely affect the Company.

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We rely on General Agents and agents who are independent from the Company for the distribution of our products.

The independent General Agent system is our primary product distribution system.  Independent General Agents and agents are not captive to the Company.  Management believes that interest crediting rates, General Agent product commission levels, annuity and life product features, Company support services and perceived Company financial stability help determine our competitive nature at any given point in time and influence General Agents and their agents to distribute our products.  The Insurance Company’s top ten General Agents, as measured by combined 2010 annuity and life premiums, accounted for approximately 27% of our sales in 2010.  No single General Agent or agent accounted for more than 4.4% of total sales.  The simultaneous loss of several distribution sources would diminish our product distribution and reduce sales and could have an adverse material impact on our business unless these sources are timely replaced.

A failure in our operational systems or infrastructure could impair our liquidity, disrupt our businesses, damage our reputation and cause losses.

Shortcomings or failures in our internal processes, people or systems could lead to impairment of our liquidity, financial loss, disruption of our businesses, liability to clients, regulatory intervention or reputational damage. For example, our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions. The transactions we process have become increasingly complex and often must adhere to client-specific guidelines, as well as legal and regulatory standards. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, adversely affecting our ability to process these transactions. Despite the contingency plans and facilities we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses.

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, it could potentially jeopardize our or our clients’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in significant losses or reputational damage. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

Our businesses may be adversely affected if we are unable to hire and retain qualified employees.

Our performance is largely dependent on the talents and efforts of highly skilled individuals. Competition in the financial services industry for qualified employees is intense.  Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees; an inability to do so may impact our ability to take advantage of business opportunities or remediate inefficiencies.

Discrepancies between actual claims experience and assumptions used in setting prices for our products would have an adverse effect on our results of operations.

We establish liabilities for amounts payable under life insurance policies, accident and health insurance policies and annuity contracts.  Generally, these amounts are payable over a long period of time and the profitability of the products is dependent on the pricing. Principal assumptions used in pricing policies and in the establishment of liabilities for future policy benefits are investment returns, mortality, expenses and persistency. The reserves reflected in the Company's consolidated financial statements are based upon the Company's best estimates of mortality, persistency, expenses and investment income, with appropriate provisions for adverse statistical deviation and the use of the net level premium method for all non-interest-sensitive products.  While we historically have not experienced significant adverse deviations from our assumptions, there can be no guarantee that future estimates and assumptions will not significantly deviate from actual results.

Our business may be adversely affected if the decline in annuity contracts in-force were to continue for an extended period of time:

The declining trend in annuity in force primarily reflects unusually large volumes of business written in 2000 thru 2002.  These contracts started to come off surrender charge at the end of 2005, through the end of 2008, at a relatively large expected surrender rate.  In 2010, annuity surrenders, death claims and policy lapses outpaced new sales causing a slight decline in total annuity

25

in force.  The Company believes that surrenders and death claim activity combined with the challenging low interest rate environment for annuity sales may cause total annuities in force to fall.

We have made errors in the preparation of certain of our historical financial statements and our internal control over financial reporting has not been effective.

Because of the material weaknesses in our internal control over financial reporting (see item 9A on page 57), we could be subject to sanctions or investigations by the exchange on which we list our shares, the SEC or other regulatory authorities, including the NYSID.  In addition, as a result of restatements of our previously issued financial statements, we have from time to time been unable to timely file reports we are required to file under the Exchange Act, including our Forms 10-K and 10-Q.  Because of these events, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock.  If we are unable to remediate any material deficiencies in our internal control effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent registered public accounting firm.  In addition, we may identify additional material weaknesses in the future.  Any additional failures of internal controls could have a material adverse effect on our results of operations and harm our reputation.

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ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

The Company owns, and the Insurance Company leases and is the sole occupant of, two adjacent office buildings located at 69 Lydecker Street and 10 North Broadway in Nyack, New York.  These buildings contain an aggregate of approximately 45,000 square feet of usable office space.

The Insurance Company also owns two acres of unimproved land in Nyack, New York.

Management believes that the Company’s present facilities are adequate for its anticipated needs.

ITEM 3.

LEGAL PROCEEDINGS

On December 30, 2009, an alleged stockholder plaintiff, Alan R. Kahn (the "Plaintiff"), filed a derivative action in the Chancery Court of Delaware, for the purported benefit of the Company, against Mr. Herbert Kurz  ( the then Chairman of the Board of the Company)and the Company's other directors, and the Company itself (as a nominal defendant).  The defendants moved to dismiss the claim for failure to state a claim.  On October 1, 2010, without opposing Defendants’ motion, Plaintiff moved to discontinue the action with prejudice as to Plaintiff only. On October 4, 2010, the Court granted Plaintiff’s application and the case was discontinued.

ITEM 4.

REMOVED AND RESERVED

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Part II

ITEM 5.  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “PLFE”.  The following table sets forth, for the indicated periods, the high and low sales prices per share for the common stock on the NASDAQ Global Select Market, and the per share cash dividends declared on the common stock.

The Company has paid regular cash dividends since 1980.  The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and the financial condition of the Company.  Any determination to pay dividends is at the discretion of the Board of Directors and is subject to regulatory and contractual restrictions as described in “Part I – Business – Insurance Regulation” and Part II – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”  On July 6, 2011, there were approximately 486 holders of record of the Company’s common stock (which does not include persons whose stock is held in nominee or “street name” accounts through brokers, banks and other intermediaries).

The Company did not repurchase any shares of its common stock pursuant to publicly announced plans or programs during 2010.

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Stock Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.  

The following graph compares the cumulative total return of our common stock with:  (i) the S&P 600 SmallCap Index; and (ii) the S&P Life and Health Insurance Index and assumes an investment of $100 on December 31, 2005 in each of our common stock, the stocks comprising the S&P 600 SmallCap Index and the stocks comprising the S&P Life and Health Insurance Index, assuming the reinvestment of dividends.

29

ITEM 6.  SELECTED FINANCIAL DATA

The selected consolidated financial data for the Company set forth below for each of the five years in the period ended December 31, 2010 are not necessarily an indication of future operations.  This data should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto and Item 7, Management’s Discussion and Analysis of Operations and Financial Condition.  

¹This table includes restated financial results for the Company for the years ended 2010, 2009 and 2008.   See Note 15 in Notes to Consolidated Financial Statements for the effects of the restatement on the Company’s Balance Sheet as of December 31, 2010, 2009 and 2008.  Fiscal Years 2007 and 2006 have also been corrected to conform to the restated accounting treatment of our limited partnership investments and to reflect restated OTTI.

²Net investment income divided by average cash and total invested assets, based on book value (including accrued investment income).

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under Item 8 of this Form 10-K.

Explanatory Note Regarding Restatement

This Form 10-K/A reflects the Original Restatement and the OTTI Restatement of the Company’s Consolidated Financial Statements (as such terms are defined below).

As previously disclosed in a Current Report on Form 8-K filed with the SEC on March 10, 2011, the Board of Directors of the Company determined on March 7, 2011 that the Company’s financial statements for the years ended December 31, 2009 and 2008 (the “Annual Financial Statements”) and for the quarterly periods ended March 31, 2010, June 30, 2010 and September 30, 2010 (the “Quarterly Financial Statements” and, together with the Annual Financial Statements, collectively, the “Previously Issued Financial Statements”) should no longer be relied upon because they contained an error as addressed in FASB ASC Topic 250.  The error in the Previously Issued Financial Statements related to the application of the equity method of accounting for the Company’s limited partnership investments.  The Company sought to correct the error with respect to the Annual Financial Statements by restating (the “Original Restatement”) such financial statements included in its original Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 29, 2011.   The Original Restatement incorporates a change in the way we accounted for certain of our investments.  Approximately 5% of our overall investment portfolio is invested in private limited partnerships, with respect to which we had historically applied the equity method of accounting.  After extensive discussions with the staff of the SEC, we determined that we should not have applied the equity method to many of the partnerships because we did not exert any influence over them.  As a result, we now apply the fair value method of accounting for investments in limited partnerships in which we have less than a 5% interest and do not have more than virtually no influence over the operating and financial policies of the partnership, and apply the equity method of accounting where we have either a 5% or greater interest or less than a 5% interest, but with respect to which partnership we have more than virtually no influence over the operating and financial policies of the partnership.  The Original Restatement primarily impacts the net investment income, change in deferred policy acquisition costs and provision (benefit) for income taxes amounts in the statement of income and the limited partnerships investments, deferred policy acquisition costs, deferred income tax asset and shareholders' equity amounts in the balance sheet.  

As previously disclosed in a Current Report on Form 8-K filed with the SEC on May 10, 2011, the Board of Directors of the Company determined that the Company’s financial statements for the years ended December 31, 2009 and 2008, as previously restated in the Original 2010 Form 10-K, the financial statements for the year ended December 31, 2010 included in the Original 2010 Form 10-K and the financial statements for each of the first three quarters of the year ended December 31, 2010 (such financial statements, the “Subject Financial Statements”), should no longer be relied upon because they contain an error as addressed in FASB Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections.  In the process of preparing the Subject Financial Statements, the Company made an error in failing to analyze other-than-temporary-impairment (“OTTI”) related to its limited partnership investments. Management has determined that this error resulted in an understatement of net loss for the year ended December 31, 2008 and an overstatement of net income for the year ended December 31, 2009 in the Subject Financial Statements.  The error resulted in an understatement of accumulated other comprehensive income and an overstatement of retained earnings as of December 31, 2010, 2009 and 2008.  There was no change in total stockholder’s equity as a result of the error.  Because the components of stockholder’s equity are being restated, accumulated other comprehensive income and retained earnings will change in each of the first three quarters of 2010 from that previously reported.  This error is being corrected herein by restating (the “OTTI Restatement”) the Company’s financial statements for the years ended December 31, 2008, 2009 and 2010.

The Company intends to correct the error in the Quarterly Financial Statements as a result of the Original Restatement and the OTTI Restatement through the filing of amendments to its Quarterly Reports on Form 10-Q for the periods ended March 31, 2010, June 30, 2010 and September 30, 2010.

31

The effects of the Original Restatement and the OTTI restatement on the Company's consolidated financial statements is summarized as follows:

32

33

General

We are engaged in the sale of insurance products including individual annuities, individual life insurance and accident and health insurance.  Our revenues are derived primarily from premiums received from the sale of annuity contracts and life,  accident and health products, and from gains (net of losses) from our investment portfolio.  

Under GAAP, our revenues from the sale of whole life insurance products and annuity contracts with life contingencies are treated differently from our revenues from the sale of annuity contracts without life contingencies, deferred annuities and universal life insurance products.  Premiums from the sale of whole life insurance products and life contingent annuities are reported as premium income on our income statement.  Premiums from the sale of deferred annuities, universal life insurance products and annuities without life contingencies are not reported as revenues, but rather are reported as additions to policyholders’ account balances on our balance sheet.  For these products, revenues are recognized over time in the form of policy fee income, surrender charges and mortality and other charges deducted from policyholders’ account balances.

The profitability of our individual annuities, individual life insurance and group accident and health products depends largely on the size of our in-force book of business, the adequacy of product pricing and underwriting discipline, and the efficiency of our claim and expense management.

As described under “Ratings” and “Regulation,” the Company’s business is substantially affected by capital ratios and their impact on the Company’s ratings.  Insurance sales are being made with a greater selectivity based on increased profit level requirements for new business. We have determined that the level of competition in the sale of traditional and universal life insurance products has made it very difficult for smaller insurance companies to participate in that business in a profitable way.  Accordingly, under the current market conditions, we are not engaged in the sale of traditional and universal life policies.

Unless specifically stated otherwise, all references to 2010, 2009 and 2008 refer to our fiscal years ended, or the dates, as the context requires, December 31, 2010, December 31, 2009 and December 31, 2008, respectively.

Executive Overview

Results

The Company’s earnings (loss) per share were $0.73 for 2010, as compared to $0.17 in 2009 and $(.21) in 2008.  Results in 2010 primarily reflect an increase in realized investment gains when compared to 2009 and 2008.  Our total revenues in 2010 were $297.0 million, compared to $247.8 million in 2009 and $225.8 million in 2008.  Net income (loss) in 2010 was $21.5 million as compared to $4.9 million in 2009 and $(6.3) million in 2008.  Benefits and expenses in 2010 were $262.2 million, compared to $246.8 million in 2009 and $247.3 million in 2008.  The Company’s increases in earnings and revenues in 2010 resulted primarily from increases in realized investment gains.  Net realized investment gains (losses), including OTTI losses from limited partnerships using the fair value method of accounting, totaling $26.2 million, $(7.9 million) and $15.3 million in 2010, 2009 and 2008, respectively, is classified as net realized investment gains (losses).

34

Certain Factors That May Affect Our Business

There are numerous factors, some of which are outside our control, which could have a material impact on our business.  We have described these factors in detail under the heading “Risk Factors.”  Certain of these factors, which include market conditions, legal and regulatory changes, operational risk and interest rate risk, have a particular impact on our business:

1.

 Market Conditions.  Like all companies, we are affected by the general state of financial markets and economic conditions in the U.S. and elsewhere.  The pressures related to the recent recession and slow recovery, coupled with the significant dislocation in the capital markets during late 2008 and 2009 have resulted in a historically difficult business environment and the ability to obtain desired returns on the investment portfolio, without exposing the Company to excess risk, has never been more challenging.  

2.

Legal and Regulatory Risk.  As an insurance company, we are subject to substantial regulatory control.  Any material change in the framework in which we operate could have a material impact on the business.  For further discussion on the regulatory environment in which we operate, see “Item 1. Business – Insurance Regulation.”

3.

Operational Risk.  Our business is dependent on our ability to process, on a daily basis, our payment obligations under outstanding policies and the condition of the investment portfolio.  Any failures in our internal processes, people or systems could lead to material, adverse consequences to the Company.  In addition, despite the contingency plans in place, the ability to conduct business may be adversely impacted by a significant disruption in the infrastructure that supports our business and the community in which we are located.

4.

Interest Rate Risk.   Our principal product is deferred annuities, which are interest rate sensitive instruments.  In an interest rate environment of falling or stable rates, annuity holders are less likely to seek to surrender their annuities prior to maturity due to the absence of alternative, higher-yielding investments.  However, in an environment of moderately or significantly increasing rates, such surrenders should be expected to increase.  As of December 31, 2010, the existence of surrender fees on approximately 42.5% of the Insurance Company’s outstanding deferred annuities acts as a deterrent against surrenders.   However, if interest rates climb sufficiently, such fees may not have a significant deterrent effect.  Moreover, the surrender fees are only in effect primarily for up to the first seven years of each annuity policy.  In the event of a substantial increase in surrenders during a short period of time, we may have to sell longer-term assets to pay current surrender liabilities.  We continually develop strategies to address the match between the timing of our assets and liabilities.  To that end, in 2006, 2007 and 2008, a significant number of policies came off surrender charge and a significant portion of these policies were surrendered.  The Company anticipated this event and maintained a significant level of cash equivalents to fund surrenders, avoiding the need to sell long-term assets at a loss. The Company believes that the heavy surrender activity associated with the 2006-2008 period is now largely behind us. Additionally, management has increased the incentive for agents to retain this business with the Company by paying full first year compensation on internal rollovers.  Since 2008, a significantly smaller amount of business has been coming off surrender charge.  The table below shows the in-force deferred annuities that are within the surrender charge period and the projected timing regarding the expiration of these surrender charges.  

35

Pricing

Management believes that we are able to offer our products at competitive prices to the Company’s targeted markets as a result of: (i) maintaining relatively low issuance costs by selling through the independent general agency system; (ii) minimizing home office administrative costs; and (iii) utilizing appropriate underwriting guidelines.

The long-term profitability of sales of life and most annuity products depends on the degree of margin of the actuarial assumptions that underlie the pricing of such products.  Actuarial calculations for such products, and the ultimate profitability of sales of such products, are based on four major factors: (i) persistency; (ii) rate of return on cash invested during the life of the policy or contract; (iii) expenses of acquiring and administering the policy or contract; and (iv) mortality.

Persistency is the rate at which insurance policies remain in force, expressed as a percentage of the number of policies remaining in force over the previous year. Policyholders can either surrender policies or cause their policies to lapse by failing to pay premiums.

The assumed rate of return on invested cash and desired spreads during the period that insurance policies or annuity contracts are in force also affects pricing of products and currently includes an assumption of a specified rate of return and/or spread on our investments for each year that such insurance or annuity product is in force.

Investment Results

The following table summarizes our investment results for the periods indicated, as determined in accordance with GAAP.

¹

Average of cash and aggregate invested amounts at the beginning and end of period.

²

Net investment income is gross investment income net of investment expenses and excludes capital gains and losses and provision for income taxes.

³

Net investment income (loss) divided by average cash and total invested assets, based on book value (including accrued investment income).

⁴

Net realized investment gains (losses) include provisions for impairment in value that are considered other than temporary and exclude provisions for income taxes.

Investments

The Company derives a predominant portion of its total revenues from investment income. The Company manages most of its investments internally.  All investments made on behalf of the Company are governed by the Statement of Investment Policy established and approved by the Finance and Investment Committee and the Board of Directors of the Insurance Company and the Company and by qualitative and quantitative limits prescribed by applicable insurance laws and regulations.  The Finance and Investment Committee meets regularly to set and review investment policy and to approve current investment plans.  The actions of the Finance and Investment Committees are subject to review and approval by the Board of Directors of the Insurance Company and the Company.  The Company's Statement of Investment Policy must comply with NYSID regulations and the regulations of other applicable regulatory bodies.

The Company's investment philosophy generally focuses on purchasing investment grade securities with the intention of holding such securities to maturity.  However, as market opportunities, liquidity or regulatory considerations may dictate, securities may be sold prior to maturity.  The Company has categorized all fixed maturity securities as available for sale and carries such investments at market value.

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The Company’s principal goal in managing its investment portfolio is to meet the diversification, yield and liquidity requirements of its insurance policy and annuity contract obligations. The Company's liquidity requirements are monitored regularly so that cash flow needs are satisfied.  Adjustments periodically are made to the Company's investment policies to reflect changes in the Company's short-and long-term cash needs, as well as changing business and economic conditions.

The Company seeks to manage its investment portfolio in part to reduce its exposure to interest rate fluctuations.  In general, the market value of our fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and our net investment income increases or decreases in direct relationship with interest rate changes.  For example, if interest rates decline, the Company's fixed maturity investments generally will increase in market value, while net investment income will decrease as fixed income investments mature or are sold and proceeds are reinvested at the declining rates, and vice versa.  Management is aware that prevailing market interest rates frequently shift and, accordingly, has adopted strategies that are designed to address either an increase or decrease in prevailing rates.  

The Company¢s principal investments are in fixed maturities, all of which are exposed to at least one of three primary sources of investment risk: credit, interest rate and market valuation.  The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. When assessing our intent to sell a fixed maturity security or if it is more likely that we will be required to sell a fixed maturity security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio and sale of securities to meet cash flow needs.  In order to determine the amount of the credit loss for a fixed maturity security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover.  The discount rate is the effective interest rate implicit in the underlying fixed maturity security.  The effective interest rate is the original yield or the coupon if the fixed maturity security was previously impaired.  If an other than temporary impairment (“OTTI”) exists and we have the intent to sell the security, we conclude that the entire OTTI is credit-related and the amortized cost for the security is written down to current fair value with a corresponding charge to realized loss on our Consolidated Statements of Income.  If we do not intend to sell a fixed maturity security or it is not more likely than not we will be required to sell a fixed maturity security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the fixed maturity security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized loss on our Consolidated Statements of Income, as this is also deemed the credit portion of the OTTI.  The remainder of the decline to fair value is recorded to other comprehensive income (“OCI”), as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e., recoverable) impairment.

To determine the recovery period of a fixed maturity security, we consider the facts and circumstances surrounding the underlying issuer, including, but not limited to, the following:

·

historic and implied volatility of the security;

·

length of time and extent to which the fair value has been less than amortized cost;

·

adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;

·

failure, if any, of the issuer of the security to make scheduled payments; and

·

recoveries or additional declines in fair value subsequent to the balance sheet date.

For all fixed maturities securities evaluated for OTTI, we consider the timing and amount of the cash flows. When evaluating whether our collateralized mortgage obligations (“CMOs”) are other-than-temporarily impaired, we also examine the characteristics of the underlying collateral, such as delinquency, loss severities and default rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, the quality of any credit guarantors, the susceptibility to variability of prepayments, our intent to sell the security and whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis. In assessing corporate fixed maturities securities for OTTI, we evaluate the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position, including the fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading; fundamentals of the industry in which the issuer operates, expectations regarding defaults and recovery rates and changes to the rating of the security by a rating agency.  

For an equity security, if we do not have the ability and intent to hold the security for a sufficient period of time to allow for a recovery in value, we conclude that an OTTI has occurred, and the cost of the equity security is written down to the current fair value, with a corresponding change to realized gain (loss) in our Consolidated Statements of Income.   We base our review on a number of factors, including, but not limited to, the severity and duration of the decline in fair value of the equity security as well as the cause of the decline, the length of time we have held the equity security, any third-party research reports or analysis, and the financial condition and near-term prospects of the security’s issuer, taking into consideration the economic prospects of the issuer’s industry and geographical location.

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As of December 31, 2010, 2.9% of the Company’s invested assets (approximately $108.0 million) consisted of short-term commercial paper with maturities of less than 45 days.  This compares to 8.1% of the Company’s invested assets (approximately $293.1 million) as of December 31, 2009.  This commercial paper consisted of direct obligations of various corporations rated a minimum of A1 by Standard and Poor’s and P1 by Moody’s.  This cash balance was reduced by $185.2 million during 2010, as the Company determined that its cash balances were more than sufficient to cover projected cash needs from annuity surrenders and required payments. As part of its asset-liability management strategy, the Insurance Company had kept elevated levels of cash investments since 2005, but management currently believes that its excess cash should be invested in additional fixed income investments to augment investment income.

As of December 31, 2010 and 2009, approximately 5.2% and 5.9%, respectively, of the Company's total invested assets were invested in limited partnerships and equity securities.  See “Note 2 to the Notes to Consolidated Financial Statements.”  As of December 31, 2010, the Company was committed, if called upon during a specified period, to contribute an aggregate of approximately $58.3 million of additional capital to certain of these limited partnerships.  Commitments of $31.6 million are expected to expire in 2011, $25.5 million in 2012, and $1.2 million in 2013.  In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity.   During the fourth quarter of 2010, the Company initiated the full liquidation of four of its hedge fund investments resulting in a distribution of $42.7 million.  The carrying value of these limited partnerships was $39.5 million and the Company recognized a return on capital of $10.7 million.  During 2009, there were no hedge fund distributions. With the exception of hedge funds, these risks are mitigated by our ability to receive quarterly distributions of partnership earnings.  Despite earning positive returns on its limited partnership investments and their substantial contributions to the Company’s profits in the years prior to the very significant market and economic downturn from 2008 to 2010, the Company’s limited partnership investments performed poorly in late 2008 and in 2009, contributing significant pressure on net income in these periods.  Performance rebounded somewhat in 2010.  There can be no assurance that we will again achieve the same level of positive returns on our investments in limited partnerships that we achieved in years prior to the downturn or that we will achieve any returns on such investments at all.  In addition, there can be no assurance that we will receive a return of all or any portion of our current or future capital investments in limited partnerships.  The failure to receive the return of a material portion of our capital investments in limited partnerships, or to achieve historic levels of returns on such investments, would have a material adverse effect on our financial condition and results of operations.

Approximately $42.6 million or 22% of the limited partnership portfolio is invested in restructuring funds.  Approximately 75% of the funds invested in this segment by the Company are in four partnerships which are managed by two different general partners, each of which have significant experience in distressed debt investing.  These general partners seek to invest in situations that reflect a significant discount to underlying collateral value or enterprise value, or both, with the intent of recovering substantial premiums to acquisition prices.  A common element to each general partner’s approach is to identify good companies with weak balance sheets through a rigorous fundamental analysis of each individual investment, combined with an emphasis on the acquisition of securities in the upper part of the capital structure.     

Securities or obligations of entities involved in or emerging from reorganization proceedings under U. S. Bankruptcy laws are often available at prices that may represent significant discounts to underlying collateral values or enterprise values.  Investment strategies in this segment include investments in secured debt of distressed companies where the general partner believes it can significantly influence the outcome of events by acquiring a controlling or blocking interest in order to maximize recoveries and returns.  Control-focused strategies can provide for the ability to mitigate risk by influencing not only the timing of a re-organization but also the structure of a company’s reorganized balance sheet.

The primary market risks in the Company’s investment portfolio are interest rate risk, credit risk and market valuation risk.  Changes in credit risk are generally measured by changes in corporate yields in relation to the underlying Treasuries (“corporate spreads”) as well as changes in the Credit Default Swap (“CDS”) market, although the Company is a cash investor and does not buy or sell credit default swaps. The Company's exposure to foreign exchange risk is insignificant.  The Company has no direct commodity risk.  Changes in interest rates can potentially impact our profitability.  In certain scenarios where interest rates are volatile, we could be exposed to disintermediation risk (asset/liability mismatch) and reduction in net interest rate spread or profit margin.  See “Interest Rate Risk” above.  

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Unrealized Losses

General

The following table presents the amortized cost and gross unrealized losses for fixed maturities and common stock where the estimated fair value had declined and remained below amortized cost at December 31, 2010:

The following table presents the total gross unrealized losses for fixed maturities where the estimated fair value had declined and remained below amortized cost by December 31, 2010.

As of December 31, 2010, the Company had 220 securities in a net unrealized loss position. Of this total, 198 are bonds and 22 are stocks.

The following table presents the amortized cost and gross unrealized losses for fixed maturities and common stock where the estimated fair value had declined and remained below amortized cost at December 31, 2009:

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The following table presents the total gross unrealized losses for fixed maturities where the estimated fair value had declined and remained below amortized cost by December 31, 2009.

Total unrealized losses decreased from $102.9 million at December 31, 2009 to $44.1 million at December 31, 2010.  This decrease in the unrealized losses resulted from the significant decline in U.S. Treasury yields in 2010, especially in Treasuries maturing in less than 5 years, combined with a narrowing of corporate spreads against Treasuries. Five-year Treasuries declined in yield to 2% at year-end 2010 vs. 2.67% at year-end 2009. Ten-year Treasuries declined to 3.29% at year-end 2010 from 3.83% at year-end 2009 and 30-year Treasuries declined to 4.34% at year-end 2010 from 4.63% at year-end 2009. Ten-year corporate spreads tightened by approximately 10 basis points and 30-year corporate spreads tightened by approximately 15 basis points during 2010.  The Company carefully examines each issue where the market value has fallen below 70% of book value to determine if the bonds are not-other-than-temporarily impaired. Consistent with the Company’s OTTI Policy as discussed above, the Company will recognize a write-down of book value to current market value, if warranted. Four securities were written down during 2010, producing an OTTI charge of $1,392,236.

Municipal Bonds

Through the “Build-America” bond program subsidized by the U.S. Federal Government in 2009 and 2010, the Company has significantly increased its exposure to taxable municipal bonds, which totaled $278.2 million (cost) at December 31, 2010. Municipal bonds had a greater-than-12-month loss of $4.6 million on a fair value of $122.9 million. Approximately $354,000 of the losses represented three purchases of Fulton County, Georgia General Obligation Bonds (total market value of $5,096,213) purchased in September 2010, near the low in interest rates for 2010. Approximately $305,000 of the unrealized loss represented a single position in General Obligation Bonds of the State of Wisconsin (market value of $4,694,100) and $256,000 of the unrealized loss represented a single position in a General Obligation Bond for Spokane County, Washington (market value of $3,308,961), both purchased in August 2010 near the low in interest rates.

Corporate Bonds 

The predominant investment category for the Company’s investments is the “corporate bond” category (including Public Utilities), which totaled $2.6 billion at December 31, 2010.  Unrealized losses on corporate bonds decreased from $86.7 million at December 31, 2009 to $28.2 million at December 31, 2010.  The five largest loss positions at December 31, 2010 consisted of the following holdings:

MMCaps Funding Ltd.:

$3,144,629

Western and Southern Financial:

$2,118,270

Nationwide Mutual Life:

$1,729,531

Hearst-Argyle Television

$1,052,722

First Tennessee Capital Trust:

$   995,590

MMCaps is a hybrid security that is backed by junior subordinated deferrable interest debentures issued by community banks and other middle-market financial institutions.  The Western and Southern and Nationwide Mutual holdings are outsized positions ($14.6 million and $10.2 million market value, respectively) in major insurance companies that were affected by the 2008 financial crisis. Hearst-Argyle Television was impacted by a transaction to take it private by its parent, Hearst, Inc., in 2010. The First Tennessee position is a hybrid security in a regional bank (First Horizon Corp.) that has been impacted by losses in residential and commercial lending.

Preferred Stocks

At December 31, 2010, preferred stock losses of duration longer than 12 months totaled $6.8 million on a cost basis of $55.6 million. The largest loss of $3.0 million is a $6.97 million market value position in 5 ¾% preference shares in the Royal Bank of Scotland. Although non-cumulative, Royal Bank of Scotland has asserted that it has a contractual obligation to continue to pay these dividends under the indenture of this issue or risk a default of an associated bond issue. It has asserted that it will continue to pay these dividends unless prohibited by its financial regulators. The next four positions include a $1.2 million loss position in a National Westminster Bank 8 5/8% preference stock, also of the Royal Bank of Scotland; $390,204 loss in a Duke Realty 6 ½% preferred; $291,674 loss in a Morgan Stanley 6 ¼% capital trust preferred and $228,000 loss in a Bank Santander 6.41% preferred.

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Statutory Information

The Insurance Company prepares its statutory financial statements in accordance with accounting practices prescribed by the New York State Insurance Department.  Prescribed SAP include state laws, regulations and general administrative rules, as well as a variety of publications from the NAIC.  Accounting principles used to prepare statutory financial statements differ from financial statements prepared on the basis of GAAP.  (See Item 1, Business, Insurance Regulation, Statutory Reporting Practices.)  The restatements did not affect the statutory financial statements.

A reconciliation of the Insurance Company’s net income as filed with regulatory authorities to net income reported in the accompanying financial statements for the years ended December 31, 2010, 2009 and 2008, is set forth in the following table:

¹As restated, see explanatory note regarding restatement and Note 15 to the Consolidated Financial Statements.

A reconciliation of the Insurance Company’s shareholders’ equity as filed with regulatory authorities to shareholders’ equity reported in the accompanying financial statements as of December 31, 2010 and 2009  is set forth in the following table: