PRESIDENTIAL LIFE CORP, 424B2, 1999-02-19

PRESIDENTIAL LIFE CORP
424B2, 1999-02-19
LIFE INSURANCE

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<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-63831

Prospectus Supplement
(to Prospectus dated February 18, 1999)

$100,000,000
Presidential Life Corporation
7 7/8% Senior Notes due 2009
----------------
We are offering $100,000,000 aggregate principal amount of our 7 7/8% Senior
Notes due 2009 (the "Notes"). The Notes include the terms set forth below. This
prospectus supplement and the related prospectus include additional information
on the terms of the Notes, including optional redemption prices and covenants.

The Notes will mature on February 15, 2009. We will pay interest on the
Notes on February 15 and August 15, commencing August 15, 1999. Interest will
accrue from the issue date of the Notes.

We may redeem the Notes at any time, subject to the payment of a premium as
further described in the related prospectus.

Out of the net proceeds we receive from this offering:

. we will use approximately $50.8 million to repay our outstanding 9
1/2% Senior Notes due 2000;

. we will use approximately $11 million to repay our indebtedness
under a revolving credit facility; and

. we will use the balance for general corporate purposes.

The Notes will be senior unsecured obligations of the Company.

The Notes will not be listed on any securities exchange or included in any
quotation system.

The Notes will be offered on a firm commitment basis if and when an
underwriting agreement is executed by the underwriters at the time of pricing
of the offering.
----------------
Investing in the Notes involves a high degree of risk. See "Risk Factors,"
beginning on page 8 of the Prospectus.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this Prospectus Supplement or the accompanying
Prospectus. Any representation to the contrary is a criminal offense.
----------------
<TABLE>
<CAPTION>
Per Note Total
-------- -----------
<S> <C> <C>
Public Offering Price (1)................................. 99.151% $99,151,000
Underwriting Discounts and Commissions (2)................ 0.700% $ 700,000
Proceeds to Us (1)(3)..................................... 98.451% $98,451,000
</TABLE>
- --------
(1) Plus accrued interest, if any, from the issue date of the Notes.
(2) We have agreed to indemnify the Underwriters against certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting" in this
Prospectus Supplement.
(3)Before deducting expenses payable by us estimated at $500,000.
----------------
BT Alex. Brown Incorporated and Salomon Smith Barney Inc. may withdraw,
cancel or modify the offer of the Notes without notice. Unless certain
conditions are met, BT Alex. Brown Incorporated and Salomon Smith Barney Inc.
will not receive the Notes from us, and they will withdraw this offer. You
should refer to "Underwriting" in this Prospectus Supplement for more
information. We expect that delivery of the Notes will be made on or about
February 23, 1999 through the book-entry facilities of The Depository Trust
Company.

BT Alex. Brown Salomon Smith Barney

The date of this Prospectus Supplement is February 18, 1999.
<PAGE>

This summary contains a brief description of Presidential Life Corporation
(the "Company") and the offering. You should read the entire Prospectus
Supplement and the related prospectus (the "Prospectus") including the
financial statements and notes thereto before investing in the Notes. This
Prospectus Supplement and the Prospectus contain forward looking statements
that involve risks and uncertainties. The Company's actual results may differ
substantially from the expected results discussed in the forward looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Risk factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Prospectus.

The Offering

The summary below describes the principal terms of the Notes. Certain of the
terms and conditions described below are subject to important limitations and
exceptions. The "Description of Notes" section of the Prospectus contains a
more detailed description of the terms and conditions of the Notes.

<TABLE>
<C> <S>
Issuer.............................. Presidential Life Corporation
Securities Offered.................. $100,000,000 principal amount of 7 7/8%
Senior Notes due 2009.
Maturity............................ February 15, 2009.
Interest Rate....................... 7 7/8% per year (calculated using a 360-
day year).
Interest Payment Dates.............. February 15 and August 15, beginning on
August 15, 1999. Interest will accrue
from the issue date of the Notes.
Ranking............................. The Notes will be unsecured and will rank
equally with all of our other unsecured
senior indebtedness. After giving pro
forma effect to the application of the
proceeds of the Notes, we will have no
secured indebtedness and our only senior
indebtedness will be the Notes. We are a
holding company and, accordingly, the
Notes are also effectively subordinated
to the liabilities of our subsidiaries.
As of September 30, 1998, the outstanding
assets and liabilities of our
subsidiaries, including policyholder
liabilities, trade payables and accrued
expenses were approximately $2.394
billion and $1.899 billion, respectively.
Optional Redemption by Us........... We may redeem all or some of the Notes at
any time at a price equal to 100% of the
principal amount of the Notes, plus
accrued interest, plus a premium as
further described in the Prospectus. We
must give you between 30 and 60 days
notice before redeeming the Notes. See
"Description of Notes--Optional
Redemption" in the Prospectus.
</TABLE>

Optional Redemption by You.......... If we should sell a Significant
Subsidiary (as defined in the
Prospectus), you may redeem

S-2
<PAGE>

some or all of your Notes, at a price
equal to 100% of the principal amount
of the Notes, plus accrued interest.
See "Description of Notes--Optional
Redemption" in the Prospectus.

Certain Indenture Provisions..... The Indenture governing the Notes will
contain covenants that will, among
other things:

. limit our ability and the
ability of our subsidiaries to
create liens on our respective
assets;

. limit our ability to sell the
capital stock of our
subsidiaries, or to permit any
of them to issue capital stock,
except in certain circumstances
described in the Prospectus; and

. forbid us to restrict our
subsidiaries' ability to pay
dividends, transfer assets to us
or our affiliates, or to make
certain other distributions.

These covenants are subject to a number
of important limitations and
exceptions. See "Description of Notes--
Certain Covenants" in the Prospectus.

Use of Proceeds.................. Out of the net proceeds we receive from
this offering:

. we will use approximately
$50.8 million to repay our
outstanding 9 1/2% Senior Notes
due 2000 (the "9 1/2% Notes");

. we will use approximately
$11 million to repay our
indebtedness under a revolving
credit facility; and

. we will use the balance for
general corporate purposes.

Depositary Arrangements.......... The Notes will be represented by one or
more global securities, without
coupons, which will be deposited with a
custodian for The Depository Trust
Company ("DTC"). DTC will keep records
of the owners of beneficial interests
in the global securities. The only way
to transfer those beneficial interests
will be to have DTC record the
transfers. Except under very limited
circumstances, we will not issue
certificates evidencing Notes to anyone
other than DTC. See "Description of
Notes--Form, Denomination and Title" in
the Prospectus.

S-3
<PAGE>

Consolidated Ratio of Earnings to Fixed Charges

The following table sets forth the consolidated ratio of earnings to fixed
charges and consolidated ratio of earnings to fixed charges and interest
credited to policyholder accounts of the Company for each of the five years in
the five-year period ended December 31, 1997 and for the nine month periods
ended September 30, 1997 and 1998 and on a pro forma basis for the year ended
December 31, 1997 and the nine months ended September 30, 1998 to give effect
to the offering of the Notes and the application of the proceeds therefrom. In
calculating this ratio, earnings consist of income before income taxes and
cumulative effect of a change in an accounting principle, plus fixed charges
adjusted to exclude interest capitalized. Fixed charges consist of interest,
whether expensed or capitalized, capitalized lease interest expense and
amortization of deferred financing fees, whether expensed or capitalized, plus
the portion of rental expense under operating leases which has been deemed by
the Company to be representative of the interest factor.

<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------------------------------------- --------------------------
Actual Pro forma(1) Actual Pro forma(1)
--------------------------------- ------------ ------------- ------------
1993 1994 1995 1996 1997 1997 1997 1998 1998
------ ----- ------ ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges.......... 10.21x 8.07x 12.18x 16.12x 16.48x 10.44x 15.71x 11.23x 8.99x
Ratio of earnings to
fixed charges and
interest credited to
policyholder accounts.. 1.68x 1.45x 1.67x 1.95x 2.10x 2.02x 2.06x 1.90x 1.86x
</TABLE>
- --------
(1) Gives effect to the offering of the Notes, and the application of the net
proceeds therefrom, and reflects the interest rate for the Notes of 7 7/8%
and the amortization of debt issue costs including the unrealized loss
under the T-Lock Agreement which was $6.72 million as of February 18, 1999.
See Note 3 to the Unaudited Consolidated Financial Statements included
under "Third Quarter 1998 Results" elsewhere in this Prospectus Supplement.

S-4
<PAGE>

USE OF PROCEEDS

The net proceeds of the sale of the Notes (after deducting the estimated fees
and expenses incurred in connection with the offering and the settlement of the
T-Lock Agreement) are estimated to be approximately $91.2 million. For a
description of the T-Lock Agreement see Note 3 to the Unaudited Consolidated
Financial Statements included under "Third Quarter 1998 Results" elsewhere in
this Prospectus Supplement.We will use the net proceeds of the Notes to redeem
our 9 1/2% Notes by depositing with the trustee for the 9 1/2% Notes the
principal amount, premium and interest payable on the 9 1/2% Notes on the date
set for redemption of the 9 1/2% Notes. In addition to the redemption of the 9
1/2% Notes and the payment of related fees and expenses in connection
therewith, we will use the net proceeds of the offering to repay all of our
outstanding indebtedness under our revolving credit facility, which as of
September 30, 1998 was approximately $23 million and as of February 8, 1999 was
approximately $11 million. The balance of the net proceeds will be used for
general corporate purposes. As of September 30, 1998, the 9 1/2% Notes bear
interest at a rate of 9 1/2% per annum and the short-term note payable under
our revolving credit facility had an approximate weighted average interest rate
of 6.5%. Pending their use, we will invest the net proceeds from the offering
in short-term, interest-bearing, investment grade debt securities, certificates
of deposit or direct or guaranteed obligations of the United States.

S-5
<PAGE>

CAPITALIZATION

Set forth below is our short-term debt and capitalization as of September 30,
1998, and as adjusted to give effect to the offering of the Notes and the
application of the proceeds therefrom. This table should be read in conjunction
with "Use of Proceeds" and the consolidated financial statements of the
Company, including the related notes thereto, appearing elsewhere in the
Prospectus accompanying this Prospectus Supplement.

<TABLE>
<CAPTION>
As of September 30,
1998
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Debt:
Short-term debt (1)....................................... $ 23,000 $ 0
Long-term debt (2)........................................ 50,000 100,000
-------- --------
Total Notes Payable..................................... $ 73,000 $100,000
Stockholders' equity:
Capital stock (100,000,000 shares of Common Stock, par
value $0.01 per share, authorized; 31,921,863 shares
issued and outstanding).................................. 319 319
Additional paid-in capital................................ 4,354 4,354
Net unrealized investment gains........................... 61,478 61,478
Retained earnings......................................... 444,459 444,459
-------- --------
Total stockholders' equity.............................. 510,610 510,610
-------- --------
Total debt and stockholders' equity $583,610 $610,610
======== ========
</TABLE>

- ---------

(1) Short-term debt consists of $23 million of borrowings under our
revolving credit facility.

(2) Actual long-term debt consists of the 9 1/2% Notes which will be
redeemed with the proceeds of the offering.

S-6
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
dated February 18, 1999 (the "Underwriting Agreement"), the underwriters named
below (the "Underwriters") have severally agreed to purchase from the Company
the following respective principal amounts of Notes:

<TABLE>
<CAPTION>
Principal Amount
Underwriter of Notes
----------- ----------------
<S> <C>
BT Alex. Brown Incorporated................................. $ 75,000,000
Salomon Smith Barney Inc. .................................. 25,000,000
------------
Total..................................................... $100,000,000
============
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the Notes offered hereby if any of such Notes are purchased.

The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public at the public offering price set forth
on the cover page of this Prospectus Supplement, and to certain dealers at such
price less a concession not in excess of 0.45% of the principal amount of the
Notes. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of 0.25% of the principal amount of the Notes to certain other
dealers. After the initial offering of Notes to the public, the offering price
and other selling terms may be changed by the Underwriters.

The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that the Underwriters intend
to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Notes or the price at which
the Notes will trade.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof.

The Company has agreed with the Underwriters for a period of 90 days after
the date of this Prospectus Supplement not to offer, sell or otherwise dispose
of, directly or indirectly, debt securities issued or guaranteed by the Company
or any of its subsidiaries without the prior written consent of BT Alex. Brown
Incorporated which consent may be given at any time without public notice.

In order to facilitate the offering of the Notes, the Underwriters, any
selling group members and their respective affiliates may engage in stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M

S-7
<PAGE>

under the Exchange Act. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed the specified
maximum. Syndicate covering transactions involve purchases of Notes in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from an Underwriter or a dealer when the Notes originally sold to
such Underwriter or dealer are purchased in a covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Notes to be higher
than it would otherwise be in the absence of such transactions. The
Underwriters, any selling group members and their respective affiliates are not
required to engage in these activities and, if commenced, may end any of these
activities at any time.

In May 1998, the Company and BT Alex. Brown Incorporated entered into a
forward treasury lock agreement (the "T-Lock Agreement") pursuant to which BT
Alex. Brown Incorporated will make or receive payment to, or from, the Company
in respect of an aggregate notional principal amount of $100 million depending
upon whether the interest rate for ten-year Treasury Notes in effect on the
settlement date has increased or declined, respectively, from the level set
forth in the T-Lock Agreement. As is customarily its practice, BT Alex. Brown
Incorporated entered into corresponding arrangements with other counterparties
in conjunction with the T-Lock Agreement, which will result in the offsetting
of any payments BT Alex. Brown Incorporated will receive or make under the T-
Lock Agreement. See Note 3 to the Unaudited Consolidated Financial Statements
included under "Third-Quarter 1998 Results" elsewhere in this Prospectus
Supplement.

In the ordinary course of their respective businesses, the Underwriters and
certain of their affiliates have provided, and may in the future provide,
investment banking and/or commercial banking services to the Company and have
received customary fees and compensation for these services. The Trustee for
the Notes is an affiliate of BT Alex. Brown Incorporated.

S-8
<PAGE>

THIRD QUARTER 1998 RESULTS

The following is the information contained in our Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998:

S-9
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)

<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of $1,748,124
and $1,799,929, respectively)..................... $1,841,928 $1,909,924
Common stocks (Cost of $35,158 and $32,021,
respectively)..................................... 47,433 45,773
Mortgage Loans..................................... 17,252 17,865
Real Estate........................................ 415 417
Policy Loans....................................... 17,320 18,120
Short-term investments............................. 208,131 264,098
Other invested assets.............................. 262,999 208,162
---------- ----------
Total investments................................ 2,395,478 2,464,359
Cash and cash equivalents........................... 813 13,480
Accrued investment income........................... 26,127 28,167
Deferred policy acquisition costs................... 39,086 37,685
Furniture and equipment, net........................ 662 567
Amounts due from reinsurers......................... 8,146 8,249
Other assets........................................ 9,645 1,222
Assets held in separate account..................... 3,983 4,612
---------- ----------
TOTAL ASSETS..................................... $2,483,940 $2,558,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances.................... $1,293,977 $1,280,900
Future policy benefits:
Annuity.......................................... 394,505 380,109
Life and accident and health..................... 52,344 50,848
Other policy liabilities......................... 3,021 3,124
---------- ----------
Total policy liabilities....................... 1,743,847 1,714,981
---------- ----------
Dollar Repurchase Agreements........................ 99,201 205,202
Note payable........................................ 50,000 50,000
Short-term note payable............................. 23,000 20,000
Deposits on policies to be issued................... 2,665 2,436
Deferred federal income taxes....................... 38,229 46,575
General expenses and taxes accrued.................. 8,441 7,074
Other liabilities................................... 3,964 4,807
Liabilities related to separate account............. 3,983 4,612
---------- ----------
Total liabilities.................................. 1,973,330 2,055,687
---------- ----------
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
31,921,863 shares in 1998 and 32,621,549 shares
in 1997).......................................... 319 326
Additional paid in capital......................... 4,354 18,274
Net unrealized investment gains.................... 61,478 71,540
Retained earnings.................................. 444,459 412,514
---------- ----------
Total Shareholders' Equity....................... 510,610 502,654
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $2,483,940 $2,558,341
========== ==========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

S-10
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)

<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Revenues:
Insurance revenues:
Premiums............................................ $ 2,076 $ 1,982
Annuity considerations.............................. 19,965 14,808
Universal life and investment type policy fee
income............................................. 1,695 1,522
Net investment income............................... 145,792 142,466
Realized investment gains........................... 14,087 20,531
Other income........................................ 2,916 3,739
---------- ----------
Total revenues.................................... 186,531 185,048
---------- ----------
Benefits and expenses:
Death and other life insurance benefits............. 5,574 5,126
Annuity benefits.................................... 30,930 28,299
Interest credited to policyholders' account
balances........................................... 57,183 56,638
Interest expense on notes payable................... 5,546 4,415
Other interest and other charges.................... 207 371
Change in liability for future policy benefits...... 15,533 12,420
Commissions to agents, net.......................... 3,499 3,442
General expenses and taxes.......................... 10,514 10,016
Change in deferred policy acquisition costs......... 805 (627)
---------- ----------
Total benefits and expenses....................... 129,791 120,100
---------- ----------
Income before income taxes............................ 56,740 64,948
---------- ----------
Provision (benefit) for income taxes
Current............................................. 20,987 21,871
Deferred............................................ (2,928) (1,861)
---------- ----------
Total provision for income taxes.................. 18,059 20,010
---------- ----------
Net income............................................ $ 38,681 $ 44,938
========== ==========
Income per share...................................... $ 1.20 $ 1.37
========== ==========
Weighted average number of shares outstanding during
the period........................................... 32,179,413 33,772,968
========== ==========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

S-11
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)

<TABLE>
<CAPTION>
Three Months Ended
September 30
----------------------
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Revenues:
Insurance revenues:
Premiums............................................ $ 923 $ 884
Annuity considerations.............................. 4,320 6,831
Universal life and investment type policy fee
income............................................. 555 566
Net investment income............................... 35,716 44,444
Realized investment gains........................... 5,018 9,518
Other income........................................ 560 743
---------- ----------
Total revenues.................................... 47,092 62,986
---------- ----------
Benefits and expenses:
Death and other life insurance benefits............. 2,008 2,026
Annuity benefits.................................... 10,195 9,475
Interest credited to policyholders' account
balances........................................... 19,073 19,204
Interest expense on notes payable................... 1,713 1,634
Other interest and other charges.................... 65 143
Change in liability for future policy benefits...... 2,962 5,304
Commissions to agents, net.......................... 1,161 1,546
General expenses and taxes.......................... 2,284 2,264
Change in deferred policy acquisition costs......... (292) (1,468)
---------- ----------
Total benefits and expenses....................... 39,169 40,128
---------- ----------
Income before income taxes............................ 7,923 22,858
---------- ----------
Provision (benefit) for income taxes
Current............................................. 1,512 6,563
Deferred............................................ (101) 277
---------- ----------
Total provision for income taxes.................. 1,411 6,840
---------- ----------
Net income............................................ $ 6,512 $ 16,018
========== ==========
Income per share...................................... $ .20 $ .49
========== ==========
Weighted average number of shares outstanding during
the period........................................... 31,946,352 32,686,691
========== ==========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

S-12
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands, except share data)
(Unaudited)

<TABLE>
<CAPTION>
Net
Additional Unrealized
Capital Paid in Investment Retained
Stock Capital Gains (Losses) Earnings Total
------- ---------- -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $330 $24,023 $40,294 $358,416 $423,063
Net income.............. 44,938 44,938
Issuance of Shares Under
Stock Option Plan...... 4 4
Purchase and Retirement
of Stock............... (4) (5,758) (5,762)
Change in Unrealized In-
vestment Gains, Net.... 30,294 30,294
Dividends Paid to
Shareholders (.16 per
share)................. (5,238) (5,238)
---- ------- ------- -------- --------
Balance at September 30,
1997................... $326 $18,269 $70,588 $398,116 $487,299
==== ======= ======= ======== ========
Balance at December 31,
1997................... $326 $18,274 $71,540 $412,514 $502,654
Net Income.............. 38,681 38,681
Issuance of Shares Under
Stock Option Plan...... 51 51
Purchase and Retirement
of Stock............... (7) (13,971) (13,978)
Change in Unrealized In-
vestment Gains, Net.... (10,062) (10,062)
Dividends paid to
Shareholders (.21 per
share)................. (6,736) (6,736)
---- ------- ------- -------- --------
Balance at September 30,
1998................... $319 $ 4,354 $61,478 $444,459 $510,610
==== ======= ======= ======== ========
</TABLE>

The accompanying notes are an integral part of the Unaudited Consolidated
Financial Statements.

S-13
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Operating activities:
Net income........................................... $ 38,681 $ 44,938
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Benefit for deferred income taxes................... (2,928) (1,861)
Depreciation and amortization....................... 983 361
Net accrual of discount on fixed maturities......... (7,002) (1,800)
Realized investment gains........................... (14,087) (20,531)
Changes in:
Accrued investment income........................... 2,040 3,120
Deferred policy acquisition costs................... 805 (627)
Federal income tax payable.......................... (10,726) (2,838)
Liabilities for future policy benefits.............. 15,892 12,659
Other items......................................... 1,980 1,220
----------- -----------
Net Cash Provided by Operating Activities........... 25,638 34,641
----------- -----------
INVESTING ACTIVITIES:
Fixed Maturities:
Available For Sale:
Acquisitions........................................ (221,865) (285,667)
Sales............................................... 2,602 10,363
Maturities, calls and repayments.................... 271,131 221,804
Common Stocks:
Acquisitions........................................ (10,405) (15,558)
Sales............................................... 28,301 43,090
Decrease in short term investments and policy
loans.............................................. 56,767 1,064
Other Invested Assets:
Additions to other invested assets.................. (86,131) (80,899)
Distributions from other invested assets............ 31,294 44,776
Purchase of property and equipment.................. (203) (352)
Mortgage loans on real estate....................... 613 561
----------- -----------
Net Cash Provided by (Used in) Investing
Activities......................................... 72,104 (60,818)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements........... 1,669,076 1,814,159
Repayment of Dollar Repurchase Agreements............ (1,775,077) (1,808,457)
Increase in policyholders' account balances.......... 13,077 10,090
Proceeds from line of credit......................... 3,000 16,500
Repurchase of common stock........................... (13,978) (5,762)
Deposits on policies to be issued.................... 229 2,532
Dividends paid to shareholders....................... (6,736) (5,238)
----------- -----------
Net Cash Provided by (Used in) Financing Activities.. (110,409) 23,824
----------- -----------
Decrease in Cash and Cash Equivalents................ (12,667) (2,353)
Cash and Cash Equivalents at Beginning of Period..... 13,480 819
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 813 $ (1,534)
=========== ===========
Supplemental Cash Flow Disclosure:
Income Taxes Paid................................... $ 32,166 $ 24,710
=========== ===========
Interest Paid....................................... $ 3,311 $ 2,540
=========== ===========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

S-14
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business

Presidential Life Corporation ("the Company"), through its wholly-owned
subsidiary Presidential Life Insurance Company ("the Insurance Company"), is
engaged in the sale of life insurance and annuities.

B. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
applicable to stock life insurance companies for interim financial statements
and with the requirements of Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles applicable to stock life insurance companies for complete annual
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Interim results for the nine months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. Management believes that, although the disclosures
are adequate to make the information presented not misleading, the consolidated
financial statements should be read in conjunction with the footnotes contained
in the Company's audited consolidated financial statements for the year ended
December 31, 1997.

C. Investments

Fixed maturity investments available for sale represent investments which may
be sold in response to changes in various economic conditions. These
investments are carried at market value and unrealized gains and losses, net of
the effects of amortization of deferred policy acquisition costs of
approximately $11.5 million and $13.4 million, and deferred Federal income
taxes of approximately $28.7 million and $38.5 million at September 30, 1998
and December 31, 1997, respectively, are credited or charged directly to
shareholders' equity, unless a decline in market value is considered to be
other than temporary in which case the investment is reduced to its net
realizable value. Equity securities include common stocks and non-redeemable
preferred stocks and are carried at market, with the related unrealized gains
and losses, net of deferred income taxes, if any, credited or charged directly
to shareholders' equity, unless a decline in market value is deemed to be other
than temporary in which case the investment is reduced to its net realizable
value.

"Other invested assets" are recorded at the lower of cost or market, or
equity as appropriate, and primarily include interests in limited partnerships,
which principally are engaged in real estate, international opportunities,
hedge funds, debt restructuring and merchant banking. Limited partnership
interests usually are not registered and typically are illiquid. In general,
risks associated with such limited partnerships include those related to

S-15
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
their underlying investments (i.e., equity securities, debt securities, hedges
and real estate), plus a level of illiquidity, which is mitigated by the
ability of the Company to take annual distributions of partnership earnings. To
evaluate the appropriateness of the carrying value of a limited partnership
interest, management maintains ongoing discussions with the investment manager
and considers the limited partnership's operation, its current and near term
projected financial condition, earnings capacity and distributions received by
the Company during the year. Because it is not practicable to obtain an
independent valuation for each limited partnership interest, for purposes of
disclosure, the market value of a limited partnership interest is estimated at
book value. Management believes that the net realizable value of such limited
partnership interests, in the aggregate, exceeds their related carrying value
as of September 30, 1998 and December 31, 1997. As of September 30, 1998, the
Company was committed to contribute, if called upon, an aggregate of
approximately $54.4 million of additional capital to certain of these limited
partnerships.

In evaluating whether an investment security or other investment has suffered
an impairment in value which is deemed to be "other than temporary", management
considers all available evidence. When a decline in the value of an investment
security or other investment is considered to be other than temporary, the
investment is reduced to its net realizable value, which becomes the new cost
basis. The amount of reduction is recorded as a realized loss. A recovery from
the adjusted cost basis is recognized as a realized gain only at sale.

The Company participates in "dollar roll" repurchase agreement transactions
to enhance investment income. Dollar roll transactions involve the sale of
certain mortgage backed securities to a holding institution and a simultaneous
agreement to purchase substantially similar securities for forward settlement
at a lower dollar price. The proceeds are invested in short-term securities at
a positive spread until the settlement date of the similar securities. During
this period, the holding institution receives all income and prepayments for
the security. Dollar roll repurchase agreement transactions are treated as
financing transactions for financial reporting purposes.

As part of a proposed rehabilitation plan for Fidelity Mutual Life Insurance
Company ("Fidelity"), on January 11, 1995 the Insurance Company signed a
definitive purchase agreement with the Pennsylvania Insurance Commissioner and
Fidelity to invest up to $45 million for a minority (49.9%) interest in a
Fidelity subsidiary insurance holding company. In addition, the Company had
agreed to purchase $25 million of senior notes of such company. The Company was
informed by the Pennsylvania Insurance Commissioner, that in response to the
significant improvement in the invested assets of Fidelity, she reopened the
process to select an equity investor for the recapitalization and
rehabilitation of Fidelity. The Company disagreed with the Commissioner's
actions and commenced litigation which was settled in the second quarter of
1997. As part of the settlement, the Company received $1.7 million in that
quarter.

S-16
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

D. Federal Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109") which requires an asset and
liability method in recording income taxes on all transactions that have been
recognized in the financial statements. SFAS 109 provides that deferred taxes
be adjusted to reflect tax rates at which future tax liabilities or assets are
expected to be settled or realized.

E. New Accounting Pronouncements

In December 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." SFAS No. 127 amends SFAS No. 125 by deferring for one year
the effective date of paragraph 15 of SFAS No. 125, addressing secured
borrowings and collateral, and for repurchase agreement, dollar roll, security
lending and similar transactions, of paragraphs 9 through 12 and 237(b) of SFAS
No. 125. SFAS No. 127 is effective for certain transactions occurring after
December 31, 1997, and must be applied prospectively. The Company adopted SFAS
127 effective January 1998. There was no effect on the Company's financial
position from the adoption of SFAS 127.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards
for displaying comprehensive income and its components in a full set of
general-purpose financial statements. Effective January 1998, the Company
adopted SFAS 130. Total comprehensive income for the nine-month periods ended
September 30, 1998 and 1997 was $28.62 million and $75.23 million,
respectively. The difference between net income and comprehensive income was
the change in unrealized investment gains (losses) which arose during the
period.

Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 is effective for fiscal
years beginning after December 15, 1997. The Company's definition of its
operating segments did not change.

In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits" (SFAS 132), which revises employers' disclosures about pension and
other postretirement benefit plans to require standardized disclosures for
pensions and other postretirement benefits, additional disclosure of
information on changes in the benefit obligations and fair values of plan
assets, and elimination of certain disclosures that were deemed no longer
useful. It does not change

S-17
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the measurement or recognition of those plans. SFAS 132 is effective for fiscal
years beginning after December 15, 1997.

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It also establishes
specific conditions that must be met in order for a derivative to be recognized
as a hedge of certain exposures. The Company has not yet completed its analysis
to determine the impact of this statement on the Company's financial
statements. SFAS 133 is effective for fiscal years beginning after June 15,
1999.

2. INVESTMENTS

Investments in U.S. Government & Government Agencies with an aggregate
carrying value of $409.9 million represent investments owned in any one issuer
that aggregate 10% or more of Shareholders' Equity as of September 30, 1998.

Securities with a carrying value of approximately $5.9 million were on
deposit with various state insurance departments to comply with applicable
insurance laws.

3. NOTES PAYABLE

Notes payable at September 30, 1998 and December 31, 1997 consist of $50
million, 9 1/2% Senior Notes ("Senior Notes") due December 15, 2000. Interest
is payable June 15 and December 15. Debt issue costs were amortized on the
interest method over the term of the Senior Notes. The total principal is due
on December 15, 2000. The Senior Notes are callable after December 14, 1998.

The Company has filed a registration statement with the Securities and
Exchange Commission covering up to $100 million aggregate principal amount of
senior notes ("New Senior Notes"). The net proceeds from the sale of such
offering are expected to be used to retire existing indebtedness and for
general corporate purposes. The Company intends to complete the offering during
the fourth quarter of 1998.

S-18
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 30, 1998, the agreement had an unrealized loss of $10.87 million and
$9.52 million respectively. If by the settlement date the Company has issued
the related debt, the unrecognized gain or loss will be capitalized and
amortized over the term of the New Senior Notes as a decrease or increase in
interest expense. To the extent that the Company has not issued the related
debt by the settlement date, the Company can extend the settlement date to
coincide with the offering of the New Senior Notes. To the extent the Company
changes its intention with respect to the issuance of the New Senior Notes, the
Company will be required to recognize gain or loss as if the settlement had
occurred at that time.

The Company has one bank line of credit in the amount of $25.0 million and
provides for interest on borrowings based on market indices. At September 30,
1998 the Company had $23.0 million outstanding under the line of credit.

4. INCOME TAXES

Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, (b)
operating loss carryforwards and (c) a valuation allowance.

The valuation allowance relates principally to investment writedowns recorded
for financial reporting purposes, which have not been recognized for income tax
purposes due to the uncertainty associated with their realizability for income
tax purposes. Changes in the valuation allowance for the nine months ended
September 30, 1998 reflect the reduction in the deferred tax asset as of
September 30, 1998. The Company's effective tax rates for the nine months ended
September 30, 1998 and 1997 were 31.8% and 30.8%, respectively.

S-19
<PAGE>

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Board of Directors and Shareholders
Presidential Life Corporation
Nyack, New York 10960

We have reviewed the accompanying consolidated balance sheet of Presidential
Life Corporation and subsidiaries ("the Company") as of September 30, 1998, and
the related consolidated statements of income for the three-month and nine-
month periods ended September 30, 1998 and 1997, and the consolidated
statements of shareholders' equity and cash flows for the nine-month periods
ended September 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Presidential Life Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1997 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.

Deloitte & Touche LLP
New York, New York
October 30, 1998

S-20
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

General

The Company operates in a single business segment with two primary lines of
business-individual annuities and individual life insurance. The Company
currently emphasizes the sale of a variety of single premium and flexible
premium annuity products (including those written in connection with funding
agreements for certain state lotteries, group annuities and other structured
settlements), as well as annual and single premium life insurance products.
Each of these products is designed to meet the needs of increasingly
sophisticated consumers for supplemental retirement income, estate planning and
financial protection in the event of unexpected death. Premiums shown on the
Company's consolidated financial statements in accordance with GAAP consist of
premiums received for whole or term life insurance products, as well as that
portion of the Company's single premium immediate annuities which have life
contingencies. With respect to that portion of single premium annuity contracts
without life contingencies, as well as single premium deferred annuities and
universal life insurance products, premiums collected by the Company are not
reported as premium revenues, but rather are reported as additions to
policyholder account balances. With respect to products that are accounted for
as policyholder account balances, revenues are recognized over time in the form
of policy fee income, surrender charges and mortality charges and other charges
deducted from the policyholder's account balance. The Company's operating
earnings are derived primarily from these revenues, plus the Company's
investment results, including realized gains (losses), less interest credited,
benefits to policyholders and expenses.

Certain costs related to the sale of new business are deferred as "deferred
policy acquisition costs" ("DAC") and amortized into expenses in proportion to
the recognition of earned revenues. Costs deferred include principally
commissions, certain expenses of the policy issue and underwriting departments
and certain variable sales expenses. Under certain circumstances, DAC will be
expensed earlier than originally estimated, including those circumstances where
the policy terminations are higher than originally estimated with respect to
certain annuity products. Most of the Company's annuity products have surrender
charges which are designed to discourage and mitigate the effect of early
terminations.

The Insurance Company is rated "A- (Excellent)" by A.M. Best.

Results of Operations

Comparison of Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997.

Revenues

Annuity Considerations and Life Insurance Premiums

Total annuity considerations and life insurance premiums increased to
approximately $22.0 million for the nine months ended September 30, 1998 from
approximately $16.8

S-21
<PAGE>

million for the nine months ended September 30, 1997. Of this amount, annuity
considerations increased to approximately $20.0 million for the nine months
ended September 30, 1998 from approximately $14.8 million for the nine months
ended September 30, 1997. In accordance with generally accepted accounting
principles, sales of single premium deferred annuities and universal life
products are not reported as insurance revenues, but rather as additions to
policyholder account balances. Sales of single premium annuities were
approximately $93.1 million for the nine months ended September 30, 1998
compared to $94.9 million for the nine months ended September 30, 1997.
Management believes the increase in annuity considerations is due to the
successful expansion of our Marketing Department. Beginning in 1996, the
Company added regional sales directors in various states. These regional
directors have added new general agents which have generated sales.

Policy Fee Income

Universal life and investment type policy fee income was approximately $1.7
million for the nine months ended September 30, 1998, as compared to
approximately $1.5 million for the nine months ended September 30, 1997. Policy
fee income consists principally of amounts assessed during the period against
policyholders' account balances for mortality charges and surrender charges.

Net Investment Income

Net investment income totaled approximately $145.8 million for the nine
months ended September 30, 1998, as compared to approximately $142.5 million
for the nine months ended September 30, 1997. This represents an increase of
approximately 2.3%. Investment income from "other invested assets" totaled
approximately $25.1 million during the nine months ended September 30, 1998, as
compared to approximately $29.7 million during the nine months ended September
30, 1997. The decrease in investment income from "other invested assets" during
the nine months ended September 30, 1998 is attributable to losses of $13.3
million related to hedge fund investments in Long Term Capital Partners L.P.
and The Global Convergence Fund L.P. The Company's ratio of net investment
income to average cash and invested assets less net investment income for the
nine months ended September 30, 1998 was 8.77% and for the nine months ended
September 30, 1997 was 8.67%, respectively.

Realized Investment Gains and Losses

Realized investment gains amounted to approximately $14.1 million during the
nine months ended September 30, 1998, as compared to approximately $20.5
million of gains during the nine months ended September 30, 1997. Realized
investment gains for the nine months ended September 30, 1998 and 1997 are net
of realized investment losses of approximately $3.4 million and $2.1 million,
respectively, attributable to other than temporary impairments in the value of
certain securities contained in the Company's investment portfolio. Realized
investment gains result from sales of certain equities and convertible
securities, and calls and sales of securities in the Company's investment
portfolio. There can be no assurance that the Company's investment portfolio
will yield comparable investment gains in future periods.

S-22
<PAGE>

Other Income

The decrease in other income in the nine months ended September 30, 1998 is
the result of the settlement in the second quarter of 1997 of the litigation
concerning Fidelity.

Total Benefits and Expenses

Total benefits and expenses for the nine months ended September 30, 1998
aggregated approximately $129.8 million, as compared to approximately $120.1
million for the nine months ended September 30, 1997, an increase of
approximately 8.1%. The reasons for this increase are discussed under the
respective components below.

Interest Credited and Benefits to Policyholders

Interest credited and benefits to policyholders aggregated approximately
$109.4 million for the nine months ended September 30, 1998, as compared to
approximately $102.9 million for the nine months ended September 30, 1997. This
represents an increase of approximately 6.4%. The increase is attributable to
the increase in policyholders' account balances as of September 30, 1998 as a
result of the increase in annuity considerations received during the period.

The Insurance Company's average credited rate for reserves and account
balances for the nine months ended September 30, 1998 and 1997 was less than
the Company's ratio of net investment income to mean invested assets for the
same periods as noted above under "Net Investment Income". Although management
does not currently expect material declines in the spread between the Company's
average credited rate for reserves and account balances and the Company's ratio
of net investment income to mean assets (the "Spread"), there can be no
assurance that the Spread will not decline in future periods or that such
decline will not have a material adverse effect on the Company's financial
condition and results of operations. Depending, in part, upon competitive
factors affecting the industry in general, and the Company, in particular, the
Company may, from time to time, change the credited rates on certain of its
products. There can be no assurance that the Company will reduce such rates or
that any such reductions will broaden the Spread.

Interest Expense on Notes Payable

The interest expense on the Company's notes payable was approximately $5.5
million for the nine months ended September 30, 1998, as compared to
approximately $4.4 million for the nine months ended September 30, 1997. The
increase is attributable to the increase in the amounts borrowed under the
Company's short term note payable.

General Expenses, Taxes and Commissions

General expenses, taxes and commissions to agents aggregated approximately
$14.0 million for the nine months ended September 30, 1998, as compared to
approximately $13.5 million for the nine months ended September 30, 1997, an
increase of approximately 4.1%. The increase principally is attributable to
higher commissions and selling expenses incurred in the first nine months of
1998 associated with the higher level of sales in the first

S-23
<PAGE>

nine months of 1998 partially offset by a refund of $0.8 million of state
assessment fees paid in previous years.

Deferred Policy Acquisition Costs

The change in the net Deferred Policy Acquisition Costs for the nine months
ended September 30, 1998 resulted in a charge of approximately $0.8 million, as
compared to a credit of approximately $0.6 million for the nine months ended
September 30, 1997. This change is primarily attributable to an increase in the
costs associated with recent new product sales which have been deferred and are
amortized in proportion to the recognition of earned revenue.

Income Before Income Taxes

For the reasons discussed above, income before income taxes amounted to
approximately $56.7 million for the nine months ended September 30, 1998, as
compared to approximately $64.9 million for the nine months ended September 30,
1997.

Income Taxes

Income tax expense was $18.1 million for the nine months ended September 30,
1998 as compared to approximately $20.0 million for the nine months ended
September 30, 1997. The decrease is primarily attributable to higher income
from operations and realized capital gains for the nine months ended September
30, 1997.

Net Income

For the reasons discussed above, the Company had net income of approximately
$38.7 million during the nine months ended September 30, 1998, as compared to
net income of approximately $44.9 million during the nine months ended
September 30, 1997.

Liquidity and Capital Resources

The Company is an insurance holding company and its primary uses of cash are
debt service obligations, operating expenses and dividend payments. The
Company's principal sources of cash are dividends from the Insurance Company,
sales of and interest on its investments (exclusive of those held by the
Insurance Company) and rent from its real estate. During the third quarter of
1998, the Company's Board of Directors declared a quarterly cash dividend of
$.075 per share payable on October 1, 1998. During the third quarter of 1998
the Company purchased and retired 65,900 shares of common stock. For the nine
months ended September 30, 1998, the Company has purchased and retired 705,900
shares of common stock. The Company is authorized to purchase an additional
526,333 shares of common stock.

S-24
<PAGE>

the Insurance Company is subject to restrictions on the payment of dividends
under New York State law. New York State law states that no domestic stock life
insurance company shall distribute any dividend to its shareholders unless a
notice of its intention to declare such dividend and the amount thereof shall
have been filed with the Superintendent of the New York State Insurance
Department ("Superintendent") not less than 30 days in advance of such proposed
declaration. The Superintendent may disapprove such distribution by giving
written notice to such company within 30 days after such filing that he or she
finds that the financial condition of the company does not warrant such
distribution. The New York State Insurance Department has established informal
guidelines for the Superintendent's findings which focus upon, among other
things, the overall financial condition and profitability of the insurer under
statutory accounting practices. During the first nine months of 1998, the
Insurance Company paid dividends to the Company of $49.4 million. During the
fiscal year 1997, the Insurance Company paid dividends of $24.8 million to the
Company.

Principal sources of funds at the Insurance Company are premiums and other
considerations paid, contract charges earned, net investment income received
and proceeds from investments called, redeemed or sold. The principal uses of
these funds are the payment of benefits on annuity contracts and life insurance
policies (including withdrawals and surrender payments), operating expenses and
the purchase of investments. Net cash provided by the Company's operating
activities (reflecting principally: (i) premiums and contract charges collected
less (ii) benefits paid on life insurance and annuity products plus (iii)
income collected on invested assets less (iv) commissions and other general
expenses paid) was approximately $25.6 million and $34.6 million during the
nine months ended September 30, 1998 and 1997, respectively. Net cash provided
by (used in) the Company's investing activities (principally reflecting
investments purchased less investments called, redeemed or sold) was
approximately $72.1 million and $(60.8) million during the nine months ended
September 30, 1998 and 1997, respectively.

For purposes of the Company's consolidated statements of cash flows,
financing activities relate primarily to sales and surrenders of the Company's
universal life insurance and annuity products. The payment of dividends by the
Company also are considered to be a financing activity. Net cash provided by
(used in) the Company's financing activities amounted to approximately $(110.4)
million and $23.8 million during the nine months ended September 30, 1998 and
1997, respectively. This fluctuation primarily is attributable to the reduced
activity in dollar roll repurchase transactions, partially offset by higher
policyholder account balances (as a result of increased sales), an increase in
common stock repurchased, and an increase in borrowings under the Company's
line of credit during the nine months ended September 30, 1998.

The Company currently has one bank line of credit for $25.0 million of which
$23.0 million was drawn at September 30, 1998.

The indenture governing the Senior Notes contains covenants relating to
limitations on additional indebtedness, restricted payments, liens, sale or
issuance of capital stock of the Insurance Company, certain asset sales and the
ability to engage in mergers or similar

S-25
<PAGE>

transactions. In the event the Company violates such covenants as defined in
the indenture, the Company is obligated to offer to repurchase 25% of the
outstanding principal amount of such notes. The Company believes that it is in
compliance with all of the covenants. During the first quarter of 1998,
Standard & Poor's upgraded the Senior Note from BBB- to BBB.

The Company has filed a registration statement with the Securities and
Exchange Commission covering up to $100 million aggregate principal amount of
senior notes ("New Senior Notes"). The net proceeds from the sale of such
offering are expected to be used to retire existing indebtedness and for
general corporate purposes. The Company expects to complete the offering during
the fourth quarter of 1998.

In connection with the offering of the New Senior Notes, the Company entered
into a forward treasury lock agreement with a creditworthy financial
institution pursuant to which the Company will make or receive, respectively,
payments in respect of an aggregate notional principal amount of $100 million
depending upon whether the interest rate for ten-year Treasury Notes in effect
on the settlement date has increased or declined during the term of the
agreement. The amount of any unrecognized gain or loss is not recognized in the
financial statements and fluctuates with the ten-year Treasury Note. At
September 30 and October 30, 1998, the agreement had an unrealized loss of
$10.87 million and $9.52 million respectively. If by the settlement date the
Company has issued the related debt, the unrecognized gain or loss will be
capitalized and amortized over the term of the New Senior Notes as a decrease
or increase in interest expense. To the extent that the Company has not issued
the related debt by the settlement date, the Company can extend the settlement
date to coincide with the offering of the New Senior Notes. To the extent the
Company changes its intention with respect to the issuance of the New Senior
Notes, the Company will be required to recognize gain or loss as if the
settlement had occurred at that time.

Given the Insurance Company's historic cash flow and current financial
results, management believes that for the next twelve months and for the
reasonably foreseeable future, the Insurance Company's cash flow from operating
activities will provide sufficient liquidity for the operations of the
Insurance Company, as well as provide sufficient funds to the Company, so that
the Company will be able to make dividend payments, satisfy its debt service
obligations and pay its other operating expenses.

The Company's deferred annuity products are designed to encourage persistency
by incorporating surrender charges that exceed the cost of issuing the annuity.
An annuitant may not terminate or withdraw substantial funds for periods
generally ranging from one to seven years without incurring significant
penalties in the form of surrender charges. Approximately 57.5%, 60.2% and
64.2% of the Company's deferred annuity contracts in force (measured by
reserves) as of September 30, 1998 and December 31, 1997 and 1996 are
surrenderable without charge. The decrease since December 31, 1996 is
attributable to the increase in deferred annuity contracts in force as a result
of the increase in annuity considerations received.

S-26
<PAGE>

flows necessary to correspond with the expected cash needs on the underlying
liabilities under various interest rate scenarios. In addition, the Company
invests a portion of its total assets in short-term investments (approximately
8.4% and 10.3% as of September 30, 1998 and December 31, 1997, respectively).
The McCaulay's duration to maturity at market value of the Company's investment
portfolio was approximately 5.4 years as of September 30, 1998. The Company's
fixed maturity investments are all classified as available for sale and
includes those securities available to be sold in response to, among other
things, changes in market interest rates, changes in the security's prepayment
risk, the Company's need for liquidity and other similar factors. These
investments are carried at market value and unrealized gains and losses, net of
the effects of amortization of deferred policy acquisition costs and deferred
federal income taxes, are credited or charged directly to shareholders' equity,
unless a decline in market value is considered to be other than temporary, in
which event, the Company recognizes a loss. Equity securities include common
stocks and non-redeemable preferred stocks and are carried at market value,
with the related unrealized gains and losses, net of federal income taxes, if
any, credited or charged directly to shareholders' equity, unless a decline in
market value is considered to be other than temporary, in which event, the
Company recognizes a loss.

The Insurance Company is subject to Regulation 130 adopted and promulgated by
the New York State Insurance Department ("NYSID"). Under this Regulation, the
Insurance Company's ownership of below investment grade debt securities is
limited to 20.0% of total admitted assets, as calculated under statutory
accounting practices. As of September 30, 1998 and December 31, 1997,
approximately 6.3% and 5.4%, respectively, of the Insurance Company's total
admitted assets were invested in below investment grade debt securities.

The Company maintains a portfolio which includes below investment grade debt
securities which were purchased to achieve a more favorable investment yield
all of which are classified as available for sale and reported at fair value.
As of September 30, 1998 and December 31, 1997, the carrying value of these
securities was approximately $196.7 million and $164.6 million, respectively,
(representing approximately 7.9% and 6.4%, respectively, of the Company's total
assets and 38.5% and 32.8%, respectively, of shareholder's equity).

Investments in below investment grade debt securities have different risks
than investments in corporate debt securities rated investment grade. Risk of
loss upon default by the borrower is significantly greater with respect to
below investment grade debt securities because below investment grade debt
securities generally are unsecured and often are subordinated to other
creditors of the issuer. Also, issuers of below investment grade debt
securities usually have high levels of indebtedness and often are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. Typically, there only is a
thinly traded market for such securities and recent market quotations may not
be available for some of these securities. Market quotes generally are
available only from a limited number of dealers and may not represent firm bids
of such dealers or prices for actual sales. The Company attempts to reduce the
overall risk in its below investment grade portfolio, as in all of its
investments, through careful credit analysis, investment policy limitations,
and diversification by company and by industry.

S-27
<PAGE>

As of September 30, 1998, approximately 10.98% of the Company's total
invested assets were invested in limited partnerships and 1.99% were invested
in equity securities. Pursuant to NYSID regulations, the Company's investments
in equity securities, including limited partnership interests, may not exceed
20% of the Insurance Company's invested assets. Investments in limited
partnerships are included in the Company's consolidated balance sheet under the
heading "Other invested assets." See "Note 1.C. to the Notes to Unaudited
Consolidated Financial Statements." The Company is committed, if called upon
during a specified period, to contribute an aggregate of approximately $54.4
million of additional capital to certain of these limited partnerships.
However, management does not expect the entire amount to be drawn down as
certain of these limited partnerships are nearing the end of the period during
which investors are required to make contributions. The Company may make
selective investments in additional limited partnerships as opportunities
arise. In general, risks associated with such limited partnerships include
those related to their underlying investments (i.e., equity securities, debt
securities, hedges and real estate), plus a level of illiquidity, which is
mitigated by the ability of the Company to take annual distributions of
partnership earnings. During the third quarter of 1998, the Company recorded
losses of $13.3 million related to hedge fund investments in Long Term Capital
Partners L.P. and The Global Convergence Fund, L.P. There can be no assurance
that the Company will continue to achieve the same level of returns on its
investments in limited partnerships as it has historically or that the Company
will achieve any returns on such investments at all. Further, there can be no
assurance that the Company will receive a return of all or any portion of its
current or future capital investments in limited partnerships. The failure of
the Company to receive the return of a material portion of its capital
investments in limited partnerships, or to achieve historic levels of return on
such investments, could have a material adverse effect on the Company's
financial condition and results of operations.

As previously discussed, during the first three quarters of fiscal 1998 and
in fiscal 1997, the Company participated in "dollar roll" repurchase
agreements. Amounts outstanding to repurchase securities under such agreements
were $99.2 million and $205.2 at September 30, 1998 and December 31, 1997,
respectively. The Company may engage in selected "dollar roll" transactions as
market opportunities arise.

All 50 states of the United States, the District of Columbia and Puerto Rico
have insurance guaranty fund laws requiring all life insurance companies doing
business within

S-28
<PAGE>

the jurisdictions to participate in guaranty associations, which are organized
to pay contractual obligations under insurance policies (and certificates
issued under group insurance policies) issued by impaired or insolvent life
insurance companies. These associations levy assessments (up to prescribed
limits) on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired or insolvent insurer is engaged. Some states
permit member insurers to recover assessments paid through full or partial
premium tax offsets. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's solvency. The amount of these
assessments in prior years has not been material, however, the amount and
timing of any future assessment on the Insurance Company under these laws
cannot be reasonably estimated and are beyond the control of the Company and
the Insurance Company. Recent failures of substantially larger insurance
companies could result in future assessments in material amounts.

Effects of Inflation and Interest Rate Changes

Management does not believe that inflation has had a material adverse effect
on the Company's consolidated results of operations. The Company manages its
investment portfolio in part to reduce its exposure to interest rate
fluctuations. In general, the market value of the Company's fixed maturity
portfolio increases or decreases in an inverse relationship with fluctuations
in interest rates, and the Company's 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, the Company has adopted
strategies which are designed to address either an increase or decrease in
prevailing rates. In a rising interest rate environment, the Company's average
cost of funds would be expected to increase over time as it prices its new and
renewing annuities to maintain a generally competitive market rate.
Concurrently, the Company would attempt to place new funds in investments which
were matched in duration to, and higher yielding than, the liabilities assumed.
Management believes that liquidity necessary to fund withdrawals would be
available through income, cash flow, the Company's cash reserves or from the
sale of short-term investments. In a declining interest rate environment, the
Company's cost of funds would be expected to decrease over time, reflecting
lower interest crediting rates on its fixed annuities. Should increased
liquidity be required for withdrawals, management believes that since all of
the Company's investments are designated as available for sale in the Company's
consolidated balance sheet that they could be sold without materially adverse
consequences in light of the general strengthening which would be expected in
the fixed maturity security market.

Interest rate changes also may have temporary effects on the sale and
profitability of the universal life and annuity products offered by the
Company. For example, if interest rates rise, competing investments (such as
annuity or life insurance products offered by the Company's competitors,
certificates of deposit, mutual funds and similar instruments) may

S-29
<PAGE>

become more attractive to potential purchasers of the Company's products until
the Company increases the rates credited to holders of its universal life and
annuity products. In contrast, as interest rates fall, the Company attempts to
lower its credited rates to compensate for the corresponding decline in its net
investment income. As a result, changes in interest rates could materially
adversely effect the financial condition and results of operations of the
Company depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at
competitive levels which are designed to discourage surrenders and which may be
considered attractive to purchasers of new annuity products. In addition,
because the level of prevailing interest rates impacts the Company as well as
its competition, management does not believe that the current interest rate
environment has materially affected the Company's competitive position vis a
vis other life insurance companies that emphasize the sale of annuity products.
Notwithstanding the foregoing, if interest rates continue at current levels or
decline further, there can be no assurance that this segment of the life
insurance industry, including the Company, would not experience increased
levels of surrenders and reduced sales and thereby be materially adversely
affected.

Recent Accounting Pronouncements

S-30
<PAGE>

Year 2000 Matters

In 1994, the Company initiated the process of migrating to a local area
network and preparing its computer systems and applications for the Year 2000.
This process involves modifying or replacing certain hardware and software
maintained by the Company as well as communicating with external service
providers to ensure that they are taking the appropriate action to remedy their
Year 2000 issues. Management expects that the modification process of all
significant applications will be completed by December 31, 1998 and that all of
the remaining non-critical system and application changes will be completed
during the second half of 1999.

The Company has initiated formal communications with its significant vendors
and business partners to determine the extent to which the Company may be
vulnerable to those third parties' failure to properly remediate their own year
2000 issues. While the Company is not presently aware of any such significant
exposure, the Company cannot predict the outcome of other companies'
remediation efforts.

While the Company is not presently aware of any significant exposure that its
systems will not be properly remediated on a timely basis, there can be no
assurances that all year 2000 remediation processes will be completed and
properly tested before the year 2000, or that contingency plans will
sufficiently mitigate the risk of a year 2000 readiness problem. The failure of
the systems of the Company or its significant vendors or business partners due
to a year 2000 readiness problem could have a material adverse effect on the
Company.

The Company's contingency plans, which are expected to be completed during
the second quarter of 1999, will be structured to address both remediation of
those systems not

S-31
<PAGE>

yet compliant and their components and overall business operating risk. These
plans are intended to mitigate both internal risk as well as potential risks
relative to a significant exposure identified relative to the dependencies on
third-party systems.

Purchased hardware will be capitalized in accordance with normal policy.
Personnel and all other costs related to the project are being expensed as
incurred. Based on Management's best estimates, the total cost to the Company
of both migrating to a local area network, replacing software and Year 2000
compliance activities is not expected to exceed $3.2 million. Since 1994, the
Company has incurred approximately $2.8 million in connection with migrating to
a local area network, replacing software and Year 2000 compliance. The total
cost to the Company of these Year 2000 compliance activities has not been and
is not anticipated to be material to its financial position or results of
operations in any given year.

Forward Looking Information

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

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

S-32
<PAGE>

EXPERTS

With respect to the unaudited interim financial information for the three-
month and nine-month periods ended September 30, 1998 and 1997 which is
included and incorporated herein by reference, Deloitte & Touche LLP have
applied limited procedures in accordance with professional standards for a
review of such information. However, as stated in their report for the quarter
ended September 30, 1998 and included elsewhere herein, they did not audit and
they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
Deloitte & Touche LLP are not subject to the liability provisions of Section 11
of the Securities Act of 1933 for their report on the unaudited interim
financial information because this report is not a "report" or a "part" of the
registration statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.

S-33
<PAGE>

PROSPECTUS

$100,000,000

PRESIDENTIAL LIFE CORPORATION

7 7/8% Senior Notes due February 15, 2009

----------------
Presidential Life Corporation ("Presidential," and, together with its wholly
owned subsidiaries, the "Company") may offer from time to time up to
$100,000,000 aggregate principal amount of its 7 7/8% Senior Notes due February
15, 2009 (the "Notes"). The Notes will be unsecured and will rank equally with
all other unsecured senior indebtedness of Presidential. However, since the
Notes will not be secured, they will be effectively subordinated to any secured
indebtedness of Presidential. After giving pro forma effect to the application
of the proceeds of the Notes, the Company will have no secured indebtedness
outstanding and the only senior indebtedness of the Company will be the Notes.
The Company is a holding company and, accordingly, the Notes also are
effectively subordinated to liabilities of Presidential's subsidiaries. As of
June 30, 1998, the outstanding assets and liabilities of such subsidiaries,
including policyholder liabilities, trade payables and accrued expenses were
approximately $2.544 billion and $2.023 billion, respectively.

The prospectus supplement ("Prospectus Supplement") accompanying this
Prospectus will set forth, with respect to an issue of Notes for which this
Prospectus and the Prospectus Supplement are being delivered, additional terms
of the Notes offered, including principal amount to be offered, rate of
interest and the initial price to the public. The Notes will be redeemable in
whole or in part, at the option of the Company, at any time upon not less than
30 nor more than 60 days' notice at a redemption price equal to the sum of (i)
100% of the principal amount of such Notes plus accrued and unpaid interest to,
but excluding, the date of redemption and (ii) a premium equal to the Make-
Whole Amount (as defined in the Indenture referred to below). In the event of a
Sale of a Significant Subsidiary (as defined in the Indenture), the Company
will, at the option of each holder thereof, redeem the Notes at a redemption
price equal to 100% of the principal amount of such Notes plus accrued and
unpaid interest to, but excluding, the date of redemption. The Notes will
mature on February 15, 2009, and will be limited to $100,000,000 aggregate
principal amount, which may be issued in one or more offerings up to such
aggregate principal amount. Any Notes issued subsequent to the initial offering
of Notes will have identical terms and conditions as the Notes then outstanding
and will vote on all matters together with such outstanding Notes.
Notwithstanding the above, the issue price for any additional Notes may differ
from the issue price of the outstanding Notes and the first interest period for
any additional Notes will run from the date of issuance of such additional
Notes to, but excluding, the next Interest Payment Date for the Notes. See
"Description of the Notes."

----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. any representation to the contrary is
a criminal offense.

The Notes may be sold directly to purchasers or to or through underwriters,
dealers or agents. If any underwriters, dealers or agents are involved in the
offering of any Notes, their names and any applicable fee, commission or
discount arrangements will be set forth in the Prospectus Supplement. See "Plan
of Distribution." This prospectus may not be used to consummate sales of Notes
unless accompanied by a Prospectus Supplement. Any statement contained in this
Prospectus will be deemed to be modified or superseded by any inconsistent
statement contained in any accompanying Prospectus Supplement.

----------------
The date of this Prospectus is February 18, 1999.
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
should be available at the Commission's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web
site (http://www.sec.gov) at which reports, proxy materials and other
information regarding the Company may be accessed. The common stock, par value
$0.01 per share, of the Company (the "Common Stock") is listed on the National
Association of Securities Dealers, Inc. Automated Quotation System--National
Market System ("NASDAQ-NMS"). Accordingly, certain of the Company's reports,
proxy materials and other information may be available for inspection at the
offices of the National Association of Securities Dealers, Inc. (the "NASD") at
1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form S-
3 (together with all amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Notes. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Notes, reference is made to the Registration
Statement and to the exhibits and schedules thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
filed as an exhibit to the Registration Statement or incorporated by reference
herein or therein, while complete in all material respects, do not necessarily
describe all terms or provisions of such contract, agreement or other document.
For a complete description of the matter involved, reference is made to each
such contract, agreement or other document which has been included as an
exhibit to the Registration Statement or has been incorporated by reference
therein. The Registration Statement, including the exhibits and schedules
therein, may be inspected without charge and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Commission by the Company (File No. 0-
5486) pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K for the year ended December
31, 1997;

2
<PAGE>

2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;

3. The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998;

4. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998;

5. The Company's current report on Form 8-K, dated February 16, 1999; and

6. The Company's Proxy Statement on Schedule 14A for the Annual Meeting
of Shareholders filed with the Commission on April 24, 1998.

All documents and reports filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the offering of the Notes shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
respective dates of filing of such documents or reports. Any statement
contained in a document, all or a portion of which is incorporated or deemed to
be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document or report which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to any person to whom this Prospectus
is delivered, upon written or oral request of such person, a copy of any or all
of the documents that have been incorporated by reference in this Prospectus,
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the documents so incorporated. Requests for such
copies should be directed to Michael V. Oporto, Chief Financial Officer,
Presidential Life Corporation, 69 Lydecker Street, Nyack, New York 10960,
telephone (914) 358-2300.

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the related notes thereto,
appearing elsewhere in this Prospectus. All financial information set forth
herein is presented in accordance with generally accepted accounting principles
("GAAP"), unless otherwise noted. See "Glossary of Selected Insurance Terms"
for the definitions of certain insurance terms used herein. Unless the context
otherwise requires, all references to the Company shall be deemed to include
Presidential and its wholly owned subsidiaries, including Presidential Life
Insurance Company (the "Insurance Company").

The Company

The Company is an insurance holding company that, through the Insurance
Company, a stock life insurance company, emphasizes the sale of a variety of
single premium and flexible premium annuity products as well as annual and
single premium life insurance products. The Insurance Company began operations
in 1966. During the last two years, over 90% of the Company's statutory net
premium income was derived from its individual annuity business.

The Company's products are designed to meet the needs of increasingly
sophisticated consumers for such things as supplemental retirement income,
estate planning and financial protection in the event of unexpected death. The
Company markets its products primarily to individuals in the 45 to 64 year old
age group.

The Company's strategy is to offer products that compare favorably to
competitive alternatives, to emphasize a high level of service to agents and
customers, to maintain a low cost structure and to invest predominantly in
investment grade debt securities. The Company's statutory gross premiums and
annuity considerations for the six months ended June 30, 1998 have increased by
approximately 18.5% over statutory gross premiums and annuity considerations
for the comparable period of the prior year. In that regard, the Company's
statutory gross premiums and annuity deposits were approximately $72.0 million
for the six months ended June 30, 1998, as compared to approximately $60.8
million for the six months ended June 30, 1997 and approximately $145.1 million
for the entirety of 1997. The Insurance Company is rated "A- (Excellent)" by
A.M. Best Company ("A.M. Best"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."

The Company's product distribution system consists of approximately 570
independent general agents who market the Company's products through
approximately 6,690 licensed insurance agents and brokers. Management believes
that the Company offers competitive commission rates and seeks to provide
innovative products and quality service to its independent general agents.
Management believes that the Company's use of this independent agent
distribution system provides a cost advantage, since the Company incurs no
fixed costs associated with recruiting, training and maintaining employee
agents.

4
<PAGE>

As of June 30, 1998, the Company's shareholders' equity was approximately
$523.2 million and its total assets were approximately $2.6 billion. As of June
30, 1998, the Insurance Company had statutory admitted assets of approximately
$2.4 billion, statutory capital, surplus and Asset Valuation Reserve ("AVR") of
approximately $388.3 million and a statutory Interest Maintenance Reserve
("IMR") of approximately $18.1 million.

The Company manages its investment portfolio to meet the diversification,
yield and liquidity requirements of its annuity contract and insurance policy
obligations as well as other corporate obligations. The Company's investment
philosophy generally focuses on purchasing investment grade securities
generally with the intention of holding such securities until maturity.
However, as market opportunities or liquidity or regulatory considerations may
dictate, securities may be sold prior to maturity. The fair value of the
investment portfolio as of June 30, 1998 included approximately $1.5 billion of
investment grade fixed maturity instruments, approximately $160.2 million of
below investment grade debt securities, approximately $265.6 million of limited
partnership interests, approximately $213.5 million of preferred stock and
approximately $63.0 million of common stock. As of June 30, 1998, the Company's
fixed maturity investment portfolio had a duration of approximately six years.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Investments and Investment Policy."

The Company manages its annuity and life insurance business with a goal of
maintaining a balance of relatively long- and short-term liabilities. As of
June 30, 1998, single premium immediate annuity products (generally considered
to be longer-term liabilities) represented approximately 36.1% of policy and
deposit liabilities, while life insurance cash values and deferred annuity
products (generally considered to be shorter-term liabilities) represented
approximately 63.9% of policy and deposit liabilities. Single premium immediate
annuity products provide long-term guaranteed benefit payment streams utilizing
fixed interest rate assumptions and typically cannot be surrendered or borrowed
against. In contrast, deferred annuity products and life insurance cash values
provide relatively short-term interest guarantees on funds that typically can
be surrendered. Although this mix in the Company's products may change from
time to time, management believes that the current mix of long-term and short-
term liabilities will reduce the impact on the Company's results of operations
that are caused by fluctuations in prevailing interest rates.

The Insurance Company is licensed to market its products in 48 states and in
the District of Columbia. However, for the six months ended June 30, 1998,
approximately 58.5% of the gross statutory annuity considerations and life
insurance premiums received by the Company were sold to annuitants and
policyholders residing in the State of New York.

The Company's principal offices are located at 69 Lydecker Street, Nyack, New
York 10960 and its telephone number is (914) 358-2300.

Recent Developments

On October 29, 1998, the Company announced net income for the quarter ended
September 30, 1998 of $6.5 million or $0.20 per share compared to $16.0 million
or

5
<PAGE>

$0.49 per share for the quarter ended September 30, 1997. Net income for the
quarter ended September 30, 1998 includes losses, net of taxes, of $9.2 million
or $0.29 per share related to hedge fund investments in Long Term Capital
Partners L.P. and The Global Convergence Fund, L.P. Net operating earnings for
the quarter ended September 30, 1998 were $2.9 million or $0.09 per share and
include such losses, net of taxes. Net operating earnings for the quarter ended
September 30, 1997 were $9.7 million or $0.30 per share. Net investment gains
for the quarter ended September 30, 1998 were $3.6 million or $0.11 per share
compared to $6.3 million or $0.19 per share for the quarter ended September 30,
1997. For the nine months ended September 30, 1998, the Company reported net
income of $38.7 million or $1.20 per share compared to $44.9 million or $1.37
per share for the nine months ended September 30, 1997. Net operating earnings
for the nine months ended September 30, 1998 were $28.5 million or $0.89 per
share compared to $32.1 million or $0.98 per share for the nine months ended
September 30, 1997. Net investment gains for the nine months ended September
30, 1998 were $10.2 million or $0.32 per share compared to $12.9 million or
$0.39 per share for the nine months ended September 30, 1997.

Risk Factors

Prospective purchasers of the Notes should carefully consider the factors
described under "Risk Factors," as well as other information set forth in this
Prospectus, prior to making an investment in the Notes.

6
<PAGE>

Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues:
Premiums............... $ 4,743 $ 4,249 $ 4,408 $ 4,244 $ 3,976 $ 1,098 $ 1,153
Annuity
considerations........ 3,029 1,569 3,780 8,461 19,655 7,978 15,644
Universal life and
investment type policy
fee income............ 2,665 1,912 1,934 2,090 1,988 956 1,140
Net investment income.. 157,718 145,107 170,780 186,180 191,818 98,022" 110,076
Realized investment
gains................. 36,277 19,083 17,216 20,020 26,039 11,013 9,069
Other income........... 1,927 1,834 1,746 2,679 4,228 2,995 2,357
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 206,359 173,754 199,864 223,674 247,704 122,062 139,439
-------- -------- -------- -------- -------- -------- --------
Benefits and expenses:
Interest credited and
benefits to
policyholders......... 126,740 119,731 123,923 124,260 136,998 66,703 75,125
Interest expense on
notes payable......... 6,522 4,946 5,045 5,049 5,850 2,780 3,833
Selling, general and
administrative
expenses.............. 15,890 11,858 14,506 18,008 14,298 10,490 11,663
-------- -------- -------- -------- -------- -------- --------
Total benefits and
expenses.............. 149,152 136,535 143,474 147,317 157,146 79,973 90,621
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 57,207 37,219 56,390 76,357 90,558 42,089 48,818
Provision (benefit) for
income taxes(1)........ 10,382 (2,693) 7,332 21,836 29,266 13,169 16,649
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 46,825 $ 39,912 $ 49,058 $ 54,521 $ 61,292 $ 28,920 $ 32,169
======== ======== ======== ======== ======== ======== ========
Earnings per common
share(1)............... $ 1.53 $ 1.18 $ 1.46 $ 1.64 $ 1.87 $ .88 $ 1.00
Ratio of earnings to
fixed charges(2)....... 10.21x 8.07x 12.18x 16.12x 16.48x 16.14x 13.74x
Ratio of earnings to
fixed charges and
interest credited to
policyholder
accounts(2)............ 1.68x 1.45x 1.67x 1.95x 2.10x 2.05x 2.16x
Cash dividends declared
per common share....... $ .09 $ .09 $ .105 $ .15 $ .22 $ .10 $ .135
Statutory Data(3):
Net statutory
premiums(4)............ $ 52,177 $ 53,188 $105,177 $109,937 $140,791 $ 59,084 $ 70,212
Net gain from
operations............. 23,938 13,959 34,667 41,230 43,500 24,195 31,308
Statutory capital and
surplus(5)............. 250,434 257,570 296,712 341,059 370,742 346,542 388,314
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
Balance Sheet Data:
Total assets.................................... $2,558,341 $2,612,387
Total investments............................... 2,464,359 2,541,685
Total policy liabilities........................ 1,714,981 1,734,860
Long-term notes payable......................... 50,000 50,000
Shareholders' equity............................ 502,654 523,186
</TABLE>
- --------
(1) The results for 1993 included the cumulative effect of a change in
accounting principle (Financial Accounting Standard No. 109) of $2.8
million or $0.09 per share.
(2) In calculating this ratio, earnings consist of income (loss) before income
taxes and cumulative effect of a change in accounting principle, plus fixed
charges adjusted to exclude interest capitalized. Fixed charges consist of
interest, whether expensed or capitalized, capitalized lease interest
expense and amortization of deferred financing fees, whether expensed or
capitalized, plus the portion of rental expense under operating leases
which has been deemed by the Company to be representative of the interest
factor.
(3) Statutory data reflect the data derived from the annual and quarterly
statements of the Insurance Company as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
(4) Premiums and annuity considerations, net of reinsurance, as presented for
statutory reporting purposes differ from those reported under GAAP. For
GAAP reporting, premiums for universal life, single premium deferred
annuities and single premium immediate annuities with a stated period are
reported as deposit liabilities, not as premium revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Statutory capital and surplus includes the asset valuation reserve.

7
<PAGE>

RISK FACTORS

Prospective investors in the Notes offered hereby should carefully consider
the risk factors set forth below as well as the other information contained in
this Prospectus.

Ranking; Holding Company Structure; Restrictions on Dividends

The Notes will be general unsecured obligations of Presidential and will rank
pari passu with all other unsecured senior indebtedness of Presidential and
senior to all subordinated indebtedness of Presidential. However, since the
Notes will not be secured, they will be effectively subordinated to any secured
indebtedness of Presidential. After giving pro forma effect to the offering of
the Notes, the Company will have no secured indebtedness outstanding and the
only senior indebtedness of the Company will be the Notes. The Indenture will
not prohibit Presidential from incurring additional senior indebtedness,
including secured senior indebtedness, but requires that the Notes be secured
on a pari passu basis with any additional secured senior indebtedness, other
than secured indebtedness represented by (i) capital lease obligations and
purchase money indebtedness, (ii) money deposited in trust or escrow to retire
certain of the Company's existing indebtedness, and (iii) specified
indebtedness of certain subsidiaries of the Company. See "Description of the
Notes."

Presidential 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 principal and interest payments
on its outstanding indebtedness and to pay dividends on its Common Stock, are
dividends from the Insurance Company, sales of and interest on its investments
and rent from its real estate. Because the operations of the Company are
conducted through the Insurance Company, Presidential's cash flow and
consequently its ability to service debt, including amounts under the Notes, is
substantially dependent upon dividends from the Insurance Company. The
Insurance Company will have no direct obligation, contingent or otherwise, to
pay any amount due under the Notes or to make any funds available therefor,
whether in the form of loans, dividends or otherwise. Because of this holding
company structure, claims of creditors of Presidential's subsidiaries,
including policyholders, will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of Presidential,
including holders of the Notes. Accordingly (except to the extent that
Presidential may itself be a creditor of such subsidiary), the Notes will be
effectively subordinated to liabilities, including policyholder liabilities,
trade payables and accrued expenses, of Presidential's subsidiaries. The
Indenture will not prohibit Presidential's subsidiaries, including the
Insurance Company, from incurring indebtedness. As of June 30, 1998, the
outstanding assets and liabilities of such subsidiaries, including policyholder
liabilities, trade payables and accrued expenses were approximately $2.544
billion and $2.023 billion, respectively.

In the event of a default on Presidential's debt or an insolvency,
liquidation or other reorganization of Presidential, the creditors and
stockholders of Presidential will have no right to proceed against the assets
of the Insurance Company or to cause it to be liquidated, rehabilitated or
placed in receivership or conservatorship. If the Insurance Company were to

8
<PAGE>

be liquidated, such liquidation would be conducted under the supervision of the
Superintendent of Insurance of the State of New York (the "Superintendent") as
the receiver with respect to the Insurance Company's property and business. See
"Business--Insurance Regulation."

The Insurance Company is subject to various regulatory restrictions,
including restrictions on the maximum amount of payments, including loans or
cash advances, that it may make to Presidential without obtaining prior
regulatory approval. As a New York domiciled insurance company, the Insurance
Company is subject to restrictions on the payment of dividends under New York
law. New York law states that no domestic stock life insurance company may
distribute any dividend to its shareholders unless a notice of its intention to
declare such dividend and the amount thereof shall have been filed with the
Superintendent not less than 30 days in advance of such proposed declaration.
The Superintendent may disapprove such distribution by giving written notice to
such company within 30 days after such filing that he or she finds that the
financial condition of the insurance company does not warrant such
distribution. The New York State Department of Insurance (the "NYSDI") has
established informal guidelines for the Superintendent's determinations. These
guidelines focus upon, among other things, the overall financial condition and
profitability of the insurer under statutory accounting practices. During the
first six months of 1998, the Insurance Company paid dividends of $29.4 million
to Presidential. During 1997, 1996 and 1995, the Insurance Company paid
dividends of $24.8 million, $15.0 million and $5.0 million, respectively, to
Presidential.

The inability of the Insurance Company to pay dividends to Presidential in an
amount sufficient to permit Presidential to make principal and interest
payments on its outstanding indebtedness (including the Notes), meet its
operating expenses and pay dividends would have a material adverse effect on
Presidential's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

Importance of A.M. Best Ratings

Insurers compete with other insurance companies, financial intermediaries and
other institutions on the basis of a number of factors, including the ratings
assigned by A.M. Best. The Insurance Company is rated "A- (Excellent)" by A.M.
Best. Publications of A.M. Best indicate that the "A-" rating is assigned to
those companies that, in A.M. Best's opinion, have achieved, on balance,
excellent overall performance when compared to the norms of the insurance
industry and that generally have demonstrated a strong ability to meet their
respective policyholder and other contractual obligations over a long period of
time. A.M. Best reviews its ratings of insurance companies from time to time.
If the Insurance Company's A.M. Best rating were downgraded, the Company's
sales of annuity products and life insurance policies could be significantly
impacted and the Company's financial condition and results of operations could
be materially adversely affected. See "Business--Claims Paying and Other
Ratings."

9
<PAGE>

Geographic Concentration

For the six months ended June 30, 1998, and for the years ended December 31,
1997, 1996 and 1995, approximately 58.5%, 67.3%, 78.3% and 83.5%, respectively,
of the gross statutory annuity considerations and life insurance premiums
received by the Company were sold to annuitants and policyholders residing in
the State of New York. In that regard, any event that would prevent or
materially impair the Company's ability to market its annuity and life
insurance products in the State of New York would have a material adverse
effect on the Company's financial condition and results of operations.

Surrenderable Annuities

As of June 30, 1998, approximately 61.8% of the Insurance Company's annuity
contracts in force (measured by reserves) were surrenderable. Approximately
36.4% of such contracts or approximately $593.4 million of the Insurance
Company's annuity contracts in force (measured by reserves) are surrenderable
without charge. Changes in prevailing interest rates, ratings or other factors
which result in or lead to significant levels of surrenders of existing annuity
contracts could have a material adverse effect upon the financial condition and
results of operations of the Company. Surrenders result in a reduction of
invested assets upon which the Company may earn investment income and a
reduction of policyholder account balances upon which the Company credits
interest. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" and "--Effects of Inflation and Interest Rate
Changes."

Insurance Regulation

The Insurance Company is subject to substantial governmental regulation in
each of the jurisdictions in which it conducts business. Such regulation is
vested in governmental agencies having broad administrative power with respect
to all aspects of the Insurance Company's business, including, without
limitation, premium rates, policy forms, dividend payments, capital adequacy
and the amount and type of investments that the Insurance Company may make.
Such regulations primarily are intended to protect policyholders rather than
stockholders. The Company also is regulated in the State of New York as part of
an insurance holding company system. Generally, under the New York insurance
holding company statute, the Superintendent must approve in advance the direct
or indirect acquisition of 10.0% or more of the voting securities of a New York
domiciled insurance company.

Recently, state insurance regulators have been re-examining existing laws and
regulations, specifically focusing on insurance company investment and solvency
issues, risk-adjusted capital guidelines, the implementation of non-statutory
guidelines, the definition of extraordinary dividends and the circumstances
under which normal dividends may be paid and, in connection therewith, have
enacted new insurance laws and regulations. In addition, the National
Association of Insurance Commissioners (the "NAIC") has adopted various model
laws including a law establishing minimum risk-based capital standards, which
have been recommended to states for adoption. Congress and certain federal
agencies also are

10
<PAGE>

investigating the current condition of the insurance industry in the United
States in order to determine whether federal regulation would be appropriate.
There can be no assurance that existing insurance-related laws and regulations
will not become more restrictive in the future and, therefore, it is not
possible to predict the potential effects that any proposed or future
legislation may have on the financial condition or operations of the Company.
See "Business--Insurance Regulation."

United States Federal Income Tax Treatment of Annuity Products

Under current United States federal income tax law, earnings on amounts held
by a life insurance company with respect to annuity contracts and life
insurance policies generally are accumulated on a tax-deferred basis.
Accumulated tax-deferred earnings will be subject to taxation when actually
paid (or in certain circumstances when deemed paid) to the person entitled to
receive payment under the contract or policy, as the case may be, unless such
earnings are paid as part of the death benefit under a life insurance policy.
From time to time, proposals to change the current tax treatment of earnings on
annuity contracts and life insurance policies have been made. Most recently,
the Clinton Administration's 1999 budget proposal included provisions
concerning the taxation of certain exchanges between annuities, including the
reallocation of assets within a variable annuity. Although no such proposals
currently are pending before Congress, no assurance can be given that a change
in the tax treatment of earnings on annuity contracts and life insurance
policies will not be enacted into law in the future. In the event that the
United States federal income tax law regarding tax deferral of earnings on
annuity contracts or life insurance policies is substantially revised, consumer
demand for the types of contracts or policies affected by such changes could
decline substantially or be eliminated. The operations and business prospects
of the Company would be materially adversely affected by any substantial
decrease in the demand for such products.

Factors Affecting the Business; Competition

The Company's operating results are affected by many factors, including,
without limitation, competition, lapse rates, interest rates, maintenance of
insurance ratings, governmental regulation and general business conditions,
many of which are outside of the Company's control.

The Company operates 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 the Company, many of which have substantially greater
resources, higher ratings, greater market share and larger, more widespread
agency and brokerage relationships than the Company.

Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to retain and attract independent general
agents to market its products and its ability to develop competitive products
that also are profitable. Although management believes that the Company has
good relationships with its independent general agents, competition for such
agents among insurance companies is intense. The Company's

11
<PAGE>

independent general agents typically represent other insurance companies and
may sell products that compete with those offered by the Company. See
"Business--Competition."

Dependence on Key Personnel

The Company's success depends upon the continued contributions of its key
officers and employees. The Company does not have employment agreements with
any members of senior management, including Herbert Kurz, the founder and
principal stockholder of the Company. Should one or more of these individuals
leave or otherwise become unavailable to the Company for any reason, the
Company's business and results of operations could be materially adversely
affected. See "Management--Directors and Executive Officers."

Control by Principal Stockholder

As of August 31, 1998 Mr. Kurz beneficially owned 24.8% of the outstanding
Common Stock. Accordingly, Mr. Kurz may be able to influence the outcome of
corporate actions requiring stockholder approval, including the election of the
Board of Directors, and to influence the policies and direction of the Company.

Investment Performance

The Company's results of operations depend, in large part, on the investment
performance of its assets and the spread between its return on its invested
assets and the credited rates on its annuity and life insurance products. The
Company's investment portfolio consists primarily of fixed income securities
and investments in limited partnerships. As of June 30, 1998, approximately
10.5% of the Company's investment portfolio, and 50.8% of its stockholders'
equity, consisted of interests in over forty limited partnerships which are
engaged in a variety of investment strategies, principally including merchant
banking, real estate, international opportunities and debt restructuring
activities. Investments made by such limited partnerships generally are
speculative and involve significant risks, including, without limitation, the
total loss of such investment and illiquidity. Pursuant to the terms of certain
limited partnership agreements to which the Company is a party, the Company is
currently committed to contribute, if called upon during certain periods
specified in such agreements, an aggregate of approximately $53.9 million of
additional capital to certain of these limited partnerships. However,
management does not expect this entire amount to be called because certain of
these limited partnerships are nearing the end of the period during which
investors are required to make contributions.

The limited partnerships that are involved in international investments
generally purchase sovereign debt, corporate debt and/or equity in governments
or foreign companies that are developing a greater world wide presence. Such
investments involve risks related to the particular country, including
political instability, currency fluctuations, and repatriation restrictions.

12
<PAGE>

provide a strategic or competitive advantage and are priced at levels which the
general partner believes to be attractive. Real estate investments involve
risks, including adverse changes in general or local economic conditions, real
estate values generally and in the locales of specific properties, interest
rates, supply and demand for the types of properties involved and governmental
rules and policies (including environmental restrictions).

The limited partnerships that are involved in debt restructuring activities
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
and carry a high degree of risk of loss upon default by the borrower. The high
level of indebtedness characteristic of merchant banking and debt restructuring
transactions 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.

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.

While the Company's investments in limited partnerships have generally been
profitable, there can be no assurance that the Company will continue to achieve
the same level of returns on its investments in limited partnerships that it
has achieved during the six months ended June 30, 1998, and during 1997, 1996
or 1995 or that it will achieve any returns on such investments at all. In
addition, there can be no assurance that the Company will receive a return of
all or any portion of its current or future capital investments in limited
partnerships. The failure of the Company to receive the return of a material
portion of its capital investments in limited partnerships, or to achieve
historic levels of returns on such investments, could have a material adverse
effect on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Effects of Inflation and Interest Rate Changes" and "Business--
Investments and Investment Policy."

Capital Adequacy

Effective in 1993, the NAIC adopted a risk-based capital ("RBC") formula,
which prescribes a system for assessing the adequacy of statutory capital and
surplus for all life and health insurers. The basis of the system is a risk-
based formula that applies prescribed factors to the various risk elements in a
life and health insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer. The life and health
RBC formula is designed to measure annually (i) the risk of loss from asset
defaults and asset value fluctuation, (ii) the risk of loss from adverse
mortality and morbidity experience, (iii) the risk of loss from mismatching of
asset and liability cash flow due to changing interest rates and (iv) business
risks. The formula is to be used as an early warning tool to identify companies
that are potentially inadequately capitalized. The formula is

13
<PAGE>

intended to be used as a regulatory tool only and is not intended as a means to
rank insurers generally. Maintaining appropriate levels of statutory surplus,
as measured by state insurance regulators, is considered important by state
insurance regulatory authorities and the private agencies that rate insurers'
claims-paying abilities and financial strength. At December 31, 1997, the
Insurance Company's total adjusted capital was $370.7 million and the
authorized control level RBC was $61.8 million. Failure to maintain certain
levels of statutory surplus could result in increased regulatory scrutiny,
action by state regulatory authorities or a downgrade by the private rating
agencies.

Potential Year 2000 Issues

Many computer software programs and electronic components that incorporate
computer programs use only two-digit year references for dates and date-
dependent functions and thus could require upgrading or replacement prior to
the year 2000 to function properly beginning in the year 2000.

In 1994, the Company initiated the process of migrating to a local area
network and preparing its computer applications for the year 2000. This process
involves modifying or replacing certain hardware and software maintained by the
Company as well as communicating with external service providers to ensure that
they are taking the appropriate action to remedy their year 2000 issues.
Management expects that the modification process of all significant
applications will be completed by December 31, 1998 and that all of the
remaining non-critical system and application changes will be completed during
the second half of 1999.

Based on management's best estimates, the total cost to the Company of both
migrating to a local area network, replacing software and year 2000 compliance
activities is not expected to exceed $3.2 million. Since 1994, the Company has
incurred approximately $2.7 million in connection with migrating to a local
area network, replacing software and year 2000 compliance.

There can be no assurance, however, that (i) the Company will be able to
detect and remedy all potential year 2000 problems in its computer systems and
processes or (ii) programs and components utilized by the Company, but which
are supplied by third parties, will not be susceptible to year 2000 problems.
Accordingly, year 2000 problems could have an adverse effect on the Company's
business, financial condition, results of operations and prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Matters."

USE OF PROCEEDS

The net proceeds from the sale of the Notes will be added to the Company's
general funds and are expected to be used to retire existing indebtedness and
for general corporate purposes, except as may be stated in a Prospectus
Supplement.

14
<PAGE>

CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth the consolidated ratio of earnings to fixed
charges and ratio of earnings to fixed charges and interest credited to
policyholder accounts of the Company for each year in the five-year period
ended December 31, 1997 and for the six month periods ended June 30, 1997 and
1998. In calculating this ratio, earnings consist of income (loss) before
income taxes and cumulative effect of a change in an accounting principle, plus
fixed charges adjusted to exclude interest capitalized. Fixed charges consist
of interest, whether expensed or capitalized, capitalized lease interest
expense and amortization of deferred financing fees, whether expensed or
capitalized, plus the portion of rental expense under operating leases which
has been deemed by the Company to be representative of the interest factor.

<TABLE>
<CAPTION>
Six Months
Ended June
Year Ended December 31, 30,
-------------------------------- ------------
1993 1994 1995 1996 1997 1997 1998
----- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges....................... 10.21x 8.07x 12.18x 16.12x 16.48x 16.14x 13.74x
Ratio of earnings to fixed
charges and interest credited
to policyholder accounts...... 1.68x 1.45x 1.67x 1.95x 2.10x 2.05x 2.16x
</TABLE>

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data are qualified by reference
to, and should be read in conjunction with, the Consolidated Financial
Statements, including the related notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Prospectus. The selected consolidated financial data as of
and for each of the five years in the period ended December 31, 1997 are taken
or derived from the Company's audited Consolidated Financial Statements for the
five years ended December 31, 1997, which have been audited by Deloitte &
Touche LLP ("Deloitte & Touche"), independent auditors. The selected
consolidated financial data as of and for the six-month periods ended June 30,
1997 and 1998 are taken or derived from the Company's unaudited interim
Consolidated Financial Statements included elsewhere in this Prospectus and, in
the opinion of management, have been prepared on the same basis as the audited
Consolidated Financial Statements included herein and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such data. The results of operations for an interim period are
not necessarily indicative of the results for the full year or any other
interim period.

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues:
Premiums............... $ 4,743 $ 4,249 $ 4,408 $ 4,244 $ 3,976 $ 1,098 $ 1,153
Annuity
considerations........ 3,029 1,569 3,780 8,461 19,655 7,978 15,644
Universal life and
investment type policy
fee income............ 2,665 1,912 1,934 2,090 1,988 956 1,140
Net investment income.. 157,718 145,107 170,780 186,180 191,818 98,022 110,076
Realized investment
gains................. 36,277 19,083 17,216 20,020 26,039 11,013 9,069
Other income........... 1,927 1,834 1,746 2,679 4,228 2,995 2,357
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 206,359 173,754 199,864 223,674 247,704 122,062 139,439
-------- -------- -------- -------- -------- -------- --------
Benefits and expenses:
Interest credited and
benefits to
policyholders......... 126,740 119,731 123,923 124,260 136,998 66,703 75,125
Interest expense on
notes payable......... 6,522 4,946 5,045 5,049 5,850 2,780 3,833
Selling, general and
administrative
expenses.............. 15,890 11,858 14,506 18,008 14,298 10,490 11,663
-------- -------- -------- -------- -------- -------- --------
Total benefits and
expenses.............. 149,152 136,535 143,474 147,317 157,146 79,973 90,621
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 57,207 37,219 56,390 76,357 90,558 42,089 48,818
Provision (benefit) for
income taxes(1)........ 10,382 (2,693) 7,332 21,836 29,266 13,169 16,649
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 46,825 $ 39,912 $ 49,058 $ 54,521 $ 61,292 $ 28,920 $ 32,169
======== ======== ======== ======== ======== ======== ========
Earnings per common
share(1)............... $ 1.53 $ 1.18 $ 1.46 $ 1.64 $ 1.87 $ .88 $ 1.00
Ratio of earnings to
fixed charges(2)....... 10.21x 8.07x 12.18x 16.12x 16.48x 16.14x 13.74x
Ratio of earnings to
fixed charges and
interest credited to
policyholder
accounts(2)............ 1.68x 1.45x 1.67x 1.95x 2.10x 2.05x 2.16x
Cash dividends declared
per common share....... $ .09 $ .09 $ .105 $ .15 $ .22 $ .10 $ .135
Statutory Data(3):
Net statutory
premiums(4)............ $ 52,177 $ 53,188 $105,177 $109,937 $140,791 $ 59,084 $ 70,212
Net gain from
operations............. 23,938 13,959 34,667 41,230 43,500 24,195 31,308
Statutory capital and
surplus(5)............. 250,434 257,570 296,712 341,059 370,742 346,542 388,314
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
As of December 31, As of June 30,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $2,265,218 $2,026,044 $2,356,760 $2,406,925 $2,558,341 $2,443,480 $2,612,387
Total investments....... 2,139,352 1,859,669 2,274,408 2,318,665 2,464,359 2,365,053 2,541,685
Total policy
liabilities............ 1,711,196 1,666,795 1,683,550 1,678,415 1,714,981 1,682,286 1,734,860
Long-term notes
payable................ 50,000 50,000 50,000 50,000 50,000 50,000 50,000
Shareholders' Equity.... 264,447 255,953 401,060 423,063 502,654 445,870 523,186
</TABLE>
- --------
(1) The results for 1993 included the cumulative effect of a change in
accounting principle (Financial Accounting Standard No. 109) of $2.8
million or $0.09 per share.
(2) In calculating this ratio, earnings consist of income (loss) before income
taxes and cumulative effect of a change in accounting principle, plus fixed
charges adjusted to exclude interest capitalized. Fixed charges consist of
interest, whether expensed or capitalized, capitalized lease interest
expense and amortization of deferred financing fees, whether expensed or
capitalized, plus the portion of rental expense under operating leases
which has been deemed by the Company to be representative of the interest
factor.
(3) Statutory data reflect the data derived from the annual and quarterly
statements of the Insurance Company as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
(4) Premiums and annuity considerations, net of reinsurance, as presented for
statutory reporting purposes differ from those reported under GAAP. For
GAAP reporting, premiums for universal life, single premium deferred
annuities and single premium immediate annuities with a stated period are
reported as deposit liabilities, not as premium revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Statutory capital and surplus includes the asset valuation reserve.

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Company operates in a single business segment with two primary lines of
business--individual annuities and individual life insurance. The Company
currently emphasizes the sale of a variety of single premium and flexible
premium annuity products (including those written in connection with funding
agreements for certain state lotteries, group annuities and other structured
settlements), as well as annual and single premium life insurance products.
Each of these products is designed to meet the needs of increasingly
sophisticated consumers for supplemental retirement income, estate planning and
financial protection in the event of unexpected death. Premiums shown on the
Company's Consolidated Financial Statements in accordance with GAAP consist of
premiums received for whole or term life insurance products, as well as that
portion of the Company's single premium immediate annuities which have life
contingencies. With respect to that portion of single premium annuity contracts
without life contingencies, as well as single premium deferred annuities and
universal life insurance products, premiums collected by the Company are not
reported as premium revenues, but rather are reported as additions to
policyholders' account balances. With respect to products that are accounted
for as policyholders' account balances, revenues are recognized over time in
the form of policy fee income, surrender charges, mortality charges and other
charges deducted from the policyholders' account balances. The Company's
operating earnings are derived primarily from these revenues, plus the
Company's investment results, including realized gains (losses), less interest
credited, benefits to policyholders and expenses.

The Insurance Company is rated "A-(Excellent)" by A.M. Best.

Results of Operations

1997 Compared to 1996 and 1996 Compared to 1995

Revenues

Annuity Considerations and Life Insurance Premiums

Total annuity considerations and life insurance premiums increased to
approximately $23.6 million in 1997 from approximately $12.7 million in 1996,
an increase of approximately

18
<PAGE>

86.0%. Of this amount, annuity considerations increased to approximately $19.7
million in 1997 from approximately $8.5 million in 1996, an increase of
approximately $11.2 million. In accordance with GAAP, sales of single premium
deferred annuities are not reported as insurance revenues, but rather as
additions to policyholder account balances. Sales of single premium deferred
annuities were approximately $125.5 million and $94.4 million in 1997 and 1996,
respectively. Management believes that the increase in annuity considerations
is due to the successful expansion of the Company's Marketing Department.
Beginning in 1996, the Company added regional sales directors in various
states. These regional directors have added new general agents which have
generated increased sales.

Total annuity considerations and life insurance premiums increased to
approximately $12.7 million in 1996 from approximately $8.2 million in 1995, an
increase of approximately 55.2%. Of this amount, annuity considerations
increased to approximately $8.5 million in 1996 from approximately $3.8 million
in 1995, an increase of approximately $4.7 million.

Policy Fee Income

Universal life and policy fee income was approximately $2.0 million in 1997,
as compared to approximately $2.1 million in 1996 and approximately $1.9
million in 1995. This represents approximately a 4.9% decrease comparing 1997
to 1996 and approximately an 8.1% increase comparing 1996 to 1995. The decrease
in 1997 was primarily attributable to the lower level of surrender charges
incurred by annuitants in connection with surrenders of their annuity contracts
during 1997. Surrenders of annuity products represented approximately $117.4
million, $124.5 million, and $99.8 million during 1997, 1996 and 1995,
respectively.

Net Investment Income

Net investment income totaled approximately $191.8 million in 1997, as
compared to approximately $186.2 million in 1996 and approximately $170.8
million in 1995. This represents approximately a 3.0% increase comparing 1997
to 1996 and approximately a 9.0% increase comparing 1996 to 1995. The increase
in net investment income in 1997 over 1996 and in 1996 over 1995 was mainly due
to an increase in investment income from "other invested assets" which totaled
approximately $39.8 million in 1997, $35.3 million in 1996 and $25.3 million in
1995. In 1997 and 1996, the Insurance Company participated in "dollar roll"
transactions (i.e., the sale of a mortgage-backed security to a holding
institution and a simultaneous agreement to purchase a similar security at a
later date at a lower price) to enhance investment income. The proceeds from
the sale are invested in short-term securities at a positive spread until the
settlement date of the similar security. During this period, the holding
institution receives all income and prepayments for the security. The Company's
ratio of net investment income to average cash and invested assets less net
investment income for the years ended December 31, 1997, 1996 and 1995 was
approximately 8.7%, 8.8% and 9.0%, respectively. For additional information,
see Note 2 of the Notes to Consolidated Financial Statements.

19
<PAGE>

Realized Investment Gains and Losses

Realized investment gains amounted to approximately $26.0 million in 1997, as
compared to approximately $20.0 million of gains in 1996 and gains of
approximately $17.2 million in 1995. Realized investment gains for the years
ended December 31, 1997, 1996 and 1995 were partially offset by realized
investment losses of approximately $4.9 million, $1.9 million and $6.0 million,
respectively, attributable to writedowns of certain securities contained in the
Company's investment portfolio. Realized investment gains result from sales of
certain equities and convertible securities, and calls and sales of securities
in the Company's investment portfolio, which vary from year to year. As a
result, there can be no assurance that the Company's investment portfolio will
yield comparable investment gains in future periods.

Other Income

The increase in other income in 1997 is the result of the settlement in the
second quarter of 1997 of litigation concerning Fidelity Mutual Life Insurance
Company ("Fidelity"). As part of a proposed rehabilitation plan for Fidelity,
on January 11, 1995 the Insurance Company signed a definitive purchase
agreement with the Pennsylvania Insurance Commissioner (the "Insurance
Commissioner") and Fidelity to invest up to $45 million for a minority (49.9%)
stake in a Fidelity subsidiary insurance holding company. In addition, the
Company had agreed to purchase $25 million of senior notes of such company.

The Company was informed by the Insurance Commissioner that in response to
the significant improvement in the invested assets of Fidelity, she reopened
the process to select an equity investor for the recapitalization and
rehabilitation of Fidelity.

The Company disagreed with the Insurance Commissioner's actions and commenced
litigation which was settled in the second quarter of 1997. As part of the
settlement, the Company received $1.7 million.

Total Benefits and Expenses

Total benefits and expenses for 1997 aggregated approximately $157.1 million,
as compared to approximately $147.3 million for 1996 and approximately $143.5
million for 1995. This represents an increase of approximately 6.7% comparing
1997 to 1996 and an increase of approximately 2.7% comparing 1996 to 1995. The
reasons for these changes will be discussed under the respective components
below.

Interest Credited and Benefits to Policyholders

Interest credited and benefits to policyholders amounted to approximately
$137.0 million in 1997 as compared to approximately $124.3 million in 1996 and
approximately $123.9 million in 1995. This represents an increase of
approximately 10.3% comparing 1997 to 1996 and approximately a 0.3% increase
comparing 1996 to 1995. The increase in 1997 principally is attributable to a
higher level of policyholder account balances as a result of the increase in
annuity sales.

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<PAGE>

The Insurance Company's average credited rates for reserves and account
balances for the year ended December 31, 1997, 1996 and 1995 were less than the
Company's ratio of net investment income to mean assets for the same periods as
noted above under "--Net Investment Income." Although management does not
currently expect material declines in the spread between the Company's average
credited rate for reserves and account balances and the Company's ratio of net
investment income to mean assets (the "Spread"), there can be no assurance that
the Spread will not decline in future periods or that such decline will not
have a material adverse effect on the Company's financial condition and results
of operations. Depending, in part, upon competitive factors affecting the
industry in general, and the Company, in particular, the Company may, from time
to time, adjust the average credited rates on certain of its products. There
can be no assurance that the Company will reduce such rates or that any such
reductions will broaden the Spread.

Interest Expense on Notes Payable

The interest expense on the Company's notes payable amounted to approximately
$5.9 million in 1997, approximately $5.0 million in 1996 and approximately $5.0
million in 1995. The increase in interest expense in 1997 is attributable to an
increase in the Company's short-term note payable under the Company's line of
credit (the "Short-Term Note").

General Expenses, Taxes and Commissions

General expenses, taxes and commissions to agents totaled approximately $17.2
million in 1997 as compared to approximately $17.2 million in 1996 and
approximately $15.0 million in 1995. This represents approximately no increase
comparing 1997 to 1996 and approximately a 14.7% increase comparing 1996 to
1995. The increase in 1996 compared to 1995 is primarily attributable to higher
professional fees related to the then proposed acquisition of Fidelity. In 1997
commissions and related expenses increased compared to 1996 as a result of an
increase in sales of single premium deferred annuities which was partially
offset by lower professional fees.

Deferred Policy Acquisition Costs

The change in the net DAC for 1997 resulted in a credit of approximately $2.9
million, as compared to a charge of approximately $0.9 million in 1996 and
credit of approximately $0.5 million in 1995. Such changes are due to the
effect of revisions to estimated gross profits on unamortized deferred
acquisition costs which are reflected in the year such estimated gross profits
are revised.

Income Before Income Taxes

For the reasons discussed above, income before income taxes amounted to
approximately $90.6 million in 1997, as compared to approximately $76.4 million
in 1996 and approximately $56.4 million in 1995.

Provision for Income Taxes

Income tax expense was approximately $29.3 million for 1997, as compared to
approximately $21.8 million in 1996 and approximately $7.3 million in 1995. The
increase in

21
<PAGE>

income taxes in 1997 is primarily attributable to higher income from operations
and realized capital gains during 1997. In addition, as a result of the
finalization of the Company's 1994 federal income tax return, the federal
income tax recoverable from operations and capital loss carryback recorded at
December 31, 1994 was increased in 1995 by $3.1 million which reduced income
tax expense by a similar amount.

Net Income

For the reasons discussed above, the Company had net income of approximately
$61.3 million in 1997, net income of approximately $54.5 million in 1996 and
net income of approximately $49.1 million in 1995.

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

Revenues

Annuity Considerations and Life Insurance Premiums

Total annuity considerations and life insurance premiums increased to
approximately $16.8 million for the six months ended June 30, 1998 from
approximately $9.1 million for the six months ended June 30, 1997. Of this
amount, annuity considerations increased to approximately $15.6 million for the
six months ended June 30, 1998 from approximately $8.0 million for the six
months ended June 30, 1997. Sales of single premium deferred annuities were
approximately $61.0 million for the six months ended June 30, 1998 compared to
$50.0 million for the six months ended June 30, 1997. Management believes the
increase in annuity considerations is due to the continued successful expansion
of the Company's Marketing Department. Beginning in 1996, the Company has added
regional sales directors in various states. These regional directors have added
new general agents which resulted in increased sales.

Policy Fee Income

Universal life and investment type policy fee income was approximately $1.1
million for the six months ended June 30, 1998, as compared to approximately
$1.0 million for the six months ended June 30, 1997. Policy fee income consists
principally of amounts assessed during the period against policyholders'
account balances for mortality charges and surrender charges.

Net Investment Income

Net investment income totaled approximately $110.1 million for the six months
ended June 30, 1998, as compared to approximately $98.0 million for the six
months ended June 30, 1997. This represents an increase of approximately 12.3%.
The increase in net investment income in the first six months of 1998 over the
same period in 1997 was mainly due to an increase in investment income from
"other invested assets" which totaled approximately $30.1 million during the
first six months of 1998, as compared to $22.7 million during the first six
months of 1997. The Company's ratio of net investment income to average cash
and invested assets less net investment income for the six months ended June
30, 1998 and June 30, 1997 were 9.3% and 8.8%, respectively.

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<PAGE>

Realized Investment Gains and Losses

Realized investment gains amounted to approximately $9.1 million during the
six months ended June 30, 1998, as compared to approximately $11.0 million
during the six months ended June 30, 1997. Realized investment gains were
partially offset by realized investment losses of approximately $1.7 million
and $2.1 million for the six months ended June 30, 1998 and 1997, respectively,
attributable to other than temporary impairments in the value of certain
securities contained in the Company's investment portfolio. Realized investment
gains result from sales of certain equities and convertible securities, and
calls and sales of securities in the Company's investment portfolio. There can
be no assurance that the Company's investment portfolio will yield comparable
investment gains in future periods.

Other Income

The decrease in other income in the second quarter of 1998 is the result of
the settlement in the second quarter of 1997 of the litigation concerning
Fidelity.

Total Benefits and Expenses

Total benefits and expenses for the six months ended June 30, 1998 aggregated
approximately $90.6 million, as compared to approximately $80.0 million for the
six months ended June 30, 1997, an increase of approximately 13.3%. The reasons
for this increase are discussed under the respective components below.

Interest Credited and Benefits to Policyholders

Interest credited and benefits to policyholders aggregated approximately
$75.1 million for the six months ended June 30, 1998, as compared to
approximately $66.7 million for the six months ended June 30, 1997. The
increase is primarily attributable to the increase in the liability for future
policy benefits during the six months ended June 30, 1998 as a result of the
increase in annuity considerations received during the period.

The Insurance Company's average credited rate for reserves and account
balances for the six months ended June 30, 1998 and 1997 were less than the
Company's ratio of net investment income to mean invested assets for the same
periods as noted above under "Net Investment Income." Although management does
not currently expect material declines in the Spread, there can be no assurance
that the Spread will not decline in future periods or that such decline will
not have a material adverse effect on the Company's financial condition and
results of operations. Depending, in part, upon competitive factors affecting
the industry in general, and the Company, in particular, the Company may, from
time to time, change the average credited rates on certain of its products.
There can be no assurance that the Company will reduce such rates or that any
such reductions will broaden the Spread.

Interest Expense on Notes Payable

The interest expense on the Company's notes payable was approximately $3.8
million for the six months ended June 30, 1998, as compared to approximately
$2.8 million for the six months ended June 30, 1997. The increase is
attributable to the increase in the amounts borrowed under the Short-Term Note.

23
<PAGE>

General Expenses, Taxes and Commissions

General expenses, taxes and commissions to agents aggregated approximately
$10.6 million for the six months ended June 30, 1998, as compared to
approximately $9.6 million for the six months ended June 30, 1997, an increase
of approximately 9.5%. The increase principally is attributable to higher
commissions and selling expenses incurred in the first six months of 1998
associated with the higher level of sales in the first six months of 1998.

Deferred Policy Acquisition Costs

DAC for the six months ended June 30, 1998 increased approximately $0.3
million resulting in a charge of $1.1 million, as compared to a charge of
approximately $0.8 million for the six months ended June 30, 1997. This change
is primarily attributable to an increase in the costs associated with new
product sales which will be deferred and amortized in proportion to the
recognition of earned revenue.

Income Before Income Taxes

For the reasons discussed above, income before income taxes amounted to
approximately $48.8 million for the six months ended June 30, 1998, as compared
to approximately $42.1 million for the six months ended June 30, 1997.

Provision for Income Taxes

Income tax expense was $16.6 million for the six months ended June 30, 1998
as compared to approximately $13.2 million for the six months ended June 30,
1997. The increase is primarily attributable to higher income from operations
and realized capital gains for the six months ended June 30, 1998.

Net Income

For the reasons discussed above, the Company had net income of approximately
$32.2 million during the six months ended June 30, 1998, as compared to net
income of approximately $28.9 million during the six months ended June 30,
1997.

Liquidity and Capital Resources

The Company is an insurance holding company and its primary uses of cash are
debt service obligations, operating expenses and dividend payments. The
Company's principal sources of cash are dividends from the Insurance Company,
sales of and interest on the Company's investments and rent from its real
estate. During the second quarter of 1998, the Company's board of directors
declared a quarterly dividend of $.075 per share payable on July 1, 1998.
During the second quarter of 1998, and during 1997 and 1996, the Company
purchased and retired 640,000, 372,300 and 724,000 shares of Common Stock,
respectively. The Company is authorized by the board of directors to purchase
an additional 592,000 shares of Common Stock.

24
<PAGE>

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. As a New York
domiciled insurance company, the Insurance Company is subject to restrictions
on the payment of dividends under New York law. New York law states that no
domestic stock life insurance company shall distribute any dividend to its
shareholders unless a notice of its intention to declare such dividend and the
amount thereof shall have been filed with the Superintendent not less than 30
days in advance of such proposed declaration. The Superintendent may disapprove
such distribution by giving written notice to such company within 30 days after
such filing that he or she finds that the financial condition of the company
does not warrant such distribution. The NYSDI has established informal
guidelines for the Superintendent's findings which focus upon, among other
things, the overall financial condition and profitability of the insurer under
statutory accounting practices. During the first six months of 1998, the
Insurance Company paid dividends to the Company of $29.4 million. During 1997,
1996, and 1995, the Insurance Company paid dividends of $24.8 million,
$15.0 million and $5.0 million, respectively, to the Company.

Net cash provided by the Company's operating activities (reflecting
principally: (i) premiums and contract charges collected less (ii) benefits
paid on life insurance and annuity products plus (iii) income collected on
invested assets less (iv) commissions and other general expenses paid) was
approximately $40.0 million in the six months ended June 30, 1998, and $47.3
million, $43.9 million and $30.2 million in fiscal 1997, 1996 and 1995,
respectively. Net cash provided by (used in) the Company's investing activities
(principally reflecting investments purchased less investments called, redeemed
or sold) was approximately $(55.9) million in the six months ended June 30,
1998, and $(62.5) million, $(63.7) million and $(162.7) million in fiscal 1997,
1996 and 1995, respectively.

For purposes of the Company's consolidated statements of cash flows,
financing activities relate primarily to "dollar roll" repurchase transactions,
and to sales and surrenders of the Company's annuity and universal life
insurance products. The payment of dividends by the Company to its stockholders
also is considered to be a financing activity. Net cash provided by (used in)
the Company's financing activities amounted to approximately $2.4 million in
the six months ended June 30, 1998 and $27.9 million, $22.4 million and $131.4
million in fiscal 1997, 1996 and 1995, respectively. These fluctuations
primarily are attributable to the net change in "dollar roll" repurchase
transactions, higher policyholder account balances, repurchase of Common Stock
and an increase in amounts borrowed under the Short-Term Note during 1997.

The Company currently has one bank line of credit for $25 million of which
$23 million was drawn at June 30, 1998.

25
<PAGE>

Given the Insurance Company's historic cash flow and current financial
results, management believes that, for the next twelve months and for the
reasonably foreseeable future, the Insurance Company's cash flow from operating
activities will provide sufficient liquidity for the operations of the
Insurance Company, as well as provide sufficient funds to the Company, so that
the Company will be able to make dividend payments, satisfy its debt service
obligations and pay its other operating expenses.

The Company's deferred annuity products are designed to encourage persistency
by incorporating surrender charges that exceed the cost of issuing the annuity.
An annuitant may not terminate or withdraw substantial funds for periods
generally ranging from one to seven years without incurring significant
penalties in the form of surrender charges. Approximately 59.1% and 60.2%,
64.2%, 45.7% of the Company's deferred annuity contracts in force (measured by
reserves) as of June 30, 1998 and December 31, 1997, 1996 and 1995 are
surrenderable without charge. The decrease since December 31, 1996 is
attributable to the increase in deferred annuity contracts in force as a result
of the increase in annuity considerations received.

Capital expenditures during 1997 were approximately $0.4 million. As of June
30, 1998, the Company had no outstanding commitments for significant capital
expenditures.

To meet its anticipated liquidity requirements, the Company purchases
investments taking into account the anticipated future cash flow requirements
of its underlying liabilities. In managing the relationship between assets and
liabilities, the Company analyzes the cash flows necessary to correspond with
the expected cash needs on the underlying liabilities under various interest
rate scenarios. In addition, the Company invests a portion of its total assets
in short-term investments (approximately 11.0%, 10.3%, 10.0% and 8.2% as of
June 30, 1998 and December 31, 1997, 1996 and 1995, respectively). The
McCaulay's duration of the Company's debt portfolio was approximately six years
as of June 30, 1998. The Company's fixed maturity investments are all
classified as available for sale and include those securities available to be
sold in response to, among other things, changes in market interest rates,
changes in the security's prepayment risk, the Company's need for liquidity and
other similar factors. These investments are carried at estimated market value,
and unrealized gains (losses), net of federal income taxes and deferred policy
acquisition costs, if any, are charged directly to shareholders' equity, unless
a decline in market value is considered to be other than temporary, in which
event the Company recognizes a loss. Equity securities include common stocks
and non-redeemable preferred stocks and are carried at market, with the related
unrealized gains and losses, net of federal income taxes, if any, charged or
credited directly to shareholders' equity, unless a decline in market value is
considered to be other than temporary, in which event the Company recognizes a
loss. See Note 1 of the Notes to Consolidated Financial Statements.

26
<PAGE>

The Company maintains a portfolio which includes below investment grade
securities which were purchased to achieve a more favorable investment yield,
all of which are classified as available for sale and reported at estimated
market value. As of June 30, 1998 and December 31, 1997, the carrying value of
these securities was approximately $160.2 million and $164.6 million,
respectively (representing approximately 6.1% and 6.4%, respectively, of the
Company's total assets and 30.6% and 32.8%, respectively of shareholders'
equity).

Investments in below investment grade debt securities have different risks
than investments in corporate debt securities rated investment grade. Risk of
loss upon default by the borrower is significantly greater with respect to
below investment grade debt securities than with respect to other corporate
debt securities because below investment grade debt securities generally are
unsecured and often are subordinated to other creditors of the issuer. Also,
issuers of below investment grade debt securities usually have high levels of
indebtedness and often are more sensitive to adverse economic conditions, such
as recession or increasing interest rates, than are investment grade issuers.
Typically, there is only a thinly traded market for such securities and recent
market quotations may not be available for some of these securities. Market
quotes generally are available only from a limited number of dealers and may
not represent firm bids of such dealers or prices for actual sales. The Company
attempts to reduce the overall risk in its below investment grade portfolio, as
in all of its investments, through careful credit analysis, investment policy
limitations, and diversification by company and by industry. Below investment
grade debt investments, as well as other investments, are monitored on an
ongoing basis.

In certain situations, the terms of some fixed maturity assets are
restructured or modified. There were no restructured fixed maturities at
December 31, 1997.

As of June 30, 1998, approximately 10.5% of the Company's total invested
assets were invested in limited partnerships and 2.5% were invested in equity
securities. Pursuant to NYSDI regulations, the Company's investments in equity
securities, including limited partnership interests, may not exceed 20% of the
Insurance Company's invested assets. Investments in limited partnerships are
included in the Company's consolidated balance sheet under the heading "Other
invested assets." See "Note 2 to the Notes to Consolidated Financial
Statements." The Company is committed, if called upon during a specified
period, to contribute an aggregate of approximately $53.9 million of additional
capital to certain of these limited partnerships. However, management does not
expect this entire amount to be called because certain of these limited
partnerships are nearing the end of the period during which investors are
required to make contributions. The Company may make selective investments in
additional limited partnerships as opportunities arise. 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 is mitigated by the ability of the
Company to take annual distributions of partnership earnings. There can be no
assurance that the Company will continue to achieve the same level of returns
on its investments in limited partnerships as it has historically or that the
Company will achieve any returns on such investments at all. Further, there can
be no

27
<PAGE>

assurance that the Company will receive a return of all or any portion of its
current or future capital investments in limited partnerships. The failure of
the Company to receive the return of a material portion of its capital
investments in limited partnerships, or to achieve historic levels of return on
such investments, could have a material adverse effect on the Company's
financial condition and results of operations. See "Risk Factors--Investment
Performance."

As previously discussed, during 1998 and 1997 the Company participated in
"dollar roll" repurchase agreement transactions. Amounts outstanding to
repurchase securities under such agreements were approximately $215.6 million
and $205.2 million at June 30, 1998 and December 31, 1997, respectively. The
Company may engage in selected "dollar roll" transactions as market
opportunities arise.

All 50 states of the United States, the District of Columbia and Puerto Rico
have insurance guaranty fund laws requiring all life insurance companies doing
business within the jurisdictions to participate in guaranty associations,
which are organized to pay contractual obligations under insurance policies
(and certificates issued under group insurance policies) issued by impaired or
insolvent life insurance companies. These associations levy assessments (up to
prescribed limits) on all member insurers in a particular state on the basis of
the proportionate share of the premiums written by member insurers in the lines
of business in which the impaired or insolvent insurer is engaged. Some states
permit member insurers to recover assessments paid through full or partial
premium tax offsets. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's solvency. The amount of these
assessments in prior years has not been material, however, the amount and
timing of any future assessment on the Insurance Company under these laws
cannot be reasonably estimated and are beyond the control of the Company and
the Insurance Company. Recent failures of substantially larger insurance
companies could result in future assessments in material amounts.

See "Business--Insurance Regulation" for a description of certain NAIC
initiatives that also may impact the Company's financial condition and results
of operations.

Year 2000 Matters

Purchased hardware will be capitalized in accordance with normal policy.
Personnel and all other costs related to the project are being expensed as
incurred. Based on management's best estimates, the total cost to the Company
of both migrating to a local area network, replacing software and year 2000
compliance activities is not expected to exceed

28
<PAGE>

$3.2 million. Since 1994, the Company has incurred approximately $2.7 million
in connection with migrating to a local area network, replacing software and
year 2000 compliance. The total cost to the Company of these year 2000
compliance activities has not been and is not anticipated to be material to its
financial position or results of operations in any given year.

Effects of Inflation and Interest Rate Changes

Management does not believe that inflation has had a material adverse effect
on the Company's consolidated results of operations. The Company seeks to
manage its investment portfolio in part to reduce its exposure to interest rate
fluctuations. In general, the market value of the Company's fixed maturity
portfolio increases or decreases in an inverse relationship with fluctuations
in interest rates, and the Company's 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, the Company has adopted
strategies which are designed to address either an increase or decrease in
prevailing rates. In a rising interest rate environment, the Company's average
cost of funds would be expected to increase over time as it prices its new and
renewing annuities to maintain a generally competitive market rate.
Concurrently, the Company would attempt to place new funds in investments which
were matched in duration to, and higher yielding than, the liabilities
associated with such annuities. Management believes that liquidity necessary in
such an interest rate environment to fund withdrawals, including surrenders,
would be available through income, cash flow, the Company's cash reserves or
from the sale of short-term investments. In a declining interest rate
environment, the Company's cost of funds would be expected to decrease over
time, reflecting lower interest crediting rates on its fixed annuities. Should
increased liquidity be required for withdrawals in such an interest rate
environment, management believes that the portion of the Company's investments
which are designated as available for sale in the Company's consolidated
balance sheet could be sold without materially adverse consequences in light of
the general strengthening in market prices which would be expected in the fixed
maturity security market.

Interest rate changes also may have temporary effects on the sale and
profitability of the annuity and universal life products offered by the
Company. For example, if interest rates rise, competing investments (such as
annuity or life insurance products offered by the Company's competitors,
certificates of deposit, mutual funds and similar instruments) may become more
attractive to potential purchasers of the Company's products until the Company
increases the rates credited to holders of its annuity and universal life
products. In contrast, as interest rates fall, the Company attempts to lower
its credited rates to compensate for the corresponding decline in its net
investment income. As a result, changes in interest rates could materially
adversely affect the financial condition and results of operations of the
Company depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at
competitive levels which are designed to

29
<PAGE>

discourage surrenders and which may be considered attractive to purchasers of
new annuity products. In addition, because the level of prevailing interest
rates impacts the Company as well as its competitors, management does not
believe that the low interest rate environment has materially affected the
Company's competitive position vis a vis other life insurance companies that
emphasize the sale of annuity products. Notwithstanding the foregoing, if
interest rates continue at current levels or decline further, there can be no
assurance that this segment of the life insurance industry, including the
Company, would not experience increased levels of surrenders and reduced sales
and thereby be materially adversely affected.

Forward Looking Information

The Company cautions readers regarding certain forward-looking statements
contained in this Prospectus and in any other statements made by, or on behalf
of, the Company, whether or not in future filings with the Commission. Forward-
looking statements are statements not based on historical information and which
relate to future operations, strategies, financial results, or other
developments. Statements using verbs such as "expect," "anticipate," "believe"
or words of similar import generally involve forward-looking statements.
Without limiting the foregoing, forward-looking statements include statements
which represent the Company's beliefs concerning future levels of sales and
redemptions of the Company's products, investment spreads and yields, or the
earnings and profitability of the Company's activities.

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

Recent Accounting Pronouncements

In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" (SFAS No. 127). SFAS No.
127 amends SFAS No. 125 by deferring for one year the effective date of
paragraph 15 of SFAS No. 125, addressing secured borrowings and collateral, and
for repurchase agreement, dollar roll, security lending and similar
transactions, of paragraphs 9 through 12 and 237(b) of SFAS No. 125. SFAS No.
127 is effective for certain transactions occurring after December 31, 1997,
and must be applied prospectively. The Company adopted SFAS 125 and 127
effective January 1998. There was no effect on the Company's financial position
from the adoption of SFAS 125 and 127.

30
<PAGE>

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130), which establishes
standards for displaying comprehensive income and its components in a full set
of general-purpose financial statements. Effective January 1998, the Company
adopted SFAS No. 130. Total comprehensive income (loss) for the periods ended
June 30, 1998 and 1997 was $37.4 million and $30.4 million, respectively. The
difference between net income and comprehensive income (loss) was the change in
unrealized investment gains (losses) which arose during the period.

Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 131 establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company's current definition of
its operating segments did not change.

31
<PAGE>

BUSINESS

General

The Company is an insurance holding company that, through the Insurance
Company, operates principally in a single business segment with two primary
lines of business--individual annuities and individual life insurance. During
the last two years, over 90% of the Company's net premium income was derived
from its individual annuity business. The Insurance Company is licensed to
market its products in 48 states and the District of Columbia. However, for the
six months ended June 30, 1998, approximately 58.5% of the gross annuity
considerations and life insurance premiums received by the Company were sold to
annuitants and policyholders residing in the State of New York.

Products

The Company currently emphasizes the sale of a variety of single premium and
flexible premium annuity products (including those written in connection with
funding agreements for certain state lotteries, group annuities and other
structured settlements), as well as annual and single premium life insurance
products. Each of these products is designed to meet the needs of increasingly
sophisticated consumers for supplemental retirement income, estate planning and
financial protection in the event of unexpected death.

Annuity Business

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.

Single Premium Annuity products require a one-time lump sum premium payment.
During the accumulation period, the accrual of interest is on a tax deferred
basis to the annuitant.

Single Premium Deferred Annuities ("SPDAs") provide for a single premium
payment at the time of issue, an accumulation period and an annuity payout
period at some future date. During the accumulation period, the Company credits
the account value of the annuitant with interest earnings at a current interest
rate that is guaranteed for periods ranging from one to five years, at the
annuitant's option, and that, thereafter, is subject to change based on market
and other conditions. Each contract also has a minimum guaranteed rate. This
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.

Single Premium Immediate Annuity Products ("SPIAs") guarantee a stream of
payments which begin immediately and continue for the life of the annuitant.
The payment

32
<PAGE>

may be guaranteed for a period of time (typically five to 20 years) (the
"Guarantee Period"). 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. SPIAs differ from deferred annuities in that
generally they provide for payments to begin immediately and are not subject to
surrender or loan. The implicit interest rate on SPIAs is based on market
conditions which existed at the time that the annuity was issued and is
guaranteed for the term of the annuity.

Single Premium Immediate Income Products ("SPIIs") are similar to SPIAs in
that they guarantee a stream of payments. Unlike SPIAs, SPII payments always
are guaranteed for a specified period of time, not for the life of the
annuitant. Payments are made to the payee or beneficiary even if the annuitant
dies during the payout period.

Single Premium Immediate Structured Settlement Annuities provide an
alternative to a lump-sum payment or settlement in the case of a lottery or a
personal injury case, as the case may be, and generally are purchased by state
lottery agencies for the benefit of a lottery winner or by property and
casualty insurance companies for the benefit of an injured claimant, as the
case may be, with benefits scheduled over a fixed period or over a fixed period
and for the life of the annuitant thereafter. Structured settlements offer tax
advantaged long-range financial security to the annuitant and facilitate the
operations of state lottery agencies and the ability of casualty insurance
carriers to effect claim settlements. Structured settlement annuities are long-
term in nature, guarantee a fixed benefit stream and cannot be surrendered or
borrowed against.

Flexible Premium Annuity products provide similar benefits to those provided
by the Company's single premium annuity products, but instead permit periodic
premium payments in such amounts as the holder deems appropriate. As a result,
the benefits attributable to such products will fluctuate according to the
level of such payments.

Group Terminal Funding Annuity products provide benefits similar to single
premium immediate annuities. Benefits are provided to employees when a
company's pension plan is terminated or when the employer wants to transfer
liability for making payments. Group terminal funding annuities cannot be
surrendered or borrowed against.

All of the Company's annuity products provide minimum interest rate
guarantees. The minimum guaranteed rates on the Company's annuity products
currently range from 4% to 5 1/2% annually, and the contracts (except for
SPIAs) are designed to permit the Company to change the crediting rates
annually subject to the minimum guaranteed rate. The Company takes into account
the profitability of its annuity business and its relative competitive position
in determining the frequency and extent of changes to the interest crediting
rates.

33
<PAGE>

the Company's deferred annuity contracts in force (measured by reserves) as of
June 30, 1998 are surrenderable without charge.

The following table presents annuity products in force measured by reserves,
as well as certain statistical data for each of the six-month periods ended
June 30, 1997 and 1998 and for each of the years in the five-year period ended
December 31, 1997, in each case, as determined in accordance with GAAP.

Annuities In Force

<TABLE>
<CAPTION>
As of December 31, As of June 30,
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except ratio, number and average size of contract
information)
<S> <C> <C> <C> <C> <C> <C> <C>
Single premium immediate
structured settlement
annuities.............. $ 156,339 $ 159,508 $ 163,384 $ 164,214 $ 167,269 $ 166,015 $ 167,755
Single premium immediate
annuities.............. 303,503 277,463 262,449 263,974 281,665 270,696 298,897
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total immediate
annuities............. 459,842 436,971 425,833 428,188 448,934 436,711 466,652
Single premium deferred
annuities.............. 807,562 787,290 808,292 810,636 835,900 809,531 841,114
Flexible premium
annuities.............. 198,162 195,144 196,406 182,505 168,023 174,987 163,265
Group terminal funding
annuities.............. 103,338 103,232 104,046 103,941 103,965 104,136 103,558
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total annuities........ $1,568,904 $1,522,637 $1,534,577 $1,525,270 $1,556,822 $1,525,365 $1,574,589
========== ========== ========== ========== ========== ========== ==========
Ratio of annualized
voluntary terminations
(surrenders and lapses)
to mean insurance in
force.................. 20.6% 19.7% 16.5% 15.3% 15.2% 15.9% 18.2%
Number of annuity
contracts in force..... 57,628 53,378 50,694 45,717 45,554 46,455 44,540
Average size of annuity
contract in force...... $ 27,225 $ 28,526 $ 30,271 $ 33,363 $ 34,175 $ 32,835 $ 35,352
</TABLE>

Annuity Considerations and Premiums--The following table sets forth certain
information with respect to the Insurance Company's annuity considerations and
premium revenues for each of the six-month periods ended June 30, 1997 and 1998
and for each of the five years ended December 31, 1997, as determined in
accordance with statutory accounting principles. Premiums shown on the
Company's Consolidated Financial Statements in accordance with GAAP consist of
premiums received for whole or term life insurance products, as well as that
portion of the Company's single premium immediate annuities which have life
contingencies. With respect to that portion of single premium annuity contracts
without life contingencies, as well as deferred annuities and universal life
insurance products, premiums collected by the Company are not reported as
premium revenues, but rather are reported as additions to policyholder account
balances on the Company's consolidated balance sheet.

34
<PAGE>

Distribution of Products--By Gross Premiums and Other Considerations

<TABLE>
<CAPTION>
As of December 31, As of June 30,
------------------------------------------ ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(in thousands, except number and average size of policy
information)
<S> <C> <C> <C> <C> <C> <C> <C>
Annuity Considerations.. $44,172 $44,574 $ 97,313 $102,343 $132,601 $55,042 $66,076
Whole life and term
life................... 9,260 8,363 8,200 8,254 8,364 3,996 3,796
Universal life.......... 3,449 4,320 3,581 3,152 3,811 1,878 2,163
------- ------- -------- -------- -------- ------- -------
Total Premiums and
Considerations....... $56,881 $57,257 $109,094 $113,749 $144,776 $60,916 $72,035
======= ======= ======== ======== ======== ======= =======
Number of life insurance
policies in force...... 21,627 20,359 19,650 19,069 18,708 18,825 18,531
Average size of life
insurance policy in
force.................. $52,038 $49,347 $ 47,518 $ 45,352 $ 44,006 $44,355 $42,944
</TABLE>

Life Insurance Business

Universal Life policies are interest-sensitive products which typically
provide the insured with "nonparticipating" (i.e., non-dividend paying) life
insurance with a guaranteed cash value. Current interest is credited to the
policy's cash value based upon interest rates that periodically are revised by
the Company to reflect current economic conditions (primarily interest rates).
In no event, however, will the interest rate credited on the policy's cash
value be less than the guaranteed rate specified in the policy. The Company
offers both flexible premium and single premium universal life insurance
products. The Company's flexible premium and single premium universal life
insurance products differ based on policy provisions affecting the amount and
timing of premium payments.

Whole Life policies are products which provide the insured with life
insurance with a cash value. Current interest is credited to the policy's cash
value based upon interest rates which existed at the time that the policy was
issued. 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 in amount over time. With respect to the Company's whole
life insurance products, the policyholder may borrow against the policy's
accumulated cash value. However, the death benefit is decreased by the amount
of the outstanding loan. In addition, the policyholder may choose to surrender
the policy and receive the accumulated cash value rather than continuing the
insurance protection.

Term Life policies are products which provide insurance protection if the
insured dies during the time period specified in the policy. No cash value is
built up. These products provide the maximum benefit for the lowest initial
premium outlay. The Company's term life insurance products include annually
renewable, convertible and decreasing term insurance.

Graded Benefit Life policies are products designed for the upper age (i.e.,
ages 40 to 80), sub-standard applicant. Depending upon age, these products
provide for a limited death benefit of either the return of premium plus 5%
interest for three years, or the return of premium plus 5% interest for two
years. Thereafter, the death benefit is limited to the face

35
<PAGE>

amount of the policy. This product typically is offered with a maximum face
value of $25,000.

Increasing Premium Whole Life policies are products which have
characteristics of both whole life and term life products. Initial premiums are
comparatively low and generally increase each year until the twentieth policy
year when the premium becomes fixed. No cash values are built up in the early
years of the policy, but cash values do begin to accumulate in the later
(typically around the fifteenth policy year) years of the policy.

Insurance Policies in Force The following table provides a reconciliation of
beginning and ending universal, whole and term life insurance policies, in
force, as well as certain statistical data for each of the six-month periods
ended June 30, 1998 and 1997 and for each of the years in the five-year period
ended December 31, 1997.

Life Insurance In Force

<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
-------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
In force beginning of
period:
Universal............. $ 417,198 $ 398,720 $ 392,774 $393,002 $384,008 $384,008 $383,233
Whole(1).............. 652,437 525,517 425,950 351,479 304,740 304,740 263,554
Term.................. 221,208 201,194 185,934 189,254 176,061 176,061 176,470
---------- ---------- ---------- -------- -------- -------- --------
Total............... 1,290,843 1,125,431 1,004,658 933,735 864,809 864,809 823,257
Sales and additions:
Universal............. 16,627 23,447 20,490 16,526 25,747 10,171 10,557
Whole(1).............. 63,356 62,414 54,089 44,785 42,596 18,758 17,509
Term.................. 16,073 17,753 29,404 19,295 28,985 12,680 17,058
---------- ---------- ---------- -------- -------- -------- --------
Total............... 96,056 103,614 103,983 80,606 97,328 41,609 45,124
Terminations:
Death................. 6,322 5,639 10,329 7,047 6,549 3,123 3,008
Surrenders and
conversions.......... 25,272 16,554 13,009 16,768 19,387 9,150 8,364
Lapses................ 223,935 195,309 147,134 121,761 108,846 56,106 61,716
Other................. 5,939 6,885 4,334 3,956 4,099 1,859 2,072
---------- ---------- ---------- -------- -------- -------- --------
Total............... 261,468 224,387 174,906 149,532 138,881 70,238 75,161
In force at end of
period:
Universal............. 398,720 392,774 393,002 384,008 383,233 381,489 379,961
Whole(1).............. 525,517 425,950 351,479 304,740 263,554 281,050 238,625
Term.................. 201,194 185,934 189,254 176,061 176,470 173,641 174,635
---------- ---------- ---------- -------- -------- -------- --------
Total............... $1,125,431 $1,004,658 $ 933,735 $864,809 $823,257 $836,180 $793,221
Total reinsurance
ceded.................. $ 716,527 $ 626,152 $ 573,324 $517,484 $476,248 $501,510 $449,933
---------- ---------- ---------- -------- -------- -------- --------
Total amounts in force
at end of year after
reinsurance ceded...... $ 408,904 $ 378,506 $ 360,411 $347,325 $347,009 $334,670 $343,288
========== ========== ========== ======== ======== ======== ========
</TABLE>
- --------
(1) Includes graded benefit life insurance products.

36
<PAGE>

Marketing and Distribution

The Company, through the Insurance Company, is licensed to market its
products in 48 states and in the District of Columbia. The Company sells its
individual annuity and life insurance products through approximately 570
independent general agents (approximately 225 of which are located in the State
of New York), who are independent contractors. These independent general agents
market the Company's products through approximately 6,690 licensed insurance
agents or brokers, most of whom also write products similar to those sold by
the Company for other companies. Management believes that the Company offers
competitive commission rates and seeks to provide innovative products and
quality service to its independent general agents. Compensation of agents is
strictly regulated by the NYSDI.

The independent general agency system has been the Insurance Company's
primary distribution system since the Insurance Company was founded. Management
believes that the Company's consistent focus on the independent general agent
distribution system provides a cost advantage, since the Company incurs no
fixed costs associated with recruiting, training and maintaining employee
agents. Accordingly, a substantial portion of the costs associated with
generating new business for the Company are not fixed costs but vary directly
with the level of business produced.

Since the Company utilizes independent general agents to market its products,
it is not dependent on any one agency for any substantial amount of its
business. On the other hand, the independent agents are not captive to the
Company, and most write products similar to those sold by the Company for other
companies. This can result in significant sales declines if for any reason the
Company is relatively less competitive or if there is cause for general
concern.

Among other things, crediting rates, commissions, the perceived quality of
the issuer, product features and services generally are significant factors
that management believes influence an agent's willingness and ability to sell
particular annuity products. The Company generally issues annuity contracts,
together with the agent's commission check, within two business days of
receiving the application and premium. The Company also seeks to provide
ongoing service to the agent. Towards that end, the Company provides agents
with access to the Company's senior executives. In addition, agents and
contract owners can access information about their contracts via a toll-free
telephone number.

The Company's top ten general agents accounted for approximately 34.8% of the
Company's combined annuity contracts and individual life insurance policies
sold, (measured by the combined considerations and premiums), during 1997 and
approximately 26.0%, in the six months ended June 30, 1998. Of the Company's
combined annuity contracts and individual life insurance policies sold no
single agent accounted for more than 1.0% during 1997 or 1.0% in the six months
ended June 30, 1998 and no single general agency accounted for more than 8.6%
during 1997 or 9.8% in the six months ended June 30, 1998. The loss of any
single sales source would not have a material adverse effect on the Company,
but the loss of several could cause a decline in sales until they are replaced
by the appointment of other general agents. The Company's agency department
actively recruits new general agents on a continuous basis.

37
<PAGE>

Pricing

Management believes that the Company is able to offer its products at
competitive prices to its 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 insurance 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 which insurance policies or annuity contracts remain
in force, expressed as a percentage of the number of policies remaining in
force over the previous year. Policyholders sometimes do not pay premiums,
thus, causing their policies to lapse.

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

Another major factor affecting profitability is the level of expenses.
Management believes that one of the Company's strengths is its concentration on
minimizing expenses through periodic review and adjustment of general and
administrative costs.

Mortality is the rate of death experienced by life insurance policyholders
and certain annuitants taken as a group. For calculating premiums, the Company
uses actuarial assumptions with margins added to allow for adverse statistical
variations. Actual mortality experience in a particular period may be different
than actuarially expected mortality experience and, consequently, may adversely
affect the Company's operating results for such period.

Underwriting Procedures

Premiums charged on insurance products are based, in part, on assumptions
about the expected mortality experience. In that regard, the Company has
adopted and follows detailed, uniform underwriting procedures designed to
assess and quantify insurance risks before issuing life insurance policies to
individuals. To implement these procedures, the Company employs an experienced
professional underwriting staff. The underwriting practice of the Company is to
require attending physicians' statements and medical examinations for each
applicant over age 55 or for policies in excess of certain prescribed policy
amounts, ranging from $25,000 and up. These requirements are graduated
according to the applicant's age and the face amount of the policy. The Company
also carefully reviews medical records and each applicant's written application
for insurance, which generally is prepared under the supervision of one of the
Company's independent general agents. The factors considered in

38
<PAGE>

evaluating an application for individual life insurance coverage include the
applicant's age, occupation, avocations, driving record, finances, aviation
activities, smoking habits, alcohol usage and general health and medical
history. These factors are discovered through the application, attending
physicians' statements, consumer investigation reports from investigative
agencies, direct contact, motor vehicle reports and the Medical Information
Bureau, an insurance industry information service. In accordance with industry
practice, material misrepresentations on a policy application can result in the
cancellation by the Company of the policy under the two year incontestability
clause in the general provisions of the policy.

To the extent that an applicant does not meet the Company's underwriting
standards for issuance of a policy at the standard risk classifications, the
Company may offer to issue a classified, sub-standard or impaired risk policy
for a risk adjusted premium amount rather than declining the application. The
amount of the Company's impaired risk insurance in force in proportion to the
total amount of the Company's individual life insurance in force was
approximately 4.4% at December 31, 1997 and approximately 4.5% at June 30,
1998.

Acquired Immune Deficiency Syndrome ("AIDS"), which has received wide
publicity because of its serious public health implications, presents special
concerns to the life insurance industry. Mortality risks are accepted by
insurers based on methods of classification designed to appropriately relate
premiums charged to such risks and, in this connection, steps have been taken
toward strengthening the Company's underwriting and selection process. The
Company considers AIDS information in underwriting and pricing decisions in
accordance with applicable laws. A prospective policyholder must submit to a
blood and urine test, which includes AIDS antibody screening, if the amount of
coverage applied for equals or exceeds $100,000. The Company's own mortality
experience reflects no significant adverse impact as a result of any
acceleration of AIDS-related claims. The Company is continuing to monitor
developments in this area but is necessarily unable to predict the long term
impact of this problem on the life insurance industry, in general, or on the
Company, in particular.

Annuity and Life Insurance Reserves

In accordance with applicable insurance regulations, the Company has
established and carries as liabilities in its statutory financial statements
actuarially determined reserves that are calculated to satisfy its contract and
policy obligations. Reserves, together with premiums to be received on
outstanding contracts and policies and interest thereon at certain assumed
rates, are calculated to be sufficient to satisfy policy and contract
obligations. The actuarial factors used in determining such reserves are based
on statutorily prescribed mortality and morbidity tables and interest rates.
Reserves maintained also include unearned premiums, premium deposits, reserves
for claims that have been reported but are not yet paid, reserves for claims
that have been incurred but have not yet been reported and claims in the
process of settlement. Generally, the Company maintains reserves on assumed
reinsurance, but does not continue accumulating reserves with respect to that
portion of policies or contracts that are reinsured with, or ceded to, other
insurance companies. Reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.

39
<PAGE>

The reserves reflected in the Company's Consolidated Financial Statements
included herein are calculated based on GAAP and differ from those specified by
the laws of the various states in which the Company does business and those
reflected in the Company's statutory financial statements. These differences
arise from the use of different mortality and morbidity tables and interest
rate assumptions, the introduction of lapse assumptions into the reserve
calculation and the use of the net level premium reserve method on all
insurance business. See Notes 1G, 1H and 8 of the Notes to Consolidated
Financial Statements.

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. For all interest-sensitive products the policy account
value is equal to the accumulation of gross premiums plus interest credited
less mortality and expense charges and withdrawals. In determining reserves for
its annuity and insurance products, the Company performs periodic studies to
compare current experience for mortality, interest and lapse rates with
expected experience in the reserve assumptions. Differences are reflected
currently in earnings for each period. The Company historically has not
experienced significant adverse deviations from its assumptions.

Claims Paying and Other Ratings

The Insurance Company is rated "A- (Excellent)" by A.M. Best. Publications of
A.M. Best indicate that the "A-" rating is assigned to those companies that, in
A.M. Best's opinion, have achieved, on balance, excellent overall performance
when compared to the norms of the insurance industry and which generally have
demonstrated a strong ability to meet their respective policyholder and other
contractual obligations over a long period of time.

In evaluating a company's statutory financial and operating performance, A.M.
Best reviews the company's profitability, leverage and liquidity, as well as
the company's book of business, the adequacy and soundness of its reinsurance,
the quality and estimated market value of its assets, the adequacy of its
reserves and the experience and competency of its management.

A.M. Best's rating is based on factors which primarily are relevant to
policyholders, agents and intermediaries and is not directed towards the
protection of investors, nor is it intended to allow investors to rely on such
a rating in evaluating the financial condition of the Insurance Company.
Moody's Investor Services ("Moody's") rates the Insurance Company's insurance
financial strength as Baa2. Standard & Poor's Corporation rates the Insurance
Company's insurance financial strength as Api.

Policy Claims

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

40
<PAGE>

Reinsurance

The Company follows the usual industry practice of reinsuring ("ceding")
portions of its life insurance risks with other companies, a practice which
permits the Company to write policies in amounts larger than the risk it is
willing to retain on any one life, and also to continue writing a larger volume
of new business. The Company also reinsures a portion of its life insurance
business in order to obtain commissions on the insurance ceded and thereby
reducing its net commission expense. The maximum amount of individual life
insurance normally retained by the Company on any one life is $50,000 per
policy and $100,000 per life. The maximum retention with respect to impaired
risk policies typically is the same. The Company cedes insurance 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. Reinsurance assumed consists
entirely of the Company's participation in Servicemen's Group Life Insurance.

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 its reinsurer. No reinsurer of business ceded by the Company has failed to
pay any policy claims with respect to such ceded business. As of June 30, 1998,
of the approximately $793.2 million of the Company's life insurance in force,
the Company had ceded to reinsurers approximately $449.9 million of such
insurance in force. The principal reinsuring companies of individual life
policies with whom the Company does business as of June 30, 1998 (and their
corresponding A.M. Best ratings) were Life Reassurance Corporation of America
("A+ (Superior)") and Swiss Re Life Company America ("A (Excellent)").

Competition

The Company believes that the principal competitive factors in the sale of
annuity and life insurance products are product features, commission structure,
perceived stability of the insurer, claims paying ratings, name recognition,
crediting rates, and service. Many other insurance and other companies are
capable of competing for sales in the Company's target markets.

Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to retain and attract independent general
agents to market its products, its ability to develop competitive products that
also are profitable to the Company and its ability to provide quality service.
Management believes that the Company has good relationships with its agents,
has an adequate variety of products approved for issuance and generally is
competitive within the industry.

41
<PAGE>

Investments and Investment Policy

The Company derives a substantial 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 general
requirements and guidelines established and approved by the Company's
investment committee (the "Investment Committee") and by qualitative and
quantitative limits prescribed by applicable insurance laws and regulations.
The Investment Committee meets regularly to set and review investment policy
and to approve current investment plans. The actions of the Investment
Committee are subject to review and approval by the board of directors of the
Insurance Company. The Company's investment policy must comply with NYSDI
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. The Company's investment philosophy is focused on the intermediate to
longer-term horizon and is not oriented towards trading. However, as market
opportunities, liquidity or regulatory considerations may dictate, securities
may be sold prior to maturity. As of June 30, 1998, the Company has categorized
all fixed maturity securities as available for sale. The Company carries such
investments at market value.

The Company manages its investment portfolio to meet the diversification,
yield and liquidity requirements of its annuity contract and insurance policy
obligations. The Company's liquidity requirements are monitored regularly so
that cash flow needs are sufficiently 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.

As of June 30, 1998, approximately 22.3% of the Company's investment
portfolio was invested in mortgage-backed related securities, most of which are
U.S. government and agency mortgage-backed securities, and other mortgage-
backed obligations, most of which are collateralized mortgage obligations
("CMOs") backed by residential mortgages. Most of the Company's CMOs represent
beneficial ownership interests in mortgage-backed securities of the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA"), the Government National Mortgage Association ("GNMA"),
the Resolution Trust Corporation ("RTC") or other asset-backed securities.
Mortgage-backed securities are subject to significant prepayment risk due to
the fact that, in periods of declining interest rates, mortgages may be repaid
more rapidly than scheduled as borrowers refinance higher rate mortgages to
take advantage of the lower current rates. As a result, holders of mortgage-
backed securities may receive prepayments on their investments which cannot be
reinvested at an interest rate comparable to the rate on the prepaid mortgages.
Notwithstanding the foregoing, because the Company historically has purchased
CMOs in the secondary market at prices which typically are below their par or
maturity value, the Company's portfolio has not been materially impacted as a
result of such prepayments. The Company does not invest in interest only or
principal only CMOs.

42
<PAGE>

As of June 30, 1998, approximately 5.3% of the Company's investment portfolio
consisted of bonds acquired in private placements. While these bonds are not
usually registered with the Commission, management believes that these bonds
are marketable to other institutional investors. Approximately 84.9% of the
investments acquired by the Company in private placements have been assigned a
NAIC designation corresponding to one of the two highest quality rating
categories. For NAIC designations corresponding to the entire Investment
Portfolio, see "--Bond Portfolio Ratings. "

As of June 30, 1998, approximately 10.5% of the Company's investment
portfolio, and 50.8% of its stockholders' equity, consisted of interests in
over forty limited partnerships which are engaged in a variety of investment
strategies, principally including merchant banking, real estate, international
opportunities and debt restructuring activities. 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
some degree of illiquidity, which is mitigated by the ability of the Company to
take annual distributions of partnership earnings.

The limited partnerships that are involved in real estate activities
generally invest 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 which provide a strategic or
competitive advantage and are priced at levels which the general partner
believes to be attractive.

The limited partnerships that are involved in international investments
generally purchase sovereign debt, corporate debt and/or equity in governments
or foreign companies that are developing a greater world wide presence. Such
limited partnerships are operated by a general partner who has a demonstrated
expertise in this area and country. Such investments involve risks related to
the particular country including political instability, currency fluctuations,
and repatriation restrictions.

43
<PAGE>

The Company has been investing in limited partnerships for over nine years.
During this time, the Company has had an opportunity to consider and evaluate a
substantial number of limited partnerships and their managers. The Company
makes limited partnership investments based on a number of considerations,
including the reputation, investment philosophy (particularly with respect to
risk), performance history and investment strategy of the manager of the
limited partnership. Managers of the limited partnerships in which the Company
is invested include, among others, Blackstone Investment Management, Omega
Institutional Partners, Goldman Sachs Partners, Trust Company of the West Asset
Management, Clayton Dubilier & Rice Partners, Apollo Real Estate and DLJ Real
Estate Capital.

Limited partnership investments are selected through a careful, two-stage
review process. Shirley P. Jordan, Executive Vice President and Chief
Investment Officer of the Insurance Company, and her staff review the offering
documents and performance history of each investment manager. Ms. Jordan has
more than 20 years of experience in analyzing investments. Separately, the
Investment Committee (which is comprised of investment professionals who
collectively have more than 80 years experience in analyzing investments)
interviews the manager to determine whether the investment philosophy
(particularly with respect to risk) and strategies of the limited partnership
are in the best interests of the Company. Only after a positive recommendation
is made by both the Chief Investment Officer and the Investment Committee does
the Company invest in a limited partnership. In addition, the actions of the
Investment Committee are subject to review and approval by the board of
directors of the Insurance Company. To evaluate both the carrying value and the
continuing appropriateness of the Company's investment in any limited
partnership, management maintains ongoing discussions with the investment
manager and considers the limited partnership's operations, its current and
near term projected financial condition, earnings capacity and distributions
received by the Company during the year.

Pursuant to the terms of certain limited partnership agreements to which the
Company is a party, the Company is committed to contribute, if called upon, an
aggregate of approximately $53.9 million of additional capital to certain of
these limited partnerships. However, management does not expect the entire
amount to be drawn down as certain of these limited partnerships are nearing
the end of the period during which investors are required to make
contributions.

The book value of the Company's investments in limited partnerships as of
June 30, 1998 and as of December 31, 1997, 1996 and 1995 was approximately
$265.6 million, $208.2 million, $176.1 million and $150.3 million,
respectively. Net investment income derived from the Company's interests in
limited partnership investments aggregated approximately $30.1 million in the
six months ended June 30, 1998 and $39.8 million, $35.3 million and $25.3
million in fiscal 1997, 1996 and 1995, respectively.

Management anticipates that in the future it will continue to make selective
investments in limited partnerships as opportunities arise, 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 applicable company. There
can be no assurance that the Company will continue to

44
<PAGE>

achieve the same level of returns on its investments in limited partnerships
that it has achieved during the six months ended June 30, 1998 or fiscal 1997,
1996 or 1995 or that it will achieve any returns on such investments at all. In
addition, there can be no assurance that the Company will receive a return of
all or any portion of its current or future capital investments in limited
partnerships. The failure of the Company to receive the return of a material
portion of its capital investments in limited partnerships, or to achieve
historic levels of returns on such investments, could have a material adverse
effect on the Company's financial condition and results of operations.

As of June 30, 1998, the Company's investment portfolio also consisted of
approximately 0.5% invested in convertible debt securities, approximately 8.4%
invested in preferred stock, approximately 0.7% invested in mortgage loans, and
approximately 2.5% invested in common stock. The Company's mortgage loans were
collateralized by commercial office and retail properties located in New York
and Pennsylvania. The Company's only real estate investments are two buildings,
which are used as the current home office of the Insurance Company, and two
acres of undeveloped land in Nyack, New York.

In order to enhance investment income, the Company participates in "dollar
roll" repurchase agreement transactions. Such transactions involve the sale of
a mortgage-backed security to a holding institution and a simultaneous
agreement to purchase a substantially similar security (with the same coupon
rate as the security sold) for forward settlement (typically, around 30 days)
at a lower dollar price. The proceeds are invested in short-term investment
grade commercial paper or loan participations at a positive spread until the
settlement date of the similar security. In connection with its "dollar roll"
transactions, the Company does not engage in yield maintenance transactions.
The purchase and maturity dates of all short-term investments are matched
exactly to the sale and purchase dates of the underlying collateral, with a 90-
day maximum for any one transaction. During this period, the holding
institution receives all income and prepayments for the security. To reduce the
risk that a party will default on its obligations under the repurchase
agreement, the Company only enters into "dollar roll" transactions with major
securities dealers such as Morgan Stanley & Co. Incorporated, Goldman, Sachs &
Co., Merrill Lynch & Co., Salomon Smith Barney Inc., Bear, Stearns & Co. Inc.,
CS First Boston and Sandler, O'Neill L.P. Additionally, if the counterparty to
the "dollar roll" agreement defaults under the terms of such agreement, the
Company is not obligated to repurchase the underlying securities to the
transaction. Under GAAP, during the period between the sale by the Company of a
mortgage-backed security to the holding institution and the Company's
repurchase of a substantially similar mortgage-backed security from the holding
institution, the Company's consolidated balance sheet will reflect both the
mortgage-backed security sold to the holding institution and the cash received
for such security as assets, and the Company's repurchase obligation as a
liability. In 1997 and 1996, dollar roll transactions generated approximately
$1.4 million and $1.0 million, respectively, of net investment income for the
Company. Amounts outstanding to repurchase securities under dollar roll
repurchase agreements were approximately $215.7 million, $205.2 million and
$200.9 million as of June 30, 1998, December 31, 1997 and December 31, 1996,
respectively.

45
<PAGE>

The following table summarizes the Company's investment portfolio as of June
30, 1998.

Investment Portfolio

<TABLE>
<CAPTION>
As of June 30, 1998
-------------------
Total Carrying
Value(1)
-------------------
(in thousands)
<S> <C>
Fixed Maturities
Bonds and Notes:
U.S. Government, government agencies and authorities(2).... $ 515,585
Investment grade corporate(3).............................. 725,682
Public utilities........................................... 168,315
Below investment grade corporate........................... 111,344
Mortgage backed............................................ 155,852
Preferred stocks........................................... 213,523
----------
Total Fixed Maturities(4).................................. 1,890,301
Equity securities common stock............................. 62,957
Other Investments:
Policy loans............................................... 17,738
Mortgage loans............................................. 17,460
Other long-term investments(5)............................. 265,643
Cash and short-term investments(6)......................... 287,170
----------
Total cash and investments................................. $2,541,269
==========
</TABLE>
- --------
(1) All securities are classified as available for sale; accordingly total
carrying value equals estimated market value. Independent pricing services
provide market prices for most publicly-traded securities. Where prices
are unavailable from pricing services, prices are obtained from securities
dealers. Estimated market value either approximates estimated carrying
value or was not readily ascertainable. See Note 1(c) of the Notes to the
Consolidated Financial Statements for an explanation of the methodology
used to value "Other long-term investments."
(2) Approximately $393.4 million of such securities represent beneficial
ownership interests in mortgage- backed securities of FDIC, FHLMC, FNMA,
GNMA or the RTC.
(3) Ratings are based primarily upon those assigned by the NAIC and converted
to the generally comparable Moody's rating.
(4) Includes approximately $29.1 million of convertible debt securities and
convertible preferred stock.
(5) Consist principally of investments in limited partnerships which are
carried at cost and adjusted for income and losses, as well as
contributions and distributions.
(6) Includes approximately $215.67 million attributable to "dollar roll"
repurchase agreements.

46
<PAGE>

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

Investment Results

<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except yield data)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and total invested
assets(1).............. $2,060,270 $2,008,727 $2,065,285 $2,295,582 $2,398,240 $2,371,103 $2,526,368
Net investment
income(2).............. 185,190 157,251 170,780 186,180 191,818 98,022 110,076
Effective yield(3)...... 9.88% 8.49% 9.01% 8.83% 8.69% 8.81% 9.29%
Net realized investment
gains(4)............... $ 8,805 $ 7,259 $ 17,216 $ 20,020 $ 26,039 $ 11,013 $ 9,069
</TABLE>
- --------
(1) Average of cash and aggregate invested amounts at the beginning and end of
period.
(2) Net investment income is net of investment expenses and excludes capital
gains and losses and provision for income taxes.
(3) Net investment income divided by average cash and total invested assets
minus net 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.

The following table sets forth the composition of the Company's bond
portfolio by rating as of June 30, 1998.

Bond Portfolio Ratings

<TABLE>
<CAPTION>
As of June 30, 1998
------------------------------
Estimated
Market Percent of
Value(2) Total Estimated
Rating(1) (in thousands) Market Value(2)
- --------- -------------- ---------------
<S> <C> <C>
Aaa.............................................. $ 560,970 33.5%
Aa............................................... 32,852 2.0
A................................................ 311,902 18.6
Baa.............................................. 610,836 36.4
---------- -----
Total investment grade(3)...................... 1,516,560 90.5
---------- -----
Ba............................................... 124,694 7.4
B................................................ 26,064 1.5
C................................................ 9,458 0.6
---------- -----
Total non-investment grade..................... 160,216 9.5
---------- -----
Total........................................ $1,676,776 100.0%
========== =====
</TABLE>
- --------
(1) Ratings are those assigned primarily by Moody's when available, with
remaining ratings as assigned by Standard & Poor's and converted to a
generally comparable Moody's rating. Bonds not rated by any such
organization 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 market value.
(2) Independent pricing services provide market prices for most publicly-traded
securities. Where prices are unavailable from pricing services, prices are
obtained from securities dealers.
(3) Approximately 33.0% of which consist of U.S. government and agency bonds.

47
<PAGE>

According to Moody's, bonds that are rated "A" possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Moody's applies numerical modifiers "1," "2" and "3" in each
generic rating classification from Aa to B. Modifier "1" indicates a bond in
the higher end of a generic rating classification.

The NAIC assigns securities quality ratings and uniform prices called "NAIC
Designations," which are used by insurers when preparing their statutory
annual statements. The NAIC assigns designations to publicly traded as well as
privately placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a designation in class 1 being of the highest
quality. NAIC ratings are assigned annually as of December 31, and rerated
periodically. Of the bonds and notes in the Company's investment portfolio,
approximately 93.4% were in one of the highest two NAIC Designations at June
30, 1998. The following table sets forth the carrying value and estimated
market value of these securities according to NAIC Designations as of June 30,
1998.

<TABLE>
<CAPTION>
As of June 30, 1998
------------------------------
Estimated
NAIC Designations Market Percent of
(generally comparable to Moody's Value(2) Total Estimated
ratings)(1) (in thousands) Market Value(2)
-------------------------------- -------------- ---------------
<C> <S> <C> <C>
1 (Aaa, Aa, A)............................. $ 919,509 54.8%
2 (Baa).................................... 645,924 38.5
3 (Ba)..................................... 75,823 4.5
4 (B)...................................... 19,201 1.2
5 (Caa, Ca)................................ 16,320 1.0
6 (C)...................................... 0.0 0.0
---------- -----
$1,676,776 100.0%
========== =====
</TABLE>
- --------
(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 market value.
(2) Independent pricing services provide market prices for most publicly-
traded securities. Where prices are unavailable from pricing services,
prices are obtained from securities dealers.

The Insurance Company is subject to Regulation 130 adopted and promulgated
by the NYSDI. 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 June 30, 1998,
approximately 4.5% of the Insurance Company's total admitted assets were
invested in below investment grade debt securities. For a detailed discussion
concerning below investment grade debt securities, including the risks
inherent in such investments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Also see Note 2 of the Notes to Consolidated Financial Statements
for certain other information concerning the Company's investment portfolio.

48
<PAGE>

The following table sets forth the scheduled maturities for the Company's
investments in bonds and notes as of June 30, 1998.

Scheduled Maturities

<TABLE>
<CAPTION>
As of June 30, 1998
------------------------------
Estimated
Market Percent of
Value(2) Total Estimated
Maturity(1) (in thousands) Market Value(2)
- ----------- -------------- ---------------
<S> <C> <C>
Due in one year or less.......................... $ 27,430 1.7%
Due after one year through five years............ 120,817 7.2
Due after five years through 10 years............ 92,878 5.5
Due after 10 years through 20 years.............. 1,279,799 76.3
---------- -----
Total.......................................... 1,520,924 90.7
Mortgage-backed bonds............................ 155,852 9.3
---------- -----
Total bonds and notes.......................... $1,676,776 100.0%
========== =====
</TABLE>
- --------
(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 market value.
(2) Independent pricing services provide market prices for most publicly-traded
securities. Where prices are unavailable from pricing services, prices are
obtained from securities dealers.

Insurance Regulation

General Regulation

As an insurance holding company, the Company is subject to regulation by the
State of New York, where the Insurance Company is domiciled, as well as all
states in which the Insurance Company transacts business. Most states have
enacted legislation that requires each insurance company in a holding company
system to register with the insurance regulatory authority of the insurance
company state of domicile and furnish to that state financial and other
information concerning the operations of companies within the holding company
system that may materially affect the operations, management or financial
condition of the insurers within the system. The Company has registered as a
holding company system in New York.

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 and that charges for services be
reasonable. In addition, most transactions require either prior notification to
or approval of the Superintendent. Prior written approval of the Superintendent
is required for the direct or indirect acquisition of 10% or more of the
insurance companies' voting securities. Applicable state insurance laws, rather
than federal bankruptcy laws, also apply to the liquidation or reorganization
of insurance companies.

The Insurance Company is subject to regulation and supervision by the
insurance regulatory agencies of the states in which it is authorized to
transact business. State insurance

49
<PAGE>

laws establish supervisory 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
certain 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.

During the last decade, the insurance regulatory framework has been placed
under increased scrutiny by various states, the federal government and the
NAIC. Various states have considered or enacted legislation that changes, and
in many cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has approved and recommended to the states
for adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies and market conduct
violations. These initiatives include investment reserve requirements, risk-
based capital standards, codification of insurance accounting principles, new
investment standards and restrictions on an insurance company's ability to pay
dividends to its stockholders. The NAIC is also currently developing model laws
relating to product design and illustrations for annuity products. Current
proposals are still being debated and the Company is monitoring developments in
this area and the effects any changes would have on the Company.

The Insurance Company is required to file detailed periodic reports and
financial statements with the state insurance regulators in each of the states
in which it does business. In addition, insurance regulators periodically
examine the Insurance Company's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. As part of their routine regulatory oversight process, the NYSDI
generally conducts detailed examinations every three years of the books,
records and accounts of the Insurance Company. The Insurance Company's last
examination occurred during 1997 for the three-year period ended December 31,
1996. The final report did not raise any issues or require or recommend
adjustments.

Regulation of Dividends and Other Payments from the Insurance Company

50
<PAGE>

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. As a New York
domiciled insurance company, the Insurance Company is subject to restrictions
on the payment of dividends under New York law. New York law states that no
domestic stock life insurance company shall distribute any dividend to its
shareholders unless a notice of its intention to declare such dividend and the
amount thereof shall have been filed with the Superintendent not less than 30
days in advance of such proposed declaration. The Superintendent may
disapprove such distribution by giving written notice to such company within
30 days after such filing that he or she finds that the financial condition of
the company does not warrant such distribution. The NYSDI has established
informal guidelines for the Superintendent's determinations which focus upon,
among other things, the overall financial condition and profitability of the
insurer under statutory accounting practices. During 1997, 1996 and 1995, and
the first six months ended June 30, 1998 the Insurance Company paid dividends
of $24.8 million, $15.0 million, $5.0 million and $29.4 million, respectively,
to the Company.

In the past, the NAIC proposed the NAIC Model Act which limits dividends
that may be paid in any calendar year without regulatory approval to the
lesser of (1) 10% of the insurer's statutory surplus at the prior year-end or
(2) 100% of the statutory net gain from operations of the insurer (not
including realized capital gains) for the prior calendar year. The NAIC has
determined that it will not grant accreditation to any state insurance
regulatory authority in a state that has not enacted statutes "substantially
similar" to the NAIC Model Act regulating the payment of dividends by
insurers. The New York statutes applicable to the Insurance Company do not
conform to the NAIC Model Act and the legislature of New York may consider
legislation to bring New York laws into substantial compliance with the NAIC
Model Act.

Investment Reserve

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, mortgage loans, real estate and other invested
assets. The maximum AVR is calculated based on the application of various
factors that are applied to the assets in an insurer's portfolio. The AVR
generally captures credit-related realized and unrealized capital gains or
losses on such assets. Each year the amount of an insurer's AVR will fluctuate
as the investment portfolio changes and capital gains or losses are absorbed
by the reserve. To adjust for such changes over time, contributions must be
made to the AVR in an aggregate annual amount equal to 20% of the difference
between the maximum AVR as calculated and the actual AVR. These contributions
may result in a slower rate of growth in or a reduction of the Insurance
Company's Unassigned Surplus. The extent of 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.

51
<PAGE>

Interest Maintenance Reserve. The Interest Maintenance Reserve (the "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 ratio. The IRIS ratios were designed to advise state insurance regulators
of significant changes in the operations of an insurance company, such as
changes in its 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," such 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.
The Company anticipates that it may from time to time fall outside the "normal
range" on some of these ratios. For the year ended December 31, 1997, the
Company was within the normal range for all of the ratios. If four or more of
the Company's ratios fall outside the "normal range," the Company is likely to
experience regulatory inquiry and a higher level of scrutiny.

Risk-Based Capital

Under the NAIC's risk-based capital 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 then 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 regulatory control
of the insurance company to a requirement for the insurance company to submit a
plan to improve its capital. At December 31, 1997, the Insurance Company's
total adjusted capital was $370.7 million and the authorized control level risk
based capital was $61.8 million.

Assessments Against Insurers

Most applicable jurisdictions require insurance companies to participate in
guaranty funds, which are designed to indemnify policyholders of insolvent
insurance companies.

52
<PAGE>

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 solvency and, in certain instances,
may be offset against future state premium taxes. The amount of these
assessments in prior years has not been material, however, the amount and
timing of any future assessment on the Insurance Company under these laws
cannot be reasonably estimated and are beyond the control of the Company and
the Insurance Company. Recent failures of substantially larger insurance
companies could result in future assessments in material amounts.

Regulation at Federal Level

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 proposed 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. It is not possible to
predict the outcome of any such congressional activity nor the potential
effects thereof on the Company.

Affiliates

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

Properties

The Company owns, and the Insurance Company 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 useable floor 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.

Employees

As of June 30, 1998, the Company employed 105 persons. These employees
perform executive and administrative functions and engage in marketing and
sales activities. None of the employees of the Company are covered by a
collective bargaining agreement. The Company considers its relationships with
its employees to be good.

Legal Proceedings

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not a party to any legal proceedings, the adverse outcome of which, in
management's opinion, individually or in the aggregate, would have a material
adverse effect on the Company's financial condition or results of operations.

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MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information regarding the Company's
directors and executive officers.

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Herbert Kurz............ 78 Director and President of the Company and Chairman of the
Board of Directors and President of the Insurance Company
Shirley P. Jordan....... 63 Executive Vice President and Chief Investment Officer of the
Insurance Company
Michael V. Oporto....... 38 Chief Financial Officer and Treasurer of the Company and of
the Insurance Company
Peter A. Cohen.......... 51 Director
Jules Kroll............. 57 Director
Lawrence Rivkin......... 76 Director
Morton B. Silberman..... 75 Director
</TABLE>

Herbert Kurz has been a director of the Company since February 24, 1969. Mr.
Kurz also has served as President of the Company and Chairman of the board of
directors of the Insurance Company, the wholly-owned subsidiary of the Company
through which the Company conducts its annuity and insurance business, for more
than the past five years. Since February 22, 1995, Mr. Kurz has served as
President of the Insurance Company.

Shirley P. Jordan has served as Executive Vice President of the Insurance
Company since 1994 and as Chief Investment Officer for the Insurance Company
since June, 1988. For the six years prior to 1994 Ms. Jordan served as Senior
Vice President of the Insurance Company. Ms. Jordan currently serves as a
director of the Insurance Company.

Michael V. Oporto has served as Chief Financial Officer of the Insurance
Company since May 4, 1993 and as Treasurer of the Insurance Company since 1994.
Prior to that, Mr. Oporto served as a senior audit manager for Deloitte &
Touche LLP for more than five years. Mr. Oporto currently serves as a director
of the Insurance Company.

Peter A. Cohen has been a director of the Company since May 27, 1992. Mr.
Cohen currently is the owner of Ramius Capital Group, a private investment
firm. From November, 1992 until May, 1994, Mr. Cohen was Vice Chairman and a
director of Republic New York Corporation ("Republic"), as well as a member of
its management executive committee. Mr. Cohen was also the Chairman of
Republic's wholly-owned subsidiary, Republic New York Securities Corporation.
Commencing in February, 1990 and prior to his joining Republic in November,
1992, Mr. Cohen was a private investor and an advisor to several industrial and
financial companies. From March, 1984 until February, 1990, Mr. Cohen was
Chairman of the board of directors and Chief Executive Officer of Shearson
Lehman Hutton Inc., a subsidiary of American Express Company. In addition to
serving on the Board of Directors of the Company, Mr. Cohen serves as a
director of Olivetti SpA, Andover Togs Inc., GRC International and is a trustee
of Mt. Sinai Hospital, the Ohio State University Foundation and New York
Holocaust Commission.

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<PAGE>

Jules Kroll has been a director of the Company since November 30, 1988. Mr.
Kroll is Chairman and Chief Executive Officer of Kroll-O'Gara, a risk
mitigation company. Mr. Kroll was Chairman of Kroll Associates, Inc., a private
investigative services company. He held that position since December 1, 1991.
Since 1972 he was President and Chief Executive Officer of Kroll Associates,
Inc. He is also a member of the Board of Directors of United Auto Group, Inc.,
a company engaged in acquiring, consolidating and operating franchised
automobile and light truck dealerships.

Lawrence Rivkin has been a director of the Company since May 25, 1988. Mr.
Rivkin has been a partner in the law firm of Goldfarb & Fleece for more than
the past five years.

Morton B. Silberman has been a director of the Company since May 27, 1987.
Mr. Silberman has served as counsel to the law firm of Clark, Gagliardi and
Miller for more than the past five years.

55
<PAGE>

DESCRIPTION OF NOTES

The Notes will be issued under an indenture, to be dated as of February 23,
1999 (the "Indenture"), between the Company and Bankers Trust Company, as
Trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement. The following summaries of certain provisions of the
Indenture do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Indenture,
including the definitions therein of certain terms, and to the Trust Indenture
Act of 1939, as amended. The definitions of certain capitalized terms used in
the following summary are set forth below under "--Certain Definitions."
References to the "Company" in the following summary are references solely to
Presidential Life Corporation.

General

The Notes will mature on February 15, 2009, and will be limited to $100
million aggregate principal amount, which may be issued in one or more
offerings up to such aggregate principal amount. Any Notes issued subsequent to
the initial offering of Notes will have identical terms and conditions as the
Notes then outstanding and will vote on all matters together with such
outstanding Notes. Notwithstanding the above, the issue price for any
additional Notes may differ from the issue price of the outstanding Notes and
the first interest period for any additional Notes will run from the date of
issuance of such additional Notes to, but excluding, the next Interest Payment
Date for the Notes.

The Notes will bear interest at 7 7/8% per annum from the later of the
respective issue date of each Note, as specified in the relevant prospectus
supplement, or the most recent Interest Payment Date through which interest has
been paid, payable semiannually in arrears on February 15 and August 15 of each
year, to the persons in whose names the Notes are registered at the close of
business on the February 1 and August 1, as the case may be, immediately
preceding such Interest Payment Dates. Interest on the Notes will be computed
on the basis of a 360-day year of twelve 30-day months.

The Notes will be sold in minimum denominations of $1,000 and integral
multiples thereof.

The Notes will not be subject to any sinking fund.

Ranking

The Notes will be general senior unsecured obligations of the Company, will
be senior in right of payment to all Indebtedness of the Company expressly
subordinated in right of payment to the Notes and will rank pari passu (equally
and ratably) with all other unsecured senior Indebtedness of the Company (other
than obligations preferred by statute or operation of law). However, since the
Notes will not be secured, they will be effectively subordinated to any secured
indebtedness of Presidential.

The Indenture will not prohibit the Company from incurring additional senior
indebtedness, including secured senior Indebtedness, but requires that the
Notes be secured

56
<PAGE>

on a pari passu basis with such additional secured senior Indebtedness, other
than secured indebtedness represented by (i) capital lease obligations and
purchase money indebtedness, (ii) money deposited in trust or escrow to retire
certain of the Company's existing indebtedness, and (iii) specified
indebtedness of certain subsidiaries of the Company. In addition, the Company
is a holding company and is dependent upon dividends and other payments from
its Subsidiaries to provide funds to permit the payment of the Company's
obligations under the Notes. The payment of dividends by the Insurance Company
also is subject to regulatory restrictions. See "Business--Insurance
Regulation." The rights of the Company and its creditors, including the holders
of the Notes offered hereby, to participate in the assets of any Subsidiary
upon such Subsidiary's liquidation or reorganization or otherwise will be
subject to the prior claims of each of such Subsidiary's creditors and, in the
case of an insurance Subsidiary, policyholders, except to the extent that the
Company may itself be a creditor with recognized claims against such
Subsidiary. See "Risk Factors--Ranking; Holding Company Structure; Restrictions
on Dividends."

Form, Denomination and Title

Global Notes

The Notes will be issued in the form of one or more fully registered Global
Notes (the "Global Notes") that will be deposited with, or on behalf of, the
Depositary and registered in the name of the Depositary's nominee. Unless and
until it is exchanged in whole or in part for Notes in definitive registered
form, a Global Note may not be registered for transfer or exchange except as a
whole by the Depositary to a nominee of such Depositary.

The Depositary has advised the Company as follows: the Depositary is a
limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code, as amended, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities for its participating organizations
(collectively, "participants") and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical transfer and delivery of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the Depositary system
is available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").

So long as the Depositary or its nominee is the registered owner of a Global
Note, such Depositary or such nominee will be considered the sole owner or
holder of the Notes represented by such Global Note for all purposes under the
Indenture and the Notes. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by a
Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Notes in definitive form, and will not be
considered the owners or holders thereof under the Indenture or the Notes. In
addition, no beneficial

57
<PAGE>

owner of an interest in a Global Note will be able to transfer that beneficial
interest except in accordance with the Depositary's or its participants'
applicable procedures.

The Company expects that the Depositary, upon the issuance of a Global Note,
will credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Note to the accounts
of participants or persons who hold interests through participants. Ownership
of beneficial interests in the Global Notes will be shown on, and the transfer
of that ownership will be effected only through, records maintained by the
Depositary or its nominee (with respect to interests of participants) or by the
participants and the indirect participants (with respect to other owners of
beneficial interests in Global Notes).

The laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws, as well as
the limits on participation in the Depositary's book-entry system, may impair
the ability to transfer beneficial interests in a Global Note.

Payments due on Notes represented by a Global Note registered in the name of
the Depositary or its nominee will be made to the Depositary or its nominee, as
the case may be, as the registered owner of the Global Note representing such
Notes. The Company expects that the Depositary or its nominee, upon receipt of
any payment, will credit immediately participants' accounts with payments in
same-day funds in amounts proportionate to such participants' respective
beneficial interests in such payments, as shown on the records of the
Depositary or its nominee. The Company also expects that payments by
participants and indirect participants to owners of beneficial interests in
such Global Note held through such persons will be governed by standing
instructions and customary practices, as is now the case with securities
registered in the name of nominees for such customers, and will be the
responsibility of such participants and indirect participants. Transfers
between participants will be effected in accordance with the Depositary's rules
and procedures and will be settled in same-day funds. Neither the Company nor
the Trustee will have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note representing such Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.

The Depositary has advised the Company that it will take any action permitted
to be taken by a holder of Notes only at the direction of one or more of the
Depositary's participants to whose account with the Depositary interests in the
Global Notes are credited and only in respect of such portion of the aggregate
principal amount of the Notes as to which such participant or participants has
or have given such direction. However, in the circumstances described herein,
the Depositary will exchange Global Notes for certificated Notes in definitive
form, which it will distribute to its participants.

Certificated Notes

If the Depositary at any time notifies the Company that it is unwilling or
unable to continue as Depositary or ceases to be a clearing agency registered
under the Exchange Act

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<PAGE>

and any other applicable statute or regulation, the Company has agreed to
appoint a successor depositary. If such a successor is not appointed by the
Company within 90 days, or if there shall have occurred and be continuing an
Event of Default with respect to the Notes, the Company will issue Notes in
definitive form in exchange for the Global Note representing such Notes. In
addition, the Company may at any time and in its sole discretion determine not
to have the Notes represented by a Global Note, and, in such event, the Company
will issue Notes in definitive form in exchange for the Global Note
representing such Notes. Further, if the Company so specifies with respect to
the Notes, an owner of a beneficial interest in a Global Note representing
Notes may, on terms acceptable to the Company, the Trustee and the Depositary
for such Global Note, receive Notes in definitive form. In any such instance,
an owner of a beneficial interest in a Global Note will be entitled to physical
delivery in definitive form of Notes represented by such Global Note equal in
principal amount to such beneficial interest and to have such Notes registered
in its name. Notes so issued in definitive form will be issued in denominations
of $1,000 and integral multiples thereof.

The holder of a definitive Note may transfer such Note by surrendering it at
the office or agency maintained by the Company for such purpose in the Borough
of Manhattan, The City of New York, which initially will be the office of the
Trustee or at the office of any Paying Agent. Neither the Trustee nor any
Registrar (which initially will be the Trustee) shall be required to register
the transfer of, or exchange, Notes for a period from the record date to the
due date for any payment of principal of, or interest on, the Notes or to
register the transfer of, or exchange, any Notes for 15 days prior to the
furnishing of a notice of redemption with respect to such Notes through the
date of redemption.

Prior to the presentment of a Note (including a Global Note) for registration
of transfer, the Company, the Trustee and any agent of the Company or the
Trustee may treat the person in whose name such Note is registered as the owner
or holder of such Note for the purpose of receiving payment of principal of,
and interest on, such Note and for all other purposes whatsoever, and none of
the Company, the Trustee or any agent of the Company or the Trustee shall be
affected by notice to the contrary.

Replacement of Notes

In the event that any Note shall become mutilated, defaced, destroyed, lost
or stolen, the Company will execute and, upon the Company's request, the
Trustee will authenticate and deliver a new Note, of like tenor (including the
same date of issuance) and equal principal amount, registered in the same
manner, dated the date of its authentication and bearing interest from the date
to which interest has been paid on such Note, in exchange and substitution for
such Note (upon surrender and cancellation thereof) or in lieu of and
substitution for such Note. In the event that such Note is destroyed, lost or
stolen, the applicant for a substitute Note shall furnish to the Company and
the Trustee such security or indemnity as may be required by them to hold each
of them harmless, and, in every case of destruction, loss or theft of such
Note, the applicant shall also furnish to the Company and the Trustee
satisfactory evidence of the destruction, loss or theft of such Note and of the

59
<PAGE>

ownership thereof. Upon the issuance of any substituted Note, the Company may
require the payment by the registered holder thereof of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other fees and expenses connected therewith.

Payment

Payments of principal, premium, if any, and interest in respect of the Notes
will be made at the trust office of the Trustee in New York City. Payments in
respect of principal or premium, if any, on Notes will be made only against
surrender of such Notes at such office. Payment in respect of interest on each
Interest Payment Date with respect to any such Note will be made to the person
in whose name such Note is registered at the close of business on the February
1 or August 1 immediately preceding such Interest Payment Date by U.S. dollar
check drawn on a bank in The City of New York or, for holders of at least
$1,000,000 of Notes, by wire transfer to a dollar account maintained by the
payee with a bank in the United States; provided that a written request from
such holder to such effect designating such account is received by the Trustee
or the Paying Agent no later that 30 calendar days immediately preceding such
Interest Payment Date. Unless such designation is revoked, any such designation
made by such holder with respect to such Note payable to such holder will
remain in effect with respect to any future payments with respect to such Note
payable to such holder. The Company will pay any administrative costs imposed
by banks in connection with making payments by wire transfer.

If any payment in respect of a Note is due on a day that is not a Business
Day, then such payment may be made on the next succeeding day that is a
Business Day with the same force and effect as if made on the original
scheduled date for such payment.

The Indenture will provide that any money or securities paid or delivered by
the Company to the Trustee for any payment with respect to the Notes which
remains unclaimed for two years after the date such payment was due or such
securities were deliverable will be repaid or delivered to the Company and
thereafter the holder will look only to the Company for payments thereof as an
unsecured creditor, and the Company shall not be liable to pay any taxes or
other duties in connection with such payments; provided, however, that unless
otherwise provided by applicable law, the right to receive payment of principal
of any Note, to the extent of any cash redemption, will become void at the end
of 10 years from the relevant date thereof or such shorter period as may be
prescribed by applicable law.

Subject to certain limitations set forth in the Indenture, the Company
reserves the right at any time to vary or terminate the appointment of the
Trustee or any Paying Agent in certain circumstances and to appoint another
Trustee or additional or other Paying Agents and to approve any change in the
specified offices through which any Paying Agent acts.

Optional Redemption

Redemption at the Option of the Company

The Notes will be redeemable, in whole or in part, at the option of the
Company, upon not less than 30 nor more than 60 days' notice, at a redemption
price equal to the sum of

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(i) 100% of the principal amount of the Notes being redeemed plus accrued and
unpaid interest thereon to, but excluding, the date of redemption and (ii) a
premium equal to the Make-Whole Amount.

Redemption at the Option of Holders Upon Sale of a Significant Subsidiary

If there shall have occurred a Sale of a Significant Subsidiary, the Notes
shall be subject to redemption at the option of each holder thereof, in whole
or in part (in minimum denominations of $1,000 or integral multiples thereof),
at a redemption price in cash equal to 100% of the principal amount of such
Notes plus accrued and unpaid interest thereon to, but excluding, the date of
redemption.

Within 20 days following any Sale of a Significant Subsidiary, the Company
will notify the Trustee and furnish notice of such sale to each holder of the
Notes, stating, among other things: the redemption price; the date of
redemption, which shall be a Business Day that is not earlier than 30 days nor
later than 60 days from the date such notice is furnished, or such later date
as is necessary to comply with requirements under the Exchange Act; that any
Notes not tendered for redemption pursuant to such notice will continue to
accrue interest; that, unless the Company defaults in the payment of the
redemption price, any Notes accepted for redemption pursuant to such notice
shall cease to accrue interest after the date of redemption; and certain other
procedures that a holder must follow to exercise the option of redemption or to
withdraw such election.

The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
redemption of the Notes in connection with a Sale of a Significant Subsidiary
and may modify its notice to effect such compliance. There can be no assurance
that the Company would be able to repurchase the Notes other than through a
refinancing or that the Company would be able to refinance such Indebtedness.
The inability to repurchase the Notes could have a material adverse effect on
the Company's financial condition and results of operations.

Notice of any redemption will be mailed at least 30 days but not more than 60
days before the date of redemption to each holder of the Notes to be redeemed.

Unless the Company defaults in payment of the redemption price, on and after
the date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption.

"Make-Whole Amount" means, in connection with an optional redemption of any
Note, the excess, if any, of (i) the sum, as determined by the Quotation Agent,
of the present values of the principal amount of such Notes together with
scheduled payments of interest that would accrue thereon from the date of
redemption to the Stated Maturity of the Notes, in each case discounted to the
date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Adjusted Treasury Rate over (ii) 100% of the
principal amount of the Notes to be redeemed.

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<PAGE>

"Adjusted Treasury Rate" means, with respect to any date of redemption, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, calculated using a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such date of redemption, calculated on the third
Business Day preceding the date of redemption, plus in each case 0.25% (25
basis points).

"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the
remaining term of the Notes to be redeemed that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing
new issues of corporate debt securities of comparable maturity to the remaining
term of such Notes.

"Comparable Treasury Price" means, with respect to any date of redemption,
(i) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such date of redemption, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities," or (ii) if such release (or any successor release) is
not published or does not contain such prices on such Business Day, the average
of the Reference Treasury Dealer Quotations for such date, after excluding the
highest and lowest of such Reference Treasury Dealer Quotations, or (iii) if
the Trustee obtains fewer than three such Reference Treasury Dealer Quotations,
the average of all such Reference Treasury Dealer Quotations.

"Quotation Agent" means one of the Reference Treasury Dealers appointed by
the Company as the Quotation Agent.

"Reference Treasury Dealer" means (i) any of BT Alex. Brown Incorporated and
Salomon Smith Barney and their respective successors; provided, however, that
if either of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
shall substitute another Primary Treasury Dealer; and (ii) any other Primary
Treasury Dealer selected by the Company.

"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any date of redemption, the average, as determined by the
Company, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee and the Quotation Agent by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third Business Day preceding
such date of redemption.

Certain Covenants

Limitation on Liens. The Company will not, and will not permit any of its
Significant Subsidiaries, at any time, directly or indirectly, to, create,
assume, incur or permit to exist any Indebtedness secured by a Lien of any kind
on any of the Company's property or assets

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<PAGE>

(which, for the avoidance of doubt, shall not include any of the property or
assets of the Company's Subsidiaries) or any share of Capital Stock of any
Significant Subsidiary owned by the Company or a Significant Subsidiary
without making effective provision whereby the Notes then outstanding shall be
equally and ratably secured with such secured Indebtedness so long as such
other Indebtedness shall be secured; provided that the Lien securing any
Subordinated Indebtedness shall be subordinate and junior to the Lien securing
the Notes with the same relative priority as such Subordinated Indebtedness
shall have with respect to the Notes; and provided, further, that this
covenant shall not apply to any Liens securing any such Indebtedness which
became Indebtedness of the Company or any of its Subsidiaries pursuant to a
transaction subject to the provisions of the Indenture described below under
"--Consolidation, Merger and Sale of Assets" or Liens securing Acquired
Indebtedness and, in each case, which Liens were in existence at the time of
such transaction or the incurrence of such Acquired Indebtedness (unless such
Indebtedness was incurred or such Lien created in connection with, or in
contemplation of, such transaction or incurrence of such Acquired
Indebtedness), so long as such Liens do not extend to or cover any property or
assets of the Company or any of its Significant Subsidiaries other than
property or assets acquired in such transaction or securing such Acquired
Indebtedness prior to its incurrence; and provided, further, however, that
this covenant shall not apply to (i) any Liens created in connection with the
incurrence of any Indebtedness of the Company or any of its Significant
Subsidiaries consisting of capital lease obligations or of purchase money
indebtedness, (ii) amounts, if any, deposited in trust or in escrow for the
defeasance or redemption of the Company's 9 1/2% Senior Notes due 2000 or
(iii) liens securing Indebtedness of a Subsidiary that becomes a Significant
Subsidiary, which liens are in existence as of the end of the fiscal quarter
immediately preceding the fiscal quarter during which such Subsidiary becomes
a Significant Subsidiary.

If the Company shall hereafter be required to secure the Notes equally and
ratably with any other Indebtedness pursuant to this covenant, (i) the Company
will promptly deliver to the Trustee an Officers' Certificate stating that the
foregoing covenant has been complied with, and an Opinion of Counsel stating
that in the opinion of such counsel the foregoing covenant has been complied
with and that any instruments executed by the Company or any Subsidiary, as
the case may be, in the performance of the foregoing covenant comply with the
requirements of the foregoing covenant and (ii) the Trustee is hereby
authorized to enter into an indenture or agreement supplemental thereto and to
take such action, if any, as it may deem advisable to enable it to enforce the
rights of the holders of the Notes so secured.

Limitation on Sale or Issuance of Stock of Subsidiaries. Except for a
transaction subject to the provisions of the Indenture described below under
"--Consolidation, Merger and Sale of Assets," the Company will not, and will
not permit any of its Subsidiaries, directly or indirectly, to sell, transfer,
convey or otherwise dispose of (other than to the Company or a wholly-owned
Subsidiary of the Company) any Capital Stock of a Subsidiary of the Company or
any securities convertible into or warrants, rights or options to subscribe
for Capital Stock of any Subsidiary of the Company, and the Company shall not
permit any of its Subsidiaries to issue or sell (other than to the Company or
a wholly-owned Subsidiary of the Company)

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<PAGE>

any of its Capital Stock or securities convertible into or rights, warrants or
options to subscribe for its Capital Stock; provided, however, that this
covenant shall not prohibit (a) the sale, transfer, conveyance or other
disposition of (i) all, but not less than all, of the issued and outstanding
Capital Stock of any Significant Subsidiary owned by the Company or any of its
Subsidiaries, or (ii) all or any portion of the issued and outstanding Capital
Stock of any Subsidiary of the Company that is not a Significant Subsidiary, if
in either such case (x) the sale, transfer, conveyance or other disposition is
for Fair Market Value, (y) the Company delivers to the Trustee a written
opinion of a nationally recognized investment banking firm attesting to such
value (provided that this clause (y) shall not apply to any transaction
described in clause (a)(ii) above for total consideration less than $10
million), and (z) at least 75% of the consideration is for any combination of
cash or cash equivalents, at the time such stock is sold, transferred, conveyed
or disposed of, and such issuance and sale is otherwise in compliance with the
other provisions of the Indenture, or (b) the ownership by directors of
director's qualifying shares to the extent mandated by applicable law.

Limitation on Dividends and Other Payment Restrictions Affecting Significant
Subsidiaries. The Company will not, and will not permit any Significant
Subsidiary to, create or otherwise cause or suffer to exist or become effective
any consensual encumbrance or consensual restriction of any kind on the ability
of any Significant Subsidiary to (a) pay dividends or make any other
distribution on its Capital Stock, (b) pay any Indebtedness owed to the Company
or any other Subsidiary, (c) make loans or advances to the Company or any other
Subsidiary, or (d) transfer any of its property or assets to the Company or any
other Subsidiary, except (i) any such encumbrance or restriction pursuant to an
agreement in effect on the date of the Indenture; (ii) any such encumbrance or
restriction, with respect to a Subsidiary that is not a Subsidiary of the
Company on the date of the Indenture, in existence at the time such Person
becomes a Subsidiary of the Company (except to the extent such encumbrance or
restriction was incurred or created in connection with or in contemplation of
such Person becoming a Subsidiary of the Company), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person or the property or assets of the Person that
becomes a Subsidiary of the Company; (iii) any such encumbrance or restriction
pursuant to any law, any governmental regulation or order, or agreement with a
governmental regulator, provided that the Company has used reasonable best
efforts to have any such order or agreement diminished or removed by any
regulator authorized to do so and to obtain any exemptive orders from the
relevant regulator with respect to such encumbrance or restriction to the
extent such exemptive orders are reasonably suitable under applicable laws and
regulations; (iv) any such encumbrance or restriction in existence as of the
end of the fiscal quarter immediately preceding the fiscal quarter during which
such Subsidiary becomes a Significant Subsidiary; and (v) any such encumbrance
or restriction pursuant to any agreement that extends, refinances, renews or
replaces any agreement containing any of the restrictions described in the
foregoing clauses (i) and (ii), provided that the terms and conditions of any
such encumbrances or restrictions are not materially less favorable to the
holders of the Notes than those under or pursuant to the agreement extended,
refinanced, renewed or replaced.

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Certain Definitions

"Acquired Indebtedness" means Indebtedness of any Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from a Person.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under the direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise; and
the terms "controlling" and "controlled" have the meanings correlative to the
foregoing.

"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday,
which is not a day on which banking institutions in New York City are
authorized or obligated by law or executive order to close.

"Capital Stock," as applied to the stock of any corporation, means the
capital stock of every class whether now or hereafter authorized, regardless of
whether such capital stock shall be limited to a fixed sum or percentage with
respect to the rights of the holders thereof to participate in dividends and in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of such corporation.

"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or, if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.

"Default" means any event or condition which is, or after notice or passage
of time or both would be, an Event of Default.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell to an informed and willing
buyer.

"Indebtedness" means, with respect to any Person, (i) every obligation of
such Person for money borrowed or under any reimbursement obligation relating
to a letter of credit (other than letters of credit obtained in the ordinary
course of business), if, and to the extent, any of the foregoing would appear
as a liability upon a balance sheet of such Person prepared in accordance with
generally accepted accounting principles, (ii) every obligation of such Person
evidenced by a bond, note, debenture or similar instrument, if, and to the
extent that, any of the foregoing would appear as a liability upon a balance
sheet of such Person prepared in accordance with generally accepted accounting
principles, (iii) every obligation of such Person in respect of lease rentals
which, under generally accepted accounting

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principles, would be shown on the balance sheet of such Person as a liability
(other than a current liability or a deferred item), (iv) all obligations under
interest rate contracts of such Person, and (v) every guarantee, direct or
indirect, of any obligation described in clauses (i) through (iv) above.

"Interest Payment Date," when used with respect to any Note, means the Stated
Maturity of an installment of interest on such Note.

"Lien" means any mortgage, charge, pledge, lien, security interest or
encumbrance of any kind in respect of any property or asset, whether or not
filed, recorded or otherwise perfected under applicable law (including any
conditional sale or other title retention agreement and any lease in the nature
thereof).

"Maturity," when used with respect to any Note, means the date on which the
principal of such Note becomes due and payable as therein or herein provided,
whether at the Stated Maturity or by declaration of acceleration, call for
redemption, Sale of a Significant Subsidiary or otherwise.

"Officers' Certificate" means a certificate signed on behalf of the Company
by the Chairman of the Board, a Vice Chairman of the Board, the President or a
Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary, of the Company, and
delivered to the Trustee.

"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Company, and who shall be reasonably acceptable to the Trustee and
delivered to the Trustee.

"Paying Agent" means any Person authorized by the Company to pay the
principal of, premium, if any, and interest on, any Notes on behalf of the
Company.

"Person" means any individual, corporation, limited partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.

"Sale of a Significant Subsidiary" means the sale, transfer, assignment or
other disposition of a Significant Subsidiary to any Person who is not a wholly
owned Subsidiary of the Company.

"Significant Subsidiary" means, (i) as long as it is a Subsidiary of the
Company, Presidential Life Insurance Company, and (ii) any Subsidiary that
would be a "Significant Subsidiary" within the meaning of Rule 1-02(w)(2) under
Regulation S-X promulgated by the Commission; provided, however, that for
purposes of the definition of Sale of a Significant Subsidiary, the term "10
percent" in such rule shall be substituted by the term "40 percent."

"Stated Maturity," when used with respect to any Indebtedness or any
installment of interest thereon, means the date specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.

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"Subordinated Indebtedness" means Indebtedness the payment of which is
subordinated in right of payment to the Notes.

"Subsidiary" means a corporation of which more than 50% of the outstanding
Voting Stock entitled (without regard to the occurrence of any contingency) to
vote generally in the election of directors thereof is owned, directly or
indirectly, by the Company or by one or more other Subsidiaries, or by the
Company and one or more other Subsidiaries.

"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged, or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America, the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof.

"Voting Stock" means the stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).

Consolidation, Merger and Sale of Assets

The Company will not consolidate with or merge with or into any other Person
or, directly or indirectly, sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of its properties and assets to any Person
or group of affiliated Persons unless at the time and after giving effect
thereto (i) either (a) the Company shall be the continuing corporation, or (b)
the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition the properties and assets of the
Company, substantially as an entirety (the "Surviving Entity") shall be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall, in
either case, expressly assume, by an indenture supplemental to the Indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the covenants and obligations of the Company under the Notes and the Indenture,
and the Indenture, shall remain in full force and effect; (ii) immediately
after giving effect to such transaction on a pro forma basis, no Default or
Event of Default shall have occurred and be continuing; and (iii) if any of the
property or assets of the Company would thereupon become subject to any Lien,
the outstanding Notes shall be secured equally and ratably with (or prior to)
the obligation or liability secured by such Lien, unless the Company could
create such Lien under the Indenture without equally and ratably securing the
Notes.

In connection with any consolidation, merger, transfer or lease, the
Indenture requires the Company to deliver, or cause to be delivered, to the
Trustee, in form and substance

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reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger, transfer or lease and
the supplemental indenture in respect thereto comply with the provisions
described in the Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with.

In the event of any transaction described in, and complying with, the
conditions listed in the immediately preceding paragraphs in which the Company
is not the continuing corporation, the successor Person formed or remaining
shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under the Indenture, and thereafter the Company, except
in the case of a lease of property or assets, will be discharged from all
obligations and covenants under the Indenture and the Notes.

With respect to the sale of properties or assets, the phrase "all or
substantially all" as used in the Indenture varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which governs the Indenture) and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the properties or assets of a
person and therefore it may be unclear as to whether a transaction of the
nature discussed above has occurred.

Events of Default

An Event of Default will occur under the Indenture if any one of the
following events occurs:

(1) default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days;
or

(2) default in the payment of the principal of any Note at its Maturity;
or

(3) default in the performance, or breach, of any covenant or agreement
of the Company under the Indenture (other than a default in the
performance, or breach, of a covenant or agreement that is specifically
dealt with elsewhere therein), and continuance of such default or breach
for a period of 60 days after there has been given, by registered or
certified mail, to the Company by the Trustee or to the Company and the
Trustee by the holders of at least 25% in principal amount of the
outstanding Notes a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" under the Indenture; or

(4) (i) an event of default shall have occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing any issue of
Indebtedness of the Company or any Significant Subsidiary for money
borrowed, which issue has an aggregate outstanding principal amount of not
less than $10,000,000, and such default shall result in such Indebtedness
becoming, whether by declaration or otherwise, due and payable prior to the
date on which it would otherwise become due and payable or (ii) a default
in any payment when due at final maturity of any such Indebtedness of the
Company or any Significant Subsidiary outstanding in an aggregate principal
amount of

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not less than $10,000,000, and, in each case, ten Business Days shall have
elapsed after such event, during which period such event shall not have
been cured or rescinded or such Indebtedness shall not have been satisfied;
or

(5) final judgments or orders are rendered against the Company or any
Significant Subsidiary by a court or regulatory agency of competent
jurisdiction which require the payment in money, either individually or in
an aggregate amount, that is more than $10,000,000 and such judgment or
order shall not be discharged and either (i) any creditor shall have
commenced an enforcement proceeding upon such judgment or order, which
enforcement proceeding shall have remained unstayed for a period of ten
days or (ii) there shall have been a period of 60 days after the date on
which any period for appeal has expired during which a stay of enforcement
shall not be in effect; or

(6) a decree or order is entered by a court having jurisdiction (i) for
relief in respect of the Company or any Significant Subsidiary in an
involuntary case or proceeding under the Federal Bankruptcy Code or any
other federal or state bankruptcy, insolvency, reorganization or similar
law, including, without limitation, any such case or proceeding under
applicable state insurance laws, or (ii) adjudging the Company or any
Significant Subsidiary a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of, or in respect of the Company or
any Significant Subsidiary under the Federal Bankruptcy Code or any other
applicable federal or state law, including, without limitation, any such
case or proceeding under applicable state insurance laws, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Significant Subsidiary or of any
substantial part of any of their assets, or ordering the winding up or
liquidation of any of their affairs, any such decree or order remains
unstayed and in effect for a period of 60 consecutive days; or

(7) the Company or any Significant Subsidiary institutes a voluntary case
or proceeding under the Federal Bankruptcy Code or any other applicable
federal or state law, including, without limitation, any such case or
proceeding under applicable state insurance laws, or any other case or
proceedings to be adjudicated a bankrupt or insolvent, or the Company or
any Significant Subsidiary consents to the entry of a decree or order for
relief in respect of the Company or any Significant Subsidiary in any
involuntary case or proceeding under the Federal Bankruptcy Code or any
other applicable federal or state law, including, without limitation, any
such case or proceeding under applicable state insurance laws, or to the
institution of bankruptcy or insolvency proceedings against the Company or
any Significant Subsidiary, or the Company or any Significant Subsidiary
files a petition or answer or consent seeking reorganization or relief
under the Federal Bankruptcy Code or any other applicable federal or state
law, or consents to the filing of any such petition or to the appointment
of, or taking possession by, a custodian, receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of any of the Company or
any Significant Subsidiary or of any substantial part of its property, or
makes an assignment for the benefit of creditors, or admits in writing its
inability to pay its debts generally as they become due or takes corporate
action in furtherance of any such action.

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If an Event of Default (other than as specified in clauses (6) and (7) with
respect to the Company or any Significant Subsidiary) occurs and is continuing,
the Trustee or the holders of not less than 25% in amount of the Notes then
outstanding may declare all unpaid principal of, and accrued and unpaid
interest on, all the Notes to be due and payable immediately, by a notice in
writing to the Company (and to the Trustee if given by holders), and upon any
such declaration such principal shall become due and payable immediately. If an
Event of Default specified in clause (6) or (7) above with respect to the
Company or any Significant Subsidiary occurs and is continuing, then the
principal of all Notes shall by such fact itself become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder.

After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of at
least a majority in aggregate principal amount of the Notes outstanding, by
written notice to the Company and the Trustee, may annul such declaration if
(a) the Company has paid or deposited with the Trustee a sum sufficient to pay
(i) all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, (ii) all overdue interest on all Notes, (iii) the
principal of any Notes which have become due otherwise than by such declaration
of acceleration and interest thereon at the rate borne by the Notes, and (iv)
to the extent payment of such interest is lawful, interest upon overdue
interest at the rate borne by the Notes; and (b) all Events of Default, other
than the non-payment of principal of the Notes which has become due solely by
the declaration of acceleration, have been waived as provided in the Indenture
or cured. No such rescission shall affect any subsequent default or impair any
right consequent thereon.

The Company is also required to notify the Trustee within five Business Days
of the occurrence of any Default.

Legal Defeasance or Covenant Defeasance

The Company may, at its option and at any time, elect to have the obligations
of the Company discharged with respect to the outstanding Notes ("legal
defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on, such
Notes to Maturity, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("covenant defeasance")
and thereafter any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes. In the
event covenant defeasance occurs, certain

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events (not including non-payment, bankruptcy and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes.

In order to effect a legal defeasance or covenant defeasance, (i) the Company
must irrevocably deposit with the Trustee, in trust, for the benefit of the
holders of the Notes, cash in U.S. dollars, U.S. Government Obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal or redemption price of, and interest on, the outstanding Notes to
Maturity; (ii) in the case of legal defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable United States federal income tax law, in either case to the effect
that, and based thereon, such Opinion of Counsel shall confirm that, the
holders of the outstanding Notes will not recognize income, gain or loss for
United States federal income tax purposes as a result of such legal defeasance
and will be subject to United States federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such legal
defeasance had not occurred; (iii) in the case of covenant defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for United States federal income tax purposes as
a result of such covenant defeasance and will be subject to United States
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit, after giving effect thereto, or, in the case of a
legal defeasance, insofar as clauses (6) and (7) under the first paragraph
under "--Events of Default" are concerned, at any time in the period ending the
91st day after the date of deposit; (v) such legal defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
default under any material agreement or instrument to which the Company or any
of its Significant Subsidiaries is a party or by which the Company or any of
its Significant Subsidiaries is bound; (vi) the Company shall have delivered to
the Trustee an Officers' Certificate stating that the deposit was not made by
the Company with the intent of preferring the holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (vii) the Company shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that all conditions precedent provided for relating to either the
legal defeasance or the covenant defeasance, as the case may be, have been
complied with.

If the Trustee is unable to apply any U.S. dollars or U.S. Government
Obligations in accordance with the above, by reason of any order or judgment of
any court of governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company's obligations under the
Indenture and the Notes will be revived and reinstated as though no deposit had
occurred, until such time as the Trustee is permitted to apply all such money
in accordance with the terms of the Indenture, provided that if the Company
makes any payment of principal or redemption price of (or premium, if any) or
interest on

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any Note following the reinstatement of its obligations, the Company will be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money held by the Trustee.

Modification and Waiver

Modifications and amendments of the Indenture may be made by the Company or
the Trustee with the consent of the holders of not less than a majority in
principal amount of the outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each Note
affected thereby, (i) change the Stated Maturity of the principal of, or
interest on, any Note; (ii) reduce the principal amount thereof, the premium,
if any, or the rate of interest thereon; (iii) change any Place of Payment
where, or the currency in which, any Note or any amount due thereon is payable;
(iv) impair the right to institute suit for the enforcement of any payment on
any Note on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the date of redemption); (v) reduce the percentage in
principal amount of outstanding Notes, the consent of whose holders is required
for modification or amendment of the Indenture or for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults; or (vi)
modify any of the provisions described in this paragraph or set forth in
certain other sections of the Indenture, except to increase any such percentage
or to limit the ability of holders to modify or waive certain other provisions
of the Indenture.

The holders of at least a majority in principal amount of the outstanding
Notes may, on behalf of all holders, waive compliance by the Company with
certain restrictive provisions of the Indenture. The holders of not less than a
majority in principal amount of the outstanding Notes may, on behalf of all
holders, waive any past default under the Indenture, except a default in the
payment of principal or redemption price of, or interest on, any Note and in
respect of a covenant or provision of the Indenture that cannot be modified or
amended without the consent of the holder of each Note affected thereby.

Governing Law

The Indenture and the Notes will be governed by and construed in accordance
with the law of the State of New York.

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the principal United States federal income tax
consequences resulting from the beneficial ownership of Notes by certain
persons. This summary was prepared by Willkie Farr & Gallagher, counsel to the
Company, and, to the extent it expresses opinions or conclusions as to federal
income tax law, represents the opinion of Willkie Farr & Gallagher as to such
matters. This summary does not purport to consider all the possible United
States federal income tax consequences of the purchase, ownership or
disposition of Notes and is not intended to reflect the individual tax position
of any beneficial owner. It deals only with Notes held as capital assets.
Moreover, this summary does not address beneficial owners that may be subject
to special tax rules, such as banks, insurance companies, dealers in securities
or currencies, purchasers that hold Notes as a hedge against currency risks or
as part of a straddle with other investments or as part of a "synthetic
security" or other integrated investment (including a "conversion transaction")
comprised of a Note and one or more other investments, or purchasers that have
a "functional currency" other than the U.S. dollar. Except to the extent
discussed below under "Non-United States Holders," this summary is not
applicable to holders of Notes other than U.S. Holders (as defined below). This
summary is based upon the United States federal income tax laws and regulations
as now in effect and as currently interpreted and does not take into account
possible changes in such tax laws or such interpretations, any of which may be
applied retroactively. It does not include any description of the tax laws of
any state, local or foreign governments that may be applicable to Notes or
holders thereof. Persons considering the purchase of Notes should consult their
own tax advisors concerning the application of the United States federal income
tax laws to their particular situations as well as any consequences to them
under the laws of any other taxing jurisdiction.

For purposes of this discussion, a "U.S. Holder" is (i) a citizen or resident
of the United States, (ii) a corporation created or organized under the laws of
the United States or any state thereof (including the District of Columbia) or
(iii) a person otherwise subject to United States federal income taxation on
its worldwide income.

United States Holders

Payments of Interest

In general, payment of "qualified stated interest" on a Note (as defined
below under "Original Issue Discount"), will be taxable to a U.S. Holder as
ordinary interest income at the time it is received or accrued, depending on
the holder's method of accounting for tax purposes.

Original Issue Discount

The following discussion summarizes the United States federal income tax
consequences to U.S. Holders of Notes issued with original issue discount for
United States federal income tax purposes ("OID"). U.S. Holders of a Note
issued with OID generally will be subject to special tax accounting rules
provided in the Internal Revenue Code of 1986, as amended (the "Code") and
certain Treasury regulations promulgated thereunder (the "OID Regulations").

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U.S. Holders of Discount Notes should be aware that, as described in greater
detail below, the Code and the OID Regulations provide rules that require them
to include OID in gross income before the receipt of cash attributable to such
income, without regard to their method of accounting for tax purposes.

General

A Note will be treated as issued with OID (a "Discount Note") if the excess
of the Note's "stated redemption price at maturity" over its issue price is
greater than or equal to a de minimis amount (set forth in the Code and the OID
Regulations). Generally, the issue price of a Note (or any Note that is part of
an issue of Notes) will be the first price at which a substantial amount of
Notes that are part of such issue of Notes are sold to the public (other than
to underwriters, placement agents or wholesalers). Under the OID Regulations,
the "stated redemption price at maturity" of a Note is the sum of all payments
made with respect to the Note that are not payments of "qualified stated
interest." A "qualified stated interest" payment includes any stated interest
payment on a Note that is unconditionally payable at least annually at a single
fixed rate that appropriately takes into account the length of the interval
between stated interest payments. If a particular issue of Notes will
constitute an issue of Discount Notes, the applicable Prospectus Supplement
will so state.

In general, if the excess of a Note's stated redemption price at maturity
over its issue price is de minimis, then such excess constitutes "de minimis
OID." Under the OID Regulations, unless the election described below under
"Election to Treat All Interest as Original Issue Discount" is made, such a
Note will not be treated as issued with OID (in which case the following
paragraphs under "Original Issue Discount" will not apply) and a U.S. Holder of
such a Note will recognize capital gain with respect to such de minimis OID as
stated principal payments on the Note are made. The amount of such gain with
respect to each such payment will equal the product of the total amount of the
Note's de minimis OID and a fraction, the numerator of which is the amount of
the principal payment made and the denominator of which is the stated principal
amount of the Note.

In general, the amount of OID includible in gross income by a U.S. Holder of
a Discount Note is the sum of the "daily portions" of OID with respect to the
Discount Note for each day during the taxable year or portion of the taxable
year in which the U.S. Holder holds such Discount Note ("accrued OID"). The
daily portion is determined by allocating to each day in any "accrual period" a
pro rata portion of the OID allocable to that accrual period. Under the OID
Regulations, accrual periods with respect to a Note may be any set of periods
(which may be of varying lengths) selected by the U.S. Holder as long as (i) no
accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the Note occurs on the first day or final day of an
accrual period.

The amount of OID allocable to an accrual period equals the excess of (a) the
product of the Discount Note's adjusted issue price at the beginning of the
accrual period and the Discount Note's yield to maturity (determined on the
basis of compounding at the close of each accrual period and properly adjusted
for the length of the accrual period) over (b) the sum of any payments of
qualified stated interest on the Discount Note allocable to the

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accrual period. The yield to maturity of a Discount Note is the discount rate
that causes the present value of all payments on the Discount Note as of its
original issue date to equal the issue price of such Discount Note. The
"adjusted issue price" of a Discount Note at the beginning of the first accrual
period is the issue price and at the beginning of any accrual period thereafter
is (x) the sum of the issue price of such Discount Note, the accrued OID for
each prior accrual period (determined without regard to the amortization of any
acquisition premium or bond premium, which are discussed below), and the amount
of any qualified stated interest on the Note that has accrued prior to the
beginning of the accrual period but is not payable until a later date, less
(y) any prior payments on the Discount Note that were not qualified stated
interest payments. If a payment (other than a payment of qualified stated
interest) is made on the first day of an accrual period, then the adjusted
issue price at the beginning of such accrual period is reduced by the amount of
the payment.

As a result of this "constant yield" method of including OID in income, U.S.
Holders of Discount Notes generally will have to include in income increasingly
greater amounts of OID over the life of the Notes.

Acquisition Premium

A U.S. Holder that purchases a Discount Note for an amount in excess of its
adjusted issue price as of the purchase date but less than its stated
redemption price at maturity (any such excess being "acquisition premium"), and
that does not make the election described below under "Election To Treat All
Interest as Original Issue Discount," is permitted to reduce the amount of OID
which must be included in gross income for any taxable year (but not below
zero) by the portion of the acquisition premium properly allocable to such
year.

Optional Redemption

For purposes of determining whether a Note is a Discount Note and calculating
the amount of OID on such Note, an option to redeem a Note held by the Company
will be presumed to be exercised if, by utilizing any date on which such Note
may be redeemed or repaid as the maturity date and the amount payable on such
date in accordance with the terms of such Note (the "redemption price") as the
stated redemption price at maturity, the yield on the Note would be lower than
its yield to Stated Maturity. If such option is not in fact exercised when
presumed to be exercised, the Note would be treated solely for OID purposes as
if it were redeemed or repurchased, and a new Note were issued, on the presumed
exercise date for an amount equal to the Discount Note's adjusted issue price
on that date. U.S. Holders are urged to consult their own tax advisors with
respect to the Company's option to redeem the Notes. See "Description of
Notes--Optional Redemption."

Notes Purchased at a Premium

Under the Code, a U.S. Holder that purchases a Note for an amount in excess
of its stated redemption price at maturity will not be subject to the OID rules
and may elect to treat such excess as "amortizable bond premium," in which case
the amount of qualified stated interest required to be included in the U.S.
Holder's income each year with respect to

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<PAGE>

interest on the Note will be reduced by the amount of amortizable bond premium
allocable (using a constant yield method based on the Note's yield to maturity)
to such year. Any election to amortize bond premium is applicable to all bonds
(other than bonds the interest on which is excludible from gross income) held
by the U.S. Holder at the beginning of the first taxable year to which the
election applies or thereafter acquired by the U.S. Holder, and may not be
revoked without the consent of the Internal Revenue Service ("IRS"). A U.S.
Holder that elects to amortize such premium must reduce its tax basis in a Note
by the amount of the premium amortized during its holding period. See also
"Election to Treat All Interest as Original Issue Discount."

Notes Purchased at a Market Discount

A Note will be treated as purchased at a market discount (a "Market Discount
Note") if the amount for which a U.S. Holder purchased the Note is less than
the Note's issue price, subject to a de minimis rule similar to the rule
relating to de minimis OID described under "Original Issue Discount--General."

In general, any gain recognized on the maturity or disposition of a Market
Discount Note will be treated as ordinary income to the extent that such gain
does not exceed the accrued market discount on the Note. Alternatively, a U.S.
Holder of a Market Discount Note may elect to include market discount in income
currently over the life of the Market Discount Note. Such an election applies
to all debt instruments with market discount acquired by the electing U.S.
Holder on or after the first day of the first taxable year to which the
election applies and may not be revoked without the consent of the IRS.

Market discount accrues on a straight-line basis unless the U.S. Holder
elects to accrue such discount on a constant yield to maturity basis. Such an
election is applicable only to the Market Discount Note with respect to which
it is made and is irrevocable. A U.S. Holder of a Market Discount Note that
does not elect to include market discount in income currently generally will be
required to defer deductions for interest on borrowings allocable to the Note
in an amount not exceeding the accrued market discount on the Note until the
maturity or disposition of the Note.

Election to Treat All Interest as Original Issue Discount

Any U.S. Holder may elect to include in gross income its entire return on a
Note (i.e., the excess of all remaining payments to be received on the Note,
including payments of qualified stated interest, over the amount paid by such
U.S. Holder for such Note) using the constant yield method described above
under the heading "Original Issue Discount--General." For Notes purchased at a
premium or Market Discount Notes, the U.S. Holder making such election will
also be deemed to have an election to amortize any such premium or to accrue
any such market discount in income on a constant yield basis.

Purchase, Sale and Retirement of the Notes

A U.S. Holder's adjusted tax basis in a Note generally will equal its cost,
increased by the amount of any OID or market discount included in the U.S.
Holder's income with respect

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<PAGE>

to the Note and the amount, if any, of income attributable to de minimis OID
included in the U.S. Holder's income with respect to the Note, and reduced by
the sum of (i) the amount of any payments that are not qualified stated
interest payments, and (ii) the amount of any amortizable bond premium applied
to reduce interest on the Note. A U.S. Holder generally will recognize gain or
loss on the sale or retirement of a Note equal to the difference between the
amount realized on the sale or retirement (except for amounts attributable to
accrued or unpaid interest which will be taxable as such) and the U.S. Holder's
adjusted tax basis in the Note. Except to the extent described above under
"Notes Purchased at a Market Discount," gain or loss recognized on the sale or
retirement of a Note generally will be capital gain or loss and will be long-
term capital gain or loss if the Note was held for more than one year.

Non-United States Holders

Subject to the discussion of backup withholding below, payments of principal
(and premium, if any) and interest (including OID) by the Company or any agent
of the Company (acting in its capacity as such) to any holder of a Note that is
not a U.S. Holder (a "Non-U.S. Holder") will not be subject to United States
federal withholding tax, provided, in the case of interest (including OID),
that (i) the Non-U.S. Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (ii) the Non-U.S. Holder is not a controlled foreign
corporation for United States tax purposes that is related to the Company
(directly or indirectly) through stock ownership or a bank receiving interest
described in Section 881(c)(3)(A) of the Code, (iii) such payments are not
effectively connected with the conduct of a United States trade or business by
such Non-U.S. Holder and (iv) the beneficial owner provides a statement signed
under penalties of perjury that includes its name and address and certifies
that it is a Non-U.S. Holder in compliance with applicable requirements (or,
with respect to payments made after December 31, 1999, satisfies certain
documentary evidence requirements for establishing that it is a Non-U.S.
Holder).

Any capital gain, market discount or exchange gain realized on the sale,
exchange, retirement or other disposition of a Note by a Non-U.S. Holder will
not be subject to United States federal income or withholding taxes unless (i)
such gain is effectively connected with the conduct of a United States trade or
business of the Non-U.S. Holder or (ii) in the case of an individual, such Non-
U.S. Holder is present in the United States for 183 days or more in the taxable
year of the sale, exchange, retirement or other disposition and certain other
conditions are met.

Information Reporting and Backup Withholding

For each calendar year in which Notes are outstanding, the Company is
required to provide the IRS with certain information, including each holder's
name, address and taxpayer identification number (either the holder's Social
Security number or its employer identification number, as the case may be), the
aggregate amount of principal and interest paid (including OID, if any) to that
holder during the calendar year and the amount of tax withheld, if any.

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<PAGE>

This obligation, however, does not apply with respect to certain U.S. Holders,
including corporations, tax-exempt organizations, qualified pension and profit
sharing trusts and individual retirement accounts.

Payments on a Note beneficially owned by a Non-U.S. Holder will not be
subject to United States backup withholding tax and information reporting
requirements if such holder has provided the statement described in clause (iv)
in the first paragraph under "Non-U.S. Holders" above, or has otherwise
established an exemption (provided that neither the Company nor its agent has
actual knowledge that the holder is a United States person or that the
conditions of any exemption are not in fact satisfied). In the event that a
U.S. Holder subject to the reporting requirements described above fails to
supply its correct taxpayer identification number in the manner required by
applicable law or underreports its tax liability, the Company, its agents or
paying agents or a broker may be required to "backup" withhold a tax equal to
31% of each payment of interest (including OID) and principal (and premium if
any) on the Notes. This backup withholding is not an additional tax and may be
credited against the U.S. Holder's United States federal income tax liability,
provided that the required information is furnished to the IRS.

Payment of the proceeds from the sale of a Note to or through a foreign
"broker" (as defined in the applicable Treasury regulations) will not be
subject to information reporting requirements or backup withholding tax, except
that if the broker is a United States person, a controlled foreign corporation
for United States tax purposes or a foreign person 50 percent or more of whose
gross income from all sources for the three-year period ending with the close
of its taxable year preceding the payment was effectively connected with a
United States trade or business, information reporting may apply to such
payments. Payment of the proceeds from a sale of a Note to or through the
United States office of a broker is subject to information reporting and backup
withholding unless the holder or beneficial owner certifies as to its taxpayer
identification number or otherwise establishes an exemption from information
reporting and backup withholding.

On October 6, 1997, the United States Treasury Department issued final
Treasury regulations governing information reporting requirements and
certification procedures regarding withholding and backup withholding on
certain amounts paid to a Non-U.S. Holder after December 31, 1999. The new
Treasury regulations may change the certification procedures relating to the
receipt by intermediaries of payments on behalf of a beneficial owner of a
Note. Prospective investors should consult their tax advisors concerning the
effect, if any, of such new Treasury regulations on an investment in the Notes.

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ERISA MATTERS

The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans ("Plans") that are
subject to ERISA and/or Section 4975 of the Code and on persons who are
fiduciaries with respect to such Plans. In accordance with ERISA's general
fiduciary requirements, a fiduciary with respect to any such Plan who is
considering the purchase of Notes on behalf of such Plan should determine
whether such purchase is permitted under the governing Plan documents and is
prudent and appropriate for the Plan in view of its overall investment policy
and the composition and diversification of its portfolio. Other provisions of
ERISA and Section 4975 of the Code prohibit certain transactions involving the
assets of a Plan and persons who have certain specified relationships to the
Plan ("parties in interest" within the meaning of ERISA or "disqualified
persons" within the meaning of Section 4975 of the Code). Thus, a Plan
fiduciary considering the purchase of the Notes should consider whether such a
purchase might constitute or result in a prohibited transaction under ERISA or
Section 4975 of the Code.

The Company, directly or through it affiliates, may be considered a "party in
interest" or a "disqualified person" with respect to many Plans that are
subject to ERISA. The purchase of Notes by a Plan that is subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of Section 4975 of the Code (including individual retirement
accounts and other plans described in Section 4975(e)(1) of the Code) and with
respect to which the Company is a party in interest or a disqualified person
may constitute or result in a prohibited transaction under ERISA or Section
4975 of the Code, unless such Notes are acquired pursuant to and in accordance
with an applicable exemption, such as Prohibited Transaction Class Exemption
("PTCE") 84-14 (an exemption for certain transactions entered into at the
direction of an independent qualified professional asset manager), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 90-1 (an exemption for certain transactions involving insurance
company pooled separate accounts), PTCE 95-60 (an exemption for certain
transactions involving insurance company general accounts) or PTCE 96-23 (an
exemption for certain transactions entered into at the discretion of certain
in-house asset managers). Any persons acquiring and holding Notes for or on
behalf of any Plan, or for or on behalf of any entity which is deemed to hold
the assets of any Plan for purposes of ERISA and Section 4975 of the Code (a
"Plan Asset Entity"), shall be deemed to have represented to Presidential that
at least one of the foregoing exemptions is available with respect to such
acquisition and holding and that all applicable conditions of such exemption
have been satisfied (and will continue to be satisfied so long as the Notes are
held), or that such person has otherwise determined after due inquiry that such
acquisition and holding will not involve a prohibited transaction under Section
406 of ERISA or Section 4975 of the Code. Any persons proposing to acquire
Notes for or on behalf of any Plan or Plan Asset Entity should consult with its
counsel as to the propriety of such acquisition under ERISA and Section 4975 of
the Code.

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PLAN OF DISTRIBUTION

With respect to the offering of Notes, the following summary of the plan of
distribution will be supplemented by a description of such offering, including
the particular terms and conditions thereof (which shall include the rate of
interest), set forth in the applicable Prospectus Supplement relating to such
Notes.

The Company may sell the Notes in any of three ways: (i) through underwriters
or dealers; (ii) directly to one or a limited number of institutional
purchasers; or (iii) through agents. Each Prospectus Supplement with respect to
an issue of Notes will set forth the terms of the offering of such Notes,
including the name or names of any underwriters or agents, the price of such
Notes and the net proceeds to the Company from such sale, any underwriting
discounts, commissions or other items constituting underwriters' or agents'
compensation, any discount or concessions allowed or reallowed or paid to
dealers and any securities exchanges on which such Notes may be listed.

If underwriters are used in the sale, the Notes will be acquired by the
underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The Notes
may be offered to the public either through underwriting syndicates of
investment banking firms represented by managing underwriters, or directly by
one or more such investment banking firms or others, as designated. Unless
otherwise set forth in the applicable Prospectus Supplement, the obligations of
the underwriters to purchase the Notes will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all of the Notes
offered thereby if any are purchased. Any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.

Notes may be sold directly by the Company to one or more institutional
purchasers, or through agents designated by the Company from time to time. Any
agent involved in the offer or sale of the Notes will be named, and any
commissions payable by the Company to such agent will be set forth, in the
applicable Prospectus Supplement. Unless otherwise indicated in such Prospectus
Supplement, any such agent will be acting on a best efforts basis for the
period of its appointment.

Until the distribution of the Notes is completed, rules of the Commission may
limit the ability of underwriters to bid for and purchase the Notes. As an
exception to these rules, underwriters are permitted to engage in certain
transactions that stabilize the price of the Notes. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the
price of the Notes. If underwriters create a short position in the Notes in
connection with the offering, i.e., if they sell more Notes than are set forth
on the cover page of the applicable Prospectus Supplement, underwriters may
reduce that short position by purchasing Notes in the open market. In general,
purchase of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. Such activities, if commenced, may be
discontinued at any time.

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If so indicated in the applicable Prospectus Supplement, the Company will
authorize agents, underwriters or dealers to solicit offers by certain
specified institutions to purchase the Notes from the Company at the public
offering price set forth in such Prospectus Supplement plus accrued interest,
if any, pursuant to delayed delivery contracts providing for payment and
delivery on one or more specified dates in the future. Institutions with which
such contracts my be made include commercial and saving banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all such cases such institutions must be
approved by the Company. Such contracts will be subject only to those
conditions set forth in such Prospectus Supplement and such Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.

Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the agents or underwriters may be required to
make in respect thereof.

Agents and underwriters may engage in transactions with or perform services
for the Company in the ordinary course of business.

LEGAL MATTERS

The validity of the issuance of the Notes will be passed upon for the Company
by Willkie Farr & Gallagher, New York, New York. Certain legal matters relating
to the offering of the Notes will be passed upon for the Underwriters by
Cleary, Gottlieb, Steen & Hamilton, New York, New York.

EXPERTS

The Consolidated Financial Statements and financial statement schedules of
the Company as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 included and incorporated by reference in
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing and incorporated by reference
herein, and have been so included and incorporated by reference in reliance
upon such reports given upon their authority as experts in accounting and
auditing.

With respect to the unaudited interim financial information for the three-
month and six-month periods ended June 30, 1998 and 1997 which is included and
incorporated herein by reference, Deloitte & Touche LLP have applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their report for the quarter ended June 30,
1998 and included elsewhere herein, they did not audit and they do not express
an opinion on that interim financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. Deloitte & Touche LLP are
not subject to the liability provisions of Section 11 of the Securities Act of
1933 for their report on the unaudited interim financial information because
this report is not a "report" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Act.

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GLOSSARY OF SELECTED INSURANCE TERMS

A.M. Best.................... A.M. Best Company, the publisher of Best's
Insurance Report.

Annuity...................... A contract that provides for a fixed or
variable periodic payment made from a stated
or contingent date and continued for a
specified period, such as for a number of
years (certain period) or for life (life
contingent), either immediately or after a
stated accumulation period.

Asset Valuation Reserve;
AVR......................... AVR establishes statutory reserves for all
investments. AVR generally captures all
realized and unrealized gains and losses on
such assets, other than those resulting from
changes in interest rates. AVR has no effect
on financial statements prepared in conformity
with GAAP.

Cash Surrender Value......... The amount of cash that may be realized by the
owner of an annuity contract or life insurance
policy with a life insurance company upon
lapse or surrender of the policy or contract
prior to its maturity.

Cede, Ceding Company.........
When a company reinsures all or a portion of
its risk with another, it "cedes" business and
is referred to as the "ceding company."

Credited Rates............... Interest rates applied to annuity contracts and
life insurance policies whether contractually
guaranteed or currently declared for a
specified period.

Deferred Annuity (single
premium deferred
annuity/flexible premium
deferred annuity)...........
An annuity that: (i) can be paid either with a
single premium or an initial premium and
additional optional premiums; and (ii)
includes a schedule of periodic income
benefits to commence after an accumulation
period.

Deferred Policy Acquisition
Costs ("DAC")...............
Agents' and brokers' commissions, premiums,
taxes, marketing, underwriting and other
direct expenses which vary with and are
directly related to the production of
business. These acquisition costs are deferred
and amortized to achieve a matching of

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revenues and expenses when reported in
financial statements prepared in conformity
with GAAP.

Deposits..................... All payments and other consideration received
on certain contracts, principally universal
and investment type contracts. These amounts
are not included in revenues under GAAP but
are included directly in policyholder account
balances.

Flexible Premium Annuities... Annuities that permit annual premium payments
in such amounts as the holder deems
appropriate.

Generally Accepted
Accounting Principles;
GAAP........................
United States generally accepted accounting
principles as defined by the American
Institute of Certified Public Accountants and
the Financial Accounting Standards Board.

Guaranty Funds............... Funds created in all states, the District of
Columbia and Puerto Rico by law, to cover
funding shortfalls in paying claims of
insolvent insurance companies. These funds are
maintained by assessments of insurance
companies operating in a particular state in
proportion to their business written in that
state.

In Force..................... The total face amount of insurance coverage
under contracts that have not expired.

Interest Maintenance
Reserve; IMR................
IMR captures the net gains and losses from
changes in the overall level of interest rates
that are realized upon the sale of investments
prior to maturity and amortizes these net
realized gains into income over the remaining
life of each investment sold. IMR has no
effect on financial statements prepared in
conformity with GAAP.

IRIS......................... The NAIC's Insurance Regulatory Information
System.

Lapse........................ Termination of a policy because of surrender,
failure to pay a premium or lack of sufficient
cash value to maintain in force status.

National Association of
Insurance Commissioners
(the "NAIC")................
An association made up of the officials of each
state responsible for the administration of
that state's insurance laws.

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Net Investment Income........ Earnings on the investment portfolio of assets,
net of related investment expenses.

NYSDI........................ The New York State Department of Insurance.

Persistency..................
The rate which insurance policies or annuity
contracts remain in force, expressed as a
percentage of the number of policies remaining
in force over the previous year.

Premiums..................... Payments and considerations received during the
year on annuity contracts and insurance
policies, other than universal life and
investment-type contracts, issued or reinsured
(assumed less ceded) by an insurance company
and accounted for as revenues under GAAP.

Reinsurance..................
The practice whereby one party, called the
reinsurer or assuming company, in
consideration of a premium paid to such party,
agrees to indemnify another party, called the
ceding company. Reinsurance provides a primary
insurer with three major benefits: it reduces
net liability on individual risks; it helps to
protect against catastrophic losses; and it
helps to maintain acceptable surplus and
reserve ratios. Reinsurance provides a primary
insurer with additional underwriting capacity
in that the primary insurer can accept larger
risks and can expand the volume of business it
writes without increasing its capital base.
Reinsurance may be on an assumption basis,
which effectively transfers to the reinsurer
all rights and obligations on the business
reinsured. Reinsurance may be on a coinsurance
basis, which means that the reinsure accepts a
stated proportion of all policy risks.
Reinsurance may be on an excess or stop l loss
basis, which means that the reinsurer is
responsible for any benefits in excess of a
stated amount.

Reserves..................... Liabilities established by an insurer to
reflect the estimated discounted present value
of cost of claims, payments or contract
liabilities and the related expenses that the
insurer ultimately will be required to pay in
respect of insurance or annuities it has
written.

Retention....................
In a reinsurance context, the amount or portion
of risk which a ceding insurer retains for its
own account.

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Losses paid by a ceding insurer in excess of
the retention level are then owed to the
insurer by the reinsurer.

Risk-Based Capital
Requirements................
Regulatory and rating agency targeted surplus
based on the relationship of statutory capital
and surplus, with certain adjustments, to the
sum of stated percentages of each element of a
specified list of company risk exposures.

Single Premium Deferred
Annuities...................
Annuities that require a one-time lump sum
payment of consideration upon the issuance of
the contract with benefit payments commencing
at some future date following an accumulation
period.

Single Premium Immediate
Annuities...................
Annuities that require a one-time lump sum
payment of consideration upon the issuance of
the contract and which begin benefit payments
immediately after issuance.

Statutory Accounting
Practices ("Statutory").....
Accounting practices prescribed or permitted by
state insurance regulatory authorities.
Statutory emphasizes solvency rather than
operating results which match revenues and
expenses during an accounting period.

Statutory Reserves...........
Monetary amounts established by state insurance
law that an insurer must have available to
provide for future obligations with respect to
all policies. Statutory reserves are
liabilities on the balance sheet of financial
statements prepared in conformity with
statutory accounting practices.

Statutory Surplus............ The excess of statutory admitted assets over
statutory liabilities as shown on an insurer's
statutory financial statements.

Superintendent...............
The Superintendent of Insurance of the State of
New York.

Surrender Charge............. The fee charged to a policyholder when an
annuity or life insurance policy is
surrendered for its cash value. Such charge is
intended to recover policy acquisition

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costs and act as a deterrent to early
surrender. Surrender charges typically grade
down over a set period of time as a percentage
of the account values in relation to the
anticipated amortization of the deferred
policy acquisition costs until there are no
more surrender charges.

Surrenders and Withdrawals... Surrenders of annuity contracts and life
insurance policies for their entire net cash
surrender values and withdrawals of a portion
of such values.

Term Life Insurance.......... Life insurance protection during a certain
number of years but expiring without policy
cash value if the insured survives the stated
period. Most term policies provide for
guaranteed continuation of coverage for life
at increased premium rates.

Total Admitted Assets........
Assets which have been recognized and approved
by regulatory authorities in evaluating the
financial condition of an insurance company.

Underwriting................. The process of examining, accepting or
rejecting insurance risks, and classifying
those accepted, in order to charge the proper
premium for each.

Universal Life Insurance.....
Life insurance under which: (i) premiums and
credited interest rates generally are
flexible; (ii) the level of death benefits may
be adjusted; and (iii) expenses and other
charges are specifically disclosed to the
purchaser. This type of policy is sometimes
referred to as unbundled life insurance
because its three basis elements (investment
earnings, cost of insurance and expenses
charges) are separately identified both in the
policy and in an annual report to the
policyholder.

Whole Life Insurance......... Insurance that may be kept in force for a
person's entire life by paying one ore more
premiums. It is paid for in one of three
different ways; (i) ordinary life insurance
(premiums are payable as long as the insured
lives); (ii) limited payment life insurance
(premiums are payable over a specified number
of years); and (ii) single premium life
insurance (a lump sum amount paid at the
inception of the policy). The insurance policy
pays a benefit (contractual amount adjusted
for items such as policy loans and dividends,
if any) at the death of the insured. Whole
life insurance contracts also build up
nonforfeiture benefits.

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PRESIDENTIAL LIFE CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Audited Consolidated Financial Statements Page
-----
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997............... F-3
Consolidated Statements of Income for the years ended December 31, 1995,
1996 and 1997.......................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996
and 1997............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to the Consolidated Financial Statements.......................... F-7
Unaudited Interim Consolidated Financial Statements
Independent Accountants' Report......................................... F-22
Consolidated Balance Sheets at December 31, 1997 and June 30, 1998...... F-23
Consolidated Statements of Income for the six months ended June 30, 1997
and 1998............................................................... F-24
Consolidated Statements of Income for the three months ended June 30,
1997 and 1998.......................................................... F-25
Consolidated Statements of Shareholders' Equity for the six months ended
June 30, 1997 and 1998................................................. F-26
Consolidated Statements of Cash Flows for the six months ended June 30,
1997 and 1998.......................................................... F-27
Condensed Notes to Consolidated Financial Statements.................... F-28
Consolidated Financial Statement Schedules
II Consolidated Balance Sheets (Parent Company Only).................... Sch-1
II Condensed Statements of Income (Parent Company Only)................. Sch-2
II Condensed Statements of Cash Flows (Parent Company Only)............. Sch-3
III Supplemental Insurance Information.................................. Sch-4
IV Reinsurance.......................................................... Sch-5
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Presidential Life Corporation
Nyack, New York 10960

We have audited the accompanying consolidated balance sheets of Presidential
Life Corporation and subsidiaries ("the Company") as of December 31, 1997 and
1996 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedules listed in the
foregoing Index to Financial Statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1997 and 1996 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statements schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

/s/ Deloitte & Touche LLP

New York, New York
February 12, 1998

F-2
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---------- ----------
(In thousands,
except share data)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Available for sale..................................... $1,823,349 $1,909,924
Common stocks.......................................... 42,059 45,773
Mortgage Loans......................................... 18,622 17,865
Real Estate............................................ 426 417
Policy Loans........................................... 18,068 18,120
Short-term investments................................. 240,038 264,098
Other invested assets.................................. 176,103 208,162
---------- ----------
Total investments.................................... 2,318,665 2,464,359
Cash and cash equivalents................................ 819 13,480
Accrued investment income................................ 32,474 28,167
Deferred policy acquisition costs........................ 39,783 37,685
Furniture and equipment, net............................. 329 567
Amounts due from reinsurers.............................. 7,775 8,249
Other assets............................................. 1,532 1,222
Assets held in separate account.......................... 5,548 4,612
---------- ----------
TOTAL ASSETS......................................... $2,406,925 $2,558,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances......................... $1,260,545 $1,280,900
Future policy benefits:
Annuity................................................ 365,321 380,109
Life and accident and health........................... 49,859 50,848
Other policy liabilities................................ 2,690 3,124
---------- ----------
Total policy liabilities............................. 1,678,415 1,714,981
Dollar repurchase agreements............................. 200,883 205,202
Notes payable............................................ 50,000 50,000
Short term note payable.................................. 5,000 20,000
Deposits on policies to be issued........................ 1,270 2,436
Deferred federal income taxes............................ 31,649 46,575
General expenses and taxes accrued....................... 7,294 7,074
Other liabilities........................................ 3,803 4,807
Liabilities related to separate account.................. 5,548 4,612
---------- ----------
Total liabilities.................................... 1,983,862 2,055,687
---------- ----------
Shareholders' Equity:
Capital stock ($.01 par value, authorized 100,000,000
shares, issued and outstanding 32,621,549 shares in 1997
and 32,992,835 shares in 1996).......................... 330 326
Additional paid-in capital............................... 24,023 18,274
Net unrealized investment gains.......................... 40,294 71,540
Retained earnings........................................ 358,416 412,514
---------- ----------
Total Shareholders' Equity........................... 423,063 502,654
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $2,406,925 $2,558,341
========== ==========
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-3
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
(In thousands, except share data)
<S> <C> <C> <C>
REVENUES:
Insurance revenues:
Premiums............................. $ 4,408 $ 4,244 $ 3,976
Annuity considerations............... 3,780 8,461 19,655
Universal life and investment type
policy fee income................... 1,934 2,090 1,988
Net investment income................. 170,780 186,180 191,818
Realized investment gains............. 17,216 20,020 26,039
Other income.......................... 1,746 2,679 4,228
----------- ----------- -----------
TOTAL REVENUES..................... 199,864 223,674 247,704
----------- ----------- -----------
BENEFITS AND EXPENSES:
Death and other life insurance
benefits............................. 7,366 6,887 7,236
Annuity benefits...................... 36,016 36,510 37,867
Interest credited to policyholders'
account balances..................... 78,802 75,252 76,202
Interest expense on notes payable..... 5,045 5,049 5,850
Other interest and other charges...... 427 330 445
Increase (decrease) in liability for
future policy benefits............... 1,312 5,281 15,248
Commissions to agents, net............ 3,025 3,215 4,357
General expenses and taxes............ 11,940 13,944 12,813
Decrease (increase) in deferred policy
acquisition costs.................... (459) 849 (2,872)
----------- ----------- -----------
TOTAL BENEFITS AND EXPENSES........ 143,474 147,317 157,146
----------- ----------- -----------
Income before income taxes............. 56,390 76,357 90,558
----------- ----------- -----------
Provision (benefit) for income taxes:
Current.............................. 9,495 23,199 31,165
Deferred............................. (2,163) (1,363) (1,899)
----------- ----------- -----------
7,332 21,836 29,266
----------- ----------- -----------
NET INCOME............................. $ 49,058 $ 54,521 $ 61,292
=========== =========== ===========
Weighted average number of shares
outstanding during the year........... 33,631,719 33,184,294 32,734,733
=========== =========== ===========
Earnings per common share.............. $ 1.46 $ 1.64 $ 1.87
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-4
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
Net
Unrealized
Additional Investment
Capital Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
------- ---------- ---------- -------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.. $337 $31,751 $(39,463) $263,328 $255,953
Net income.................. 49,058 49,058
Increase in Unrealized
Investment Gains, Net...... 101,195 101,195
Purchase and Retirement of
Stock...................... (2) (1,704) (1,706)
Issuance of Shares under
Stock Option Plan.......... 83 83
Dividends Paid to
Shareholders ($.105 per
share)..................... (3,523) (3,523)
---- ------- -------- -------- --------
Balance at December 31,
1995....................... 335 30,130 61,732 308,863 401,060
Net income.................. 54,521 54,521
Change in Unrealized
Investment Gains, Net...... (21,438) (21,438)
Purchase and Retirement of
Stock...................... (7) (7,031) (7,038)
Issuance of Shares under
Stock Option Plan.......... 2 924 926
Dividends Paid to
Shareholders ($.15 per
share)..................... (4,968) (4,968)
---- ------- -------- -------- --------
Balance at December 31,
1996....................... 330 24,023 40,294 358,416 423,063
Net income.................. 61,292 61,292
Change in Unrealized
Investment Gains, Net...... 31,246 31,246
Purchase and Retirement of
Stock...................... (4) (5,758) (5,762)
Issuance of Shares under
Stock Option Plan.......... 9 9
Dividends Paid to
Shareholders ($.22 per
share)..................... (7,194) (7,194)
---- ------- -------- -------- --------
Balance at December 31,
1997....................... $326 $18,274 $ 71,540 $412,514 $502,654
==== ======= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-5
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................. $ 49,058 $ 54,521 $ 61,292
Adjustments to reconcile net income to
net cash provided by operating
activities:
Benefit for deferred income taxes..... (2,163) (1,363) (1,899)
Depreciation and amortization......... 499 439 474
Net accrual of discount on fixed matu-
rities............................... (1,108) (1,184) (4,181)
Realized investment gains............. (17,216) (20,020) (26,039)
Changes in:
Accrued investment income............. (11,531) 1,854 4,307
Deferred policy acquisition costs..... (459) 849 (2,872)
Federal income tax recoverable........ 8,657 477 0
Liability for future policy benefits.. 1,588 5,689 15,777
Other items........................... 2,911 2,612 436
----------- ----------- -----------
Net Cash Provided by Operating
Activities......................... 30,241 43,928 47,295
----------- ----------- -----------
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions......................... (326,630) (302,778) (338,058)
Sales................................ 44,453 13,713 29,325
Maturities, calls and repayments..... 90,147 259,108 252,383
Common Stocks:
Acquisitions......................... (25,087) (15,663) (18,722)
Sales................................ 73,449 54,369 68,377
Decrease (increase) in short term
investments and policy loans.......... (62,357) (46,884) (24,112)
Other Invested Assets:
Additions to other invested assets... (31,655) (62,045) (110,760)
Distributions from other invested
assets.............................. 23,812 36,274 78,701
Purchase of property and equipment..... (41) (154) (409)
Mortgage loan on real estate........... (1,392) 393 757
Amounts due from security
transactions.......................... 52,588 0 0
----------- ----------- -----------
Net Cash Used in Investing Activities... (162,713) (63,667) (62,518)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase
Agreements............................ 1,670,600 2,308,967 2,429,540
Repayment of Dollar Repurchase
Agreements............................ (1,549,547) (2,268,500) (2,425,221)
Proceeds from line of credit........... 0 5,000 15,000
Increase (decrease) in policyholders'
account balances...................... 14,207 (9,353) 20,355
Repurchase of common stock............. (1,706) (7,038) (5,762)
Deposits on policies to be issued...... 1,342 (1,677) 1,166
Dividends paid to shareholders......... (3,526) (4,967) (7,194)
----------- ----------- -----------
Net Cash Provided by Financing Activi-
ties................................... 131,370 22,432 27,884
----------- ----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents............................ (1,102) 2,693 12,661
Cash and Cash Equivalents at Beginning
of Year................................ (772) (1,874) 819
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ (1,874) $ 819 $ 13,480
=========== =========== ===========
Supplemental Cash Flow Disclosure:
Income Taxes Paid...................... $ 6,887 $ 27,303 $ 27,700
=========== =========== ===========
Interest Paid.......................... $ 4,750 $ 4,750 $ 5,508
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-6
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business

B. Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). Intercompany
transactions and balances have been eliminated in consolidation. Certain
amounts have been reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

C. Investments

Fixed maturity investments available for sale represent investments which may
be sold in response to changes in various economic conditions. These
investments are carried at estimated market value and net unrealized gains
(losses), net of the effects of amortization of deferred policy acquisition
costs and deferred Federal income taxes are credited or charged directly to
shareholders' equity, unless a decline in market value is considered to be
other than temporary in which case the investment is reduced to its net
realizable value. Equity securities include common stocks and non-redeemable
preferred stocks and are carried at estimated market, with the related
unrealized gains and losses, net of deferred income tax effect, if any, charged
or credited directly to shareholders' equity, unless a decline in market value
is deemed to be other than temporary in which case the investment is reduced to
its net realizable value.

"Other invested assets" are recorded at the lower of cost or market, or
equity as appropriate, and primarily include interests in limited partnerships,
which principally are engaged in real estate, international opportunities,
acquisitions of private growth companies, debt restructuring and merchant
banking. 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 is mitigated by
the ability of the Company to take annual distributions of partnership
earnings. To evaluate the appropriateness of the carrying value of a limited
partnership interest, management maintains ongoing discussions with the
investment manager and considers the limited partnership's operation, its
current and near term projected financial condition, earnings capacity, and

F-7
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

distributions received by the Company during the year. Because it is not
practicable to obtain an independent valuation for each limited partnership
interest, for purposes of disclosure the market value of a limited partnership
interest is estimated at book value. Management believes that the net
realizable value of such limited partnership interests, in the aggregate,
exceeds their related carrying value as of December 31, 1997 and 1996. As of
December 31, 1997, the Company was committed to contribute, if called upon, an
aggregate of approximately $73.7 million of additional capital to certain of
these limited partnerships.

In evaluating whether an investment security or other investment has suffered
an impairment in value which is deemed to be "other than temporary", management
considers all available evidence. When a decline in the value of an investment
security or other investment is considered to be other than temporary, the
investment is reduced to its net realizable value, (which contemplates the
price that can be obtained from the sale of such asset in the ordinary course
of business) which becomes the new cost basis. The amount of reduction is
recorded as a realized loss. A recovery from the adjusted cost basis is
recognized as a realized gain only at sale.

Realized gains and losses on disposal of investments are determined for fixed
maturities and equity securities by the specific-identification method.

Investments in short-term securities, which consist primarily of United
States Treasury Notes and corporate debt issues maturing in less than one year,
are recorded at amortized cost which approximates market. Mortgage loans are
stated at their amortized indebtedness. Policy loans are stated at their unpaid
principal balance.

The Company's investments in real estate include two buildings in Nyack, New
York, which are occupied entirely by the Company. The investments are carried
at cost less accumulated depreciation. Depreciation has been provided on a
straight line basis at the rate of 4% per annum for one building and 5% per
annum for the other. Accumulated depreciation amounted to $204,400 and $201,200
at December 31, 1997 and 1996, respectively, and related depreciation expense
for the years ended December 31, 1997, 1996 and 1995 was $3,200, $3,200 and
$3,200, respectively.

F-8
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

D. Furniture and Equipment

Furniture and equipment is carried at cost and depreciated on a straight line
basis over a period of five to ten years except for automobiles which are
depreciated over a period of three years. Accumulated depreciation amounted to
$219,300 and $4,100,000 at December 31, 1997 and 1996, respectively, and
related depreciation expense for each of the three years in the period ended
December 31, 1997 was $163,700, $187,200 and $192,000, respectively.

E. Recognition of Insurance Income and Related Expenses

Premiums from traditional life and annuity policies with life contingencies
are recognized generally as income over the premium paying period. Benefits and
expenses are matched with such income so as to result in the recognition of
profits over the life of the contracts. This matching is accomplished by means
of the provision for liabilities for future policy benefits and the deferral
and subsequent amortization of policy acquisition costs.

For contracts with a single premium or a limited number of premium payments
due over a significantly shorter period than the total period over which
benefits are provided ("limited payment contracts"), premiums are recorded as
income when due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the amount of
expected future benefit payments.

Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders' account
balances for mortality charges and surrender charges. Policy benefits and
claims that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances and interest
credited to policyholders' account balances.

For the fiscal years ended December 31, 1997, 1996, and 1995, approximately
67.3%, 78.3% and 83.5%, respectively, of premiums from traditional life,
annuity, universal life and investment-type contracts received by the Company
were attributable to sales to annuitants and policyholders residing in the
State of New York. In addition, approximately 0%, 0% and 12.5% of the Company's
total insurance revenues from those respective years were attributable to sales
through an agency principally owned by a director of the Company until his
death in December 1995. Management believes that the Company's transactions
with such agency were made on terms at least as fair to the Company as could be
obtained from unaffiliated third parties. Compensation of agents is strictly
regulated by the New York State Department of Insurance.

F. Deferred Policy Acquisition Costs

The costs of acquiring new business (principally commissions, certain
underwriting, agency and policy issue expenses), all of which vary with and are
primarily related to the

F-9
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

production of new business, have generally been deferred. When a policy is
surrendered, the remaining unamortized cost is written off. Deferred policy
acquisition costs are subject to recoverability testing at time of policy issue
and loss recognition testing at the end of each fiscal year.

For immediate annuities with life contingencies, deferred policy acquisition
costs are amortized over the life of the contract, in proportion to expected
future benefit payments.

For traditional life policies, deferred policy acquisition costs are
amortized over the premium paying periods of the related policies using
assumptions that are consistent with those used in computing the liability for
future policy benefits. Assumptions as to anticipated premiums are estimated at
the date of policy issue and are consistently applied during the life of the
contracts. For these contracts the amortization periods generally are for the
scheduled life of the policy, not to exceed 30 years.

Deferred policy acquisition costs are amortized over periods ranging from 15
to 25 years for universal life products and investment-type products as a
constant percentage of estimated gross profits arising principally from
surrender charges and interest and mortality margins based on historical and
anticipated future experience, updated regularly. The effects of revisions to
reflect actual experience on previous amortization of deferred policy
acquisition costs, subject to the limitation that the accrued interest on the
deferred acquisition costs balance may not exceed the amount of amortization
for the year, are reflected in earnings in the period estimated gross profits
are revised.

Unamortized deferred policy acquisition costs for the years ended December
31, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
1996 1997
------- -------
(in thousands)
<S> <C> <C>
Balance at the beginning of year.......................... $33,330 $39,783
Current year's costs deferred............................. 6,307 9,783
------- -------
Total................................................... 39,637 49,566
Less, amortization for the year........................... 7,150 6,581
------- -------
Total................................................... 32,487 42,985
Change in amortization (benefit) related to unrealized
gain (loss) in investments............................... (7,296) 5,300
------- -------
Balance at the end of the year............................ $39,783 $37,685
======= =======
</TABLE>

G. Future Policy Benefits

Future policy benefits for traditional life insurance policies are computed
using a net level premium method on the basis of actuarial assumptions as to
mortality, persistency and interest established at policy issue. Assumptions
established at policy issue as to mortality and persistency are based on
anticipated experience which, together with interest and

F-10
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

expense assumptions, provide a margin for adverse deviation. Benefit
liabilities for deferred annuities during the accumulation period are equal to
accumulated contract-holders' fund balances and after annuitization are equal
to the present value of expected future payments. During the three years in the
period ended December 31, 1997, interest rates used in establishing such
liabilities range from 4.5% to 11% for life insurance liabilities and from 5.5%
to 13.60% for annuity liabilities.

H. Policyholders' Account Balances

Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest less
mortality and expense charges and withdrawals.

These account balances are summarized as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Account balances at beginning of year..... $1,255,691 $1,269,898 $1,260,545
Additions to account balances............. 199,510 190,559 209,568
---------- ---------- ----------
Total................................... 1,455,201 1,460,457 1,470,113
Deductions from account balances.......... 185,303 199,912 189,213
---------- ---------- ----------
Account balances at end of year........... $1,269,898 $1,260,545 $1,280,900
========== ========== ==========
</TABLE>

Interest rates credited to account balances ranged from 4% to 12.5% in 1997,
1996 and 1995.

I. Federal Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax
return. The asset and liability method in recording income taxes on all
transactions that have been recognized in the financial statements is used.
Deferred taxes are adjusted to reflect tax rates at which future tax
liabilities or assets are expected to be settled or realized.

J. Separate Accounts

Separate Accounts are established in conformity with New York State Insurance
Law and represent funds for which investment income and investment gains and
losses accrue to the policyholders. Assets and liabilities (stated at market
value) of the Separate Account, representing net deposits and accumulated net
investment earnings less fees, held primarily for the benefit of contract-
holders, are shown as separate captions in the consolidated balance sheets.

Deposits to the Separate Account are reported as increases in Separate
Account liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges to the Separate Account are included in
revenues.

F-11
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

K. Earnings Per Common Share

The Financial Accounting Standards Board ("FASB") issued Statement No. 128,
"Earnings Per Share" (SFAS No. 128) which specifies the computation,
presentation and disclosure requirements of earnings per share for entities
with publicly held common stock and potential common stock. Earnings per share
(EPS) presented on the face on the consolidated income statement has been
calculated to reflect the adoption of SFAS No. 128 by the Company. Basic EPS is
computed based upon the weighted average number of common shares outstanding
during the year. Diluted EPS is computed based upon the weighted average number
of common shares including contingently issuable shares and other dilutive
items. The weighted average number of common shares used to compute diluted EPS
for the year ending December 31, 1997 was 32,736,202. The dilution from the
potential exercise of stock options outstanding did not change basic EPS.

L. Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand and amounts due from banks
with an original maturity of three months or less.

M. New Accounting Pronouncements

In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 amends SFAS
No. 125 by deferring for one year the effective date of paragraph 15 of SFAS
No. 125, addressing secured borrowings and collateral, and for repurchase
agreement, dollar roll, security lending and similar transactions, of
paragraphs 9 through 12 and 237(b) of SFAS No. 125. SFAS No. 127 is effective
for certain transactions occurring after December 31, 1997, and must be applied
prospectively. Management is evaluating the impact of SFAS 125 and 127 on the
Company.

Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 is effective for fiscal
years beginning after December 15, 1997. The Company's current definition of
its operating segments will not change.

F-12
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. INVESTMENTS

The following information summarizes the components of net investment income
and realized investment gains (losses).

<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1996 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net Investment Income:
Fixed maturities................................. $128,310 $132,467 $134,740
Common stocks.................................... 733 1,315 1,341
Short-term investments........................... 14,010 14,226 14,368
Other investment income.......................... 32,497 44,141 48,797
-------- -------- --------
175,550 192,149 199,246
Less investment expenses......................... 4,770 5,969 7,428
-------- -------- --------
Net investment income............................ $170,780 $186,180 $191,818
======== ======== ========
</TABLE>

The carrying value of fixed maturities which were non-income producing for
more than twelve months at December 31, 1997, 1996 and 1995 was $0 million, $0
million and $1.5 million, respectively.

<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1995 1996 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Realized Investment Gains (Losses):
Fixed maturities.................................... $ 5,458 $ 6,735 $12,080
Common stocks....................................... 11,758 13,285 13,959
------- ------- -------
Total realized gains on investments................. $17,216 $20,020 $26,039
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1995 1996 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Unrealized Investment Gains (Losses):
Fixed maturities.............................. $107,521 $ 61,931 $109,995
Common stocks................................. 3,668 8,438 13,752
-------- -------- --------
Unrealized investment gains................... $111,189 $ 70,369 $123,747
Amortization of deferred acquisition costs.... (16,012) (8,378) (13,686)
Deferred federal income taxes................. (33,445) (21,697) (38,521)
-------- -------- --------
Net unrealized investment gain................ 61,732 40,294 71,540
======== ======== ========
Change in net unrealized investment gains..... $101,195 $(21,438) $ 31,246
======== ======== ========
</TABLE>

The change in unrealized investment gains (losses) shown above resulted
primarily from changes in general economic conditions which directly influenced
investment security markets. These changes were also impacted by writedowns of
investment securities for declines in market values deemed to be other than
temporary.

F-13
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following tables provide additional information relating to investments
held by the Company:

December 31, 1997:

AVAILABLE FOR SALE:

<TABLE>
<CAPTION>
Amortized Gross Unrealized Market
Type of Investment Cost Gains Losses Value
------------------ ---------- -------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States government and
government agencies and
authorities................... $ 518,997 $ 21,815 $ (256) $ 540,556
States, municipalities and
political subdivisions........ 26,709 3,574 0 30,283
Foreign governments............ 12,160 2,190 0 14,350
Public utilities............... 189,555 14,142 (425) 203,272
All other corporate bonds...... 855,347 74,441 (5,908) 923,880
Preferred stocks, primarily
corporate....................... 197,161 8,047 (7,625) 197,583
---------- -------- -------- ----------
Total Fixed Maturities........... $1,799,929 $124,209 $(14,214) $1,909,924
========== ======== ======== ==========
Common Stocks.................... $ 32,021 $ 14,202 $ (450) $ 45,773
========== ======== ======== ==========
</TABLE>

December 31, 1996:

AVAILABLE FOR SALE:

<TABLE>
<CAPTION>
Amortized Gross Unrealized Market
Type of Investment Cost Gains Losses Value
------------------ ---------- ------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States government and
government agencies and
authorities..................... $ 29,643 $ 2,287 $ (74) $ 31,856
States, municipalities and
political subdivisions.......... 567,423 10,062 (2,354) 575,130
Foreign governments.............. 12,014 686 0 12,700
Public utilities................. 221,755 4,165 (4,966) 220,954
All other corporate bonds........ 774,094 52,386 (9,444) 817,036
Preferred stocks, primarily
corporate........................ 156,488 13,624 (4,439) 165,673
---------- ------- -------- ----------
Total Fixed Maturities............ $1,761,417 $83,210 $(21,277) $1,823,349
========== ======= ======== ==========
Common Stocks..................... $ 33,621 $ 8,993 $ (555) $ 42,059
========== ======= ======== ==========
</TABLE>

F-14
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The estimated fair value of fixed maturities available for sale at December
31, 1997, by contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.

<TABLE>
<CAPTION>
Estimated Fair Value
--------------------
(in thousands)
<S> <C>
Due in one year or less................................. $ 11,410
Due after one year through five years................... 143,204
Due after five years through ten years.................. 112,127
Due after ten years..................................... 1,445,600
----------
Total debt securities................................... 1,712,341
Preferred stock......................................... 197,583
----------
Total................................................... $1,909,924
==========
</TABLE>

Proceeds from sales of fixed maturities during 1997, 1996 and 1995 were
$718.4 million, $757.7 million and $506.7 million, respectively. During 1997,
1996 and 1995, respectively, gross gains of $16.4 million, $7.3 million and
$4.8 million and gross losses of $4.5 million, $7.2 million and $14.7 million
were realized on those sales.

During 1996, the Company restructured or modified the terms of certain fixed
maturity investments. Certain of these restructures included debt for equity
exchanges. The fixed maturity portfolio, based on carrying value, includes $8.6
million at December 31, 1996 of such restructured securities. These
restructures and modifications had no significant impact on gross interest
income on these fixed maturities (which is included in net investment income).
During 1997, the Company did not restructure or modify the terms of any fixed
maturity investments.

As of December 31, 1997, the Company's mortgage loans were collateralized by
commercial office buildings in New York and Pennsylvania.

Investments in U.S. Government and Government Agencies with an aggregate
carrying value of $518,997,000 represents investments owned in any one issuer
that aggregate 10% or more of shareholders' equity as of December 31, 1997.

As of December 31, 1997 securities with a carrying value of approximately
$5.5 million were on deposit with various state insurance departments to comply
with applicable insurance laws.

F-15
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company was informed by the Pennsylvania Insurance Commissioner that in
response to the significant improvement in the invested assets of Fidelity,
she has reopened the process to select an equity investor for the
recapitalization and rehabilitation of Fidelity. The Company disagreed with
the Insurance Commissioner's actions and commenced litigation which was
settled in the second quarter of 1997. As part of the settlement, the Company
received $1.7 million.

3. NOTES PAYABLE

Notes payable at December 31, 1997 and 1996 consist of $50 million, 9 1/2%
senior notes due December 15, 2000. Interest is payable June 15 and December
15. Debt issue costs are being amortized on the interest method over the term
of the notes. As of December 31, 1997, such unamortized costs were $874
thousand. There are no principal payments required for the senior notes over
the next three years and the total principal is due on December 15, 2000. The
senior notes are callable after December 14, 1998.

The indenture governing the senior notes contains covenants relating to
limitations on additional indebtedness, restricted payments, liens and sale or
issuance of capital stock of the Insurance Company. In the event the Company
violates such covenants as defined in the indenture, the Company is obligated
to offer to repurchase 25% of the outstanding principal amount of such notes.
The Company believes that it is in compliance with all of the covenants.

The short-term note payable is a bank line of credit in the amount of
$25,000,000 and provides for interest on borrowings based on market indices.
At December 31, 1997 and 1996 the Company had $20,000,000 and $5,000,000
outstanding, respectively. The short-term note payable outstanding at December
31, 1997 and 1996 had a weighted average interest rate of 6.625% and 6.281%,
respectively.

4. SHAREHOLDERS' EQUITY

The Company is authorized to issue 100,000,000 shares of its $.01 par value
Common Stock. At December 31, 1997 32,621,549 shares were outstanding and at
December 31, 1996 32,992,835 shares were outstanding.

During the third quarter of 1997, the Company's Board of Directors increased
the quarterly dividend rate to $.06 per share. During 1997 and 1996, the
Company purchased and retired 372,300 and 724,000 shares of common stock,
respectively. The Company is authorized pursuant to a resolution of the Board
of Directors to purchase an additional 232,000 shares of common stock.

Payment of dividends to the Company by the Insurance Company are effectively
restricted by the provisions of the New York Insurance Law ("Insurance Law").
All dividend payments are subject to the review and disapproval by the New
York Insurance Department.

F-16
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the New York State Insurance Law, the New York Superintendent has broad
discretion to determine whether the financial condition of a stock life
insurance company would support the payment of dividends to its shareholders.

The New York Insurance Department has established informal guidelines for the
Superintendent's determinations which focus upon, among other things, the
overall financial condition and profitability of the insurer under statutory
accounting practices. During 1997, 1996 and 1995, the Insurance Company paid
dividends of $24.8 million, $15 million and $5 million, respectively, to the
Company.

5. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS

(a) Employee Retirement Plan

The Company has a noncontributory defined benefit pension plan covering all
eligible employees. The Company is both sponsor and administrator of this plan.
The plan provides for pension benefits based on average pay and years of
service. It is the Company's general policy to fund accrued pension costs as
required under ERISA. In 1997, 1996 and 1995 the Company contributed $50,000,
$450,000, and $120,500, respectively to the plan.

Net pension cost included the following components:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1996 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Service cost...................................... $ 379 $ 405 $ 436
Interest cost..................................... 293 330 370
Actual return on plan assets...................... (293) (298) (343)
Other............................................. 0 11 16
------- ------- -------
Net pension cost.................................. $ 379 $ 448 $ 479
======= ======= =======
</TABLE>

The funded status of the plan at December 31, 1997 and 1996 was as follows:

<TABLE>
<CAPTION>
December 31,
----------------
1996 1997
------- -------
(in thousands)
<S> <C> <C>
Projected benefits obligation............................. $(5,269) $(5,923)
Plan assets at fair value................................. 4,444 4,558
------- -------
Assets less then projected benefit........................ (825) (1,365)
Unrecognized prior service cost........................... 195 167
Unrecognized net gain..................................... (757) (619)
------- -------
Accrued pension costs..................................... $(1,387) $(1,817)
======= =======
Accumulated benefit obligation:
Vested.................................................. $ 4,259 $ 4,868
Nonvested............................................... 33 8
------- -------
$ 4,292 $ 4,876
======= =======
</TABLE>

F-17
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following rates were used in computing the pension cost for the years
ended December 31:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate................................ 7.0% 7.0% 7.0%
Assumed rate of compensation increases........................ 3.0% 3.0% 3.0%
Expected long-term rates of return............................ 7.5% 7.5% 7.5%
</TABLE>

(b) Employee Savings Plan

The Company adopted an Internal Revenue Code (IRC) Section 401(k) plan for
its employees effective January 1, 1992. Under the plan, participants may
contribute up to a maximum of 15% of their pre-tax earnings or the dollar limit
as prescribed by IRC Section 415(d). A portion of participants' pre-tax
earnings may be matched by the Company. For the years ended December 31, 1997,
1996 and 1995, the Company's contribution was approximately $43,700, $40,500
and $14,000, respectively.

The Company has adopted an incentive stock option plan recommended by the
Board of Directors and approved by the shareholders. This plan grants options
to purchase up to 1,000,000 shares of common stock of the Company to officers
and key employees. Option prices are 100% of the fair market value at date of
grant. The following schedule shows all options granted, exercised, expired and
exchanged under the Company's Incentive Stock Option Plan as of December 31,
1997.

Information relating to the options is as follows:

<TABLE>
<CAPTION>
Option Price
-------------------------------
Number Total
of Shares Per Share Price
--------- --------- ----------
<S> <C> <C> <C>
Outstanding, January 1, 1995................ 194,740 $ 4.93 $ 961,105
Granted................................... 45,200 7.53 340,200
Exercised................................. (17,128) 4.88 (83,499)
Canceled.................................. (1,191) 4.88 (5,806)
-------- ----------
Outstanding, December 31, 1995.............. 221,621 $ 5.47 $1,212,000
Granted................................... 44,400 9.69 430,125
Exercised................................. (170,433) 4.88 (830,861)
Canceled.................................. (46,188) 7.20 (332,516)
-------- ----------
Outstanding, December 31, 1996.............. 49,400 $ 9.08 $ 448,748
Granted................................... 66,150 17.49 1,180,706
Exercised................................. (1,014) 9.69 (9,826)
Canceled.................................. (2,525) 12.43 (31,398)
-------- ----------
Outstanding, December 31, 1997.............. 112,011 $14.20 $1,588,230
======== ==========
</TABLE>

At December 31, 1997, 14,761 options for shares of common stock were
exercisable.

F-18
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method of FASB Statement 123, the Company's net income and earnings per common
share for the year ended December 31, 1997 would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<S> <C>
Net income (in thousands)
As reported....................................................... $61,292
Pro forma......................................................... 61,188
Earnings per common share
As reported....................................................... $1.87
Pro forma......................................................... 1.87
</TABLE>

The fair value of options granted under the Company's fixed stock option plan
during 1997 was estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used: dividend
yield of 1.19%, expected volatility of 29.81%, risk free interest rate of 7.0%,
and expected lives of 4 years.

6. INCOME TAXES

The following is a reconciliation of income taxes computed using the Federal
statutory rate with the provision for income taxes for the years ended December
31,:

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate................................. $19,737 $26,725 $31,695
Increase (decrease) in income taxes resulting
from:
Utilization of prior unrecognized deferred tax
asset relating to investment losses.......... (7,858) (5,767) (868)
Losses producing no current benefit........... 1,262 1,590 81
Other......................................... (5,809) (712) (1,642)
------- ------- -------
Provision for Federal income taxes.............. $ 7,332 $21,836 $29,266
======= ======= =======
</TABLE>

The Company provides for deferred income taxes resulting from temporary
differences which arise from recording certain transactions in different years
for income tax reporting purposes than for financial reporting purposes. The
sources of these differences and the tax effect of each were as follows:

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Deferred policy acquisition costs................ $ 333 $ (742) $ 341
Policyholders' account balances.................. (189) (216) 5
Investment adjustments........................... (1,510) 135 (481)
Other............................................ (797) (540) (1,764)
------- ------- -------
Deferred Federal income tax benefit.............. $(2,163) $(1,363) $(1,899)
======= ======= =======
</TABLE>

F-19
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred federal income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss carryforwards. Significant components of the Company's net
deferred tax (asset) liability as of December 31, 1997 and 1996 are as follows
(in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred income tax asset:
Investments............................................ $ (5,522) $ (6,003)
Insurance reserves..................................... (5,584) (6,508)
Operating loss carryforwards........................... (1,903) (1,669)
Other.................................................. (292) (249)
-------- --------
(13,301) (14,429)
Valuation allowance.................................... 6,072 5,322
-------- --------
Net deferred income tax asset.......................... $ (7,229) $ (9,107)
-------- --------
Deferred income tax liability:
Deferred policy acquisition costs...................... $ 15,964 $ 16,305
Net unrealized investment gains........................ 21,697 38,521
Policyholder account balances.......................... 85 90
Other.................................................. 1,132 766
-------- --------
Deferred income tax liability........................... 38,878 55,682
-------- --------
Net deferred income tax liability....................... $ 31,649 $ 46,575
======== ========
</TABLE>

The valuation allowance relates principally to investment writedowns recorded
for financial reporting purposes, which have not been recognized for income tax
purposes, due to the uncertainty associated with their realizability for income
tax purposes. Changes in the valuation allowance for the years ended December
31, 1997 and 1996 primarily reflect the reduction in the deferred tax asset as
a result of the utilization of previously unrecognized investment losses.

Prior to 1984, Federal income tax law allowed life insurance companies to
exclude from taxable income and set aside certain amounts in a tax memorandum
account known as the Policyholder Surplus Account ("PSA"). Under the tax law,
the PSA has been frozen at its December 31, 1983 balance of $2,900,000 which
may under certain circumstances become taxable in the future. The Insurance
Company does not believe that any significant portion of the amount in this
account will be taxed in the foreseeable future. Accordingly, no provision for
income taxes has been made thereon. If the amount in the PSA were to become
taxable, the resulting liability using current rates would be approximately
$1,015,000.

Under current tax law, there are certain limitations on the utilization of
non-life insurance company losses ("non-life losses") against life insurance
company income ("life income") in a consolidated federal income tax return. The
utilization of non-life losses against life income in any year is limited to
the lesser of 35 percent of life income or 35

F-20
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

percent of non-life losses. Any unutilized balance of non-life losses is
carried over to subsequent tax years.

The Company has net operating loss carryforwards of approximately $7,337,000
at December 31, 1997 of which $2,949,000 expire in 2009; $2,487,000 in 2010;
$1,671,000 in 2011; and $230,000 in 2012.

7. REINSURANCE

Reinsurance allows life insurance companies to share risks on a case by case
or aggregate basis with other insurance and reinsurance companies. The
Insurance Company cedes insurance to the reinsurer and compensates the
reinsurer for its assumption of risk. The maximum amount of individual life
insurance normally retained by the Company on any one life is $50,000 per
policy and $100,000 per life. The maximum retention with respect to impaired
risk policies typically is the same. The Insurance Company cedes insurance
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 reinsurance of a risk does not discharge the primary liability of the
insurance company ceding that risk, but the reinsured portion of the claim is
recoverable from the reinsurer. The major reinsurance treaties into which the
Insurance Company has entered can be characterized as follows:

Reinsurance ceded from the Insurance Company to Life Reassurance Corporation
of America and Swiss Re Life & Health America Inc. at December 31, 1997 and
1996 consists of coinsurance agreements aggregating face amounts of $230.6
million and $257.0 million, respectively, representing the amount of individual
life insurance contracts that were ceded to the reinsurers. The term
"coinsurance" refers to an arrangement under which the Insurance Company pays
the reinsurers the gross premiums on the portion of the policy to be reinsured
and the reinsurers grant a ceding commission to the Insurance Company to cover
its acquisition costs plus a margin for profit.

Reinsurance premiums ceded for 1997, 1996 and 1995 amounted to approximately
$4.5 million, $4.6 million, and $4.5 million, respectively.

8. STATUTORY FINANCIAL STATEMENTS

Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. Material
differences resulting from these accounting practices include: deferred policy
acquisition costs, deferred Federal income taxes and statutory non-admitted
assets are recognized under GAAP accounting while statutory investment
valuation reserves are not; premiums for universal life and investment-type

F-21
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

products are recognized as revenues for statutory purposes and as deposits to
policyholders' accounts under GAAP; different assumptions are used in
calculating future policyholders' benefits; and different methods are used for
calculating valuation allowances for statutory and GAAP purposes; fixed
maturities are recorded principally at market value or amortized cost as
appropriate under GAAP while under statutory accounting practices they are
recorded principally at amortized cost.

<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Statutory surplus........................... $205,135 $250,869 $296,725
========== ========== ==========
Statutory net income........................ $ 38,834 $ 41,972 $ 57,081
========== ========== ==========
</TABLE>

9. LITIGATION

10. FAIR VALUE INFORMATION

The following estimated fair value disclosures of financial instruments have
been determined using available market information, current pricing information
and appropriate valuation methodologies. If quoted market prices were not
readily available for a financial instrument, management determined an
estimated fair value. Accordingly, the estimates may not be indicative of the
amounts the Company could have realized in a market transaction.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.

For fixed maturities and common stocks, estimated fair values were based
primarily upon independent pricing services. For a limited number of privately
placed securities, where prices are not available from independent pricing
services, the Company estimates market values using a matrix pricing model,
based on the issuer's credit standing and the security's interest rate spread
over U.S. Treasury bonds. Because it is not practicable to obtain an
independent valuation for each limited partnership interest for purposes of
disclosure, the market value of a limited partnership interest is estimated to
approximate the carrying value. As of December 31, 1997, the Company was
committed to contribute, if called upon, an aggregate of approximately $73.7
million of additional capital to certain of these limited partnerships. The
market value of short-term investments, mortgage loans and policy loans is
estimated to approximate the carrying value.

F-22
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Estimated fair values of policyholders' account balances for investment type
products (i.e., deferred annuities, immediate annuities without life
contingencies and universal life contracts) are calculated by projecting the
contract cash flows and then discounting them back to the valuation date at the
appropriate discount rate. For immediate annuities without life contingencies,
the cash flows are defined contractually. For all other products, projected
cash flows are based on an assumed lapse rate and crediting rate (based on the
current treasury curve), adjusted for any anticipated surrender charges. The
discount rate is based on the current durationmatched treasury curve, plus an
adjustment to reflect the anticipated spread above treasuries on investment
grade fixed maturity securities, less an expense and profit spread.

<TABLE>
<CAPTION>
December 31, 1997 Carrying Value Estimated Fair Value
----------------- -------------- --------------------
(in thousands)
<S> <C> <C>
Assets
Fixed Maturities:
Available for Sale..................... 1,909,924 1,909,924
Common Stock............................. 45,773 45,773
Mortgage Loans........................... 17,865 17,865
Policy Loans............................. 18,120 18,120
Cash and Short-Term Investments.......... 277,578 277,578
Other Invested Assets.................... 208,162 208,162
Liabilities
Policyholders' Account Balances.......... 1,280,900 1,288,551
Note Payable............................. 50,000 52,500
Short-Term Note Payable.................. 20,000 20,000
<CAPTION>
December 31, 1996 Carrying Value Estimated Fair Value
----------------- -------------- --------------------
(in thousands)
<S> <C> <C>
Assets
Fixed Maturities:
Available for Sale..................... 1,823,349 1,823,349
Common Stock............................. 42,059 42,059
Mortgage Loans........................... 18,622 18,622
Policy Loans............................. 18,068 18,068
Cash and Short-Term Investments.......... 240,857 240,857
Other Invested Assets.................... 176,103 176,103
Liabilities
Policyholders' Account Balances.......... 1,260,545 1,225,654
Other Notes Payable...................... 50,000 50,000
Short-Term Note Payable.................. 5,000 5,000
</TABLE>

F-23
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data is presented below. Certain amounts have
been reclassified to conform to the current year's presentation.

<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
1997 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
(in thousands, except per share)
<S> <C> <C> <C> <C>
Premiums and other insurance
revenues....................... $ 6,390 $ 6,637 $ 9,024 $ 7,796
Net invested income............. 48,623 49,399 44,444 49,352
Realized investment gains....... 2,510 8,503 9,518 5,508
------- ------- ------- -------
Total revenues.................. 57,523 64,539 62,986 62,656
======= ======= ======= =======
Benefits and expenses........... 38,951 41,022 40,128 37,045
======= ======= ======= =======
Net income...................... 12,548 16,372 16,018 16,354
======= ======= ======= =======
Net income per share............ $ .38 $ .50 $ .49 $ .50
======= ======= ======= =======
<CAPTION>
Three Months Ended
-----------------------------------------
1996 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
(in thousands, except per share)
<S> <C> <C> <C> <C>
Premiums and other insurance
revenues....................... $ 2,691 $ 3,447 $ 5,533 $ 5,803
Net investment income........... 49,753 44,188 42,958 49,281
Realized investment gains....... 1,479 8,249 7,484 2,808
------- ------- ------- -------
Total revenues.................. 53,923 55,884 55,975 57,892
======= ======= ======= =======
Benefits and expenses........... 36,865 35,418 36,049 38,985
======= ======= ======= =======
Net income...................... 10,358 14,316 14,084 15,763
======= ======= ======= =======
Net income per share............ $ .31 $ .43 $ .42 $ .44
======= ======= ======= =======
</TABLE>

F-24
<PAGE>

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Directors and Shareholders
Presidential Life Corporation
Nyack, New York 10960

We have reviewed the accompanying consolidated balance sheet of Presidential
Life Corporation and subsidiaries ("the Company") as of June 30, 1998, and the
related consolidated statements of income for the three-month and six month
periods ended June 30, 1998 and 1997 and the consolidated statements of
shareholders' equity and cash flows for the six month periods ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management.

Based upon our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Presidential Life Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income, shareholders' equity, and cash flows for the year then ended; and in
our report dated February 12, 1998, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP
New York, New York

August 7, 1998

F-25
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)

<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of $1,784,222 and
$1,799,929, respectively)........................... $1,909,924 $1,890,301
Common stocks (Cost of $37,975 and $32,021,
respectively)....................................... 45,773 62,957
Mortgage Loans....................................... 17,865 17,460
Real Estate.......................................... 417 416
Policy Loans......................................... 18,120 17,738
Short-term investments............................... 264,098 287,170
Other invested assets................................ 208,162 265,643
---------- ----------
Total investments.................................. 2,464,359 2,541,685
Cash and cash equivalents.............................. 13,480 0
Accrued investment income.............................. 28,167 19,787
Deferred policy acquisition costs...................... 37,685 37,323
Furniture and equipment, net........................... 567 545
Amounts due from reinsurers............................ 8,249 8,095
Other assets........................................... 1,222 292
Assets held in separate account........................ 4,612 4,660
---------- ----------
TOTAL ASSETS....................................... $2,558,341 $2,612,387
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances...................... $1,280,900 $1,287,940
Future policy benefits:
Annuity............................................. 380,109 391,751
Life and accident and health........................ 50,848 52,092
Other policy liabilities............................. 3,124 3,077
---------- ----------
Total policy liabilities........................... 1,714,981 1,734,860
Dollar Repurchase Agreements........................... 205,202 215,665
Note payable........................................... 50,000 50,000
Short-term note payable................................ 20,000 23,000
Deposits on policies to be issued...................... 2,436 1,243
Federal income taxes payable........................... 1,371 1,748
Deferred federal income taxes.......................... 46,575 46,571
General expenses and taxes accrued..................... 7,074 7,489
Other liabilities...................................... 3,436 3,965
Liabilities related to separate account................ 4,612 4,660
---------- ----------
Total liabilities.................................. 2,055,687 2,089,201
========== ==========
Shareholders' Equity:
Capital stock ($.01 par value, authorized 100,000,000
shares, issued and outstanding 31,987,550 shares in
1998 and 32,621,549 shares in 1997)................. 326 320
Additional paid-in capital........................... 18,274 5,747
Net unrealized investment gains........................ 71,540 76,782
Retained earnings...................................... 412,514 440,337
---------- ----------
Total Shareholders' Equity......................... 502,654 523,186
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $2,558,341 $2,612,387
========== ==========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

F-26
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)

<TABLE>
<CAPTION>
Six Months Ended June
30
----------------------
1997 1998
---------- ----------
(Unaudited)
<S> <C> <C>
REVENUES:
Insurance Revenues:
Premiums............................................ $ 1,098 $ 1,153
Annuity considerations.............................. 7,978 15,644
Universal life and investment type policy fee
income............................................. 956 1,140
Net investment income................................ 98,022 110,076
Realized investment gains............................ 11,013 9,069
Other income......................................... 2,995 2,357
---------- ----------
TOTAL REVENUES.................................... 122,062 139,439
---------- ----------
BENEFITS AND EXPENSES:
Death and other life insurance benefits.............. 3,100 3,566
Annuity benefits..................................... 18,824 20,735
Interest credited to policyholders' account
balances............................................ 37,435 38,110
Interest expense on notes payable.................... 2,780 3,833
Other interest and other charges..................... 228 142
Increase in liability for future policy benefits..... 7,116 12,572
Commissions to agents, net........................... 1,896 2,337
General expenses and taxes........................... 7,752 8,229
Decrease in deferred policy acquisition costs........ 842 1,097
---------- ----------
TOTAL BENEFITS AND EXPENSES....................... 79,973 90,621
---------- ----------
Income before income taxes............................ 42,089 48,818
---------- ----------
Provision (benefit) for income taxes
Current.............................................. 15,308 19,475
Deferred............................................. (2,139) (2,826)
---------- ----------
13,169 16,649
---------- ----------
NET INCOME............................................ $ 28,920 $ 32,169
========== ==========
Income per share...................................... $ .88 $ 1.00
========== ==========
Weighted average number of shares outstanding during
the period........................................... 32,816,821 32,297,875
========== ==========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

F-27
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)

<TABLE>
<CAPTION>
Three Months Ended June 30
----------------------------
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
REVENUES:
Insurance Revenues:
Premiums...................................... $ 862 $ 983
Annuity considerations........................ 3,078 7,977
Universal life and investment type policy fee
income....................................... 521 419
Net investment income.......................... 49,399 57,654
Realized investment gains...................... 8,503 7,063
Other income................................... 2,176 550
------------- -------------
TOTAL REVENUES.............................. 64,539 74,646
------------- -------------
BENEFITS AND EXPENSES:
Death and other life insurance benefits........ 1,607 1,658
Annuity benefits............................... 9,604 10,420
Interest credited to policyholders' account
balances...................................... 18,915 19,210
Interest expense on notes payable.............. 1,436 2,229
Other interest and other charges............... 110 68
Increase (decrease) in liability for future
policy benefits............................... 3,312 6,353
Commissions to agents, net..................... 856 1,081
General expenses and taxes..................... 4,015 3,889
Decrease in deferred policy acquisition costs.. 1,167 1,357
------------- -------------
TOTAL BENEFITS AND EXPENSES................. 41,022 46,265
------------- -------------
Income before income taxes...................... 23,517 28,381
------------- -------------
Provision (benefit) for income taxes
Current........................................ 8,138 12,073
Deferred....................................... (993) (2,189)
------------- -------------
7,145 9,884
------------- -------------
NET INCOME...................................... $ 16,372 $ 18,497
============= =============
Income per share................................ $ .50 $ .58
============= =============
Weighted average number of shares outstanding
during the period.............................. 32,712,132 32,106,715
============= =============
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

F-28
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands, except share data)
(Unaudited)

<TABLE>
<CAPTION>
Additional Net Unrealized
Paid-in Investment Retained
Capital Stock Capital Gains (Losses) Earnings Total
------------- ---------- -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $330 $24,023 $40,294 $358,416 $423,063
Net Income.............. 28,920 28,920
Issuance of Shares Under
Stock Option Plan...... 2 2
Purchase and Retirement
of Stock............... (3) (4,298) (4,301)
Change in Unrealized
Investment Gains, Net.. 1,462 1,462
Dividends paid to
Shareholders
($0.10 per share)...... (3,276) (3,276)
---- ------- ------- -------- --------
Balance at June 30,
1997................... $327 $19,727 $41,756 $384,060 $445,870
==== ======= ======= ======== ========
Balance at December 31,
1997................... $326 $18,274 $71,540 $412,514 $502,654
Net Income.............. 32,169 32,169
Purchase and Retirement
of Stock............... (6) (12,527) (12,533)
Change in Unrealized
Investment Gains, Net.. 5,242 5,242
Dividends paid to
Shareholders ($0.135
per share)............. (4,346) (4,346)
---- ------- ------- -------- --------
Balance at June 30,
1998................... $320 $ 5,747 $76,782 $440,337 $523,186
==== ======= ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

F-29
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................... $ 28,920 $ 32,169
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (benefit) for deferred income taxes...... (2,139) (2,826)
Depreciation and amortization...................... 258 944
Net accrual of discount on fixed maturities........ (376) (5,045)
Realized investment gains.......................... (11,013) (9,069)
Changes in:
Accrued investment income.......................... 7,494 8,380
Deferred policy acquisition cost................... 842 1,097
Federal income tax recoverable..................... (1,130) 0
Liability for future policy benefits............... 6,695 12,886
Other items........................................ (46) 1,491
----------- -----------
Net Cash Provided by Operating Activities........ 29,505 40,027
----------- -----------
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions..................................... (122,852) (123,589)
Sales............................................ 4,369 2,602
Maturities, calls and repayments................. 87,959 134,618
Common Stocks:
Acquisitions....................................... (12,778) (7,787)
Sales.............................................. 26,702 18,030
Decrease (increase) in short-term investments and
policy loans....................................... 10,620 (22,690)
Other Invested Assets:
Additions to other invested assets................. (67,870) (68,701)
Distributions from other invested assets........... 40,337 11,221
Purchase of property and equipment.................. (189) (47)
Mortgage loans on real estate....................... 371 405
----------- -----------
Net Cash Used in Investing Activities............ (33,331) (55,938)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements.......... 1,192,909 1,228,447
Repayment of Dollar Repurchase Agreements........... (1,187,830) (1,217,984)
Increase (decrease) in policyholders' account
balances........................................... (3,179) 7,040
Repurchase of common stock.......................... (4,301) (12,533)
Proceeds from line of credit........................ 7,500 3,000
Deposits on policies to be issued................... 1,398 (1,193)
Dividends paid to shareholders...................... (3,276) (4,346)
----------- -----------
Net Cash Provided by Financing Activities........ 3,221 2,431
----------- -----------
Decrease in Cash and Cash Equivalents............... (605) (13,480)
Cash and Cash Equivalents at Beginning of Period..... 819 13,480
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 214 $ 0
=========== ===========
Supplemental Cash Flow Disclosure:
Income Taxes Paid................................... $ 16,939 $ 19,099
=========== ===========
Interest Paid....................................... $ 2,534 $ 2,900
=========== ===========
</TABLE>

The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.

F-30
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business

Presidential Life Corporation (the "Company"), through its wholly-owned
subsidiary Presidential Life Insurance Company (the "Insurance Company"), is
engaged in the sale of life insurance and annuities.

B. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
applicable to stock life insurance companies for interim financial statements
and with the requirements of Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles applicable to stock life insurance companies for complete annual
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Interim results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. Management believes that, although the disclosures are
adequate to make the information presented not misleading, the consolidated
financial statements should be read in conjunction with the footnotes contained
in the Company's audited consolidated financial statements for the year ended
December 31, 1997.

C. Investments

Fixed maturity investments available for sale represent investments which may
be sold in response to changes in various economic conditions. These
investments are carried at market value and unrealized gains and losses, net of
the effects of amortization of deferred policy acquisition costs of
approximately $12.9 million and $13.4 million, and deferred Federal income
taxes of approximately $32.3 million and $38.5 million at June 30, 1998 and
December 31, 1997, respectively, are credited or charged directly to
shareholders' equity, unless a decline in market value is considered to be
other than temporary in which case the investment is reduced to its net
realizable value. Equity securities include common stocks and non-redeemable
preferred stocks and are carried at market, with the related unrealized gains
and losses, net of deferred income taxes, if any, charged directly to
shareholders' equity, unless a decline in market value is deemed to be other
than temporary in which case the investment is reduced to its net realizable
value.

F-31
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

include those related to their underlying investments (i.e., equity
securities, debt securities and real estate), plus a level of illiquidity,
which is mitigated by the ability of the Company to take annual distributions
of partnership earnings. To evaluate the appropriateness of the carrying value
of a limited partnership interest, management maintains ongoing discussions
with the investment manager and considers the limited partnership's operation,
its current and near term projected financial condition, earnings capacity and
distributions received by the Company during the year. Because it is not
practicable to obtain an independent valuation for each limited partnership
interest, for purposes of disclosure, the market value of a limited
partnership interest is estimated at book value. Management believes that the
net realizable value of such limited partnership interests, in the aggregate,
exceeds their related carrying value as of June 30, 1998 and December 31,
1997. As of June 30, 1998, the Company was committed to contribute, if called
upon, an aggregate of approximately $53.9 million of additional capital to
certain of these limited partnerships.

In evaluating whether an investment security or other investment has
suffered an impairment in value which is deemed to be "other than temporary",
management considers all available evidence. When a decline in the value of an
investment security or other investment is considered to be other than
temporary, the investment is reduced to its net realizable value, which
becomes the new cost basis. The amount of reduction is recorded as a realized
loss. A recovery from the adjusted cost basis is recognized as a realized gain
only at sale.

The Company participates in "dollar roll" repurchase agreement transactions
to enhance investment income. Dollar roll transactions involve the sale of
certain mortgage backed securities to a holding institution and a simultaneous
agreement to purchase substantially similar securities for forward settlement
at a lower dollar price. The proceeds are invested in shortterm securities at
a positive spread until the settlement date of the similar securities. During
this period, the holding institution receives all income and prepayments for
the security. Dollar roll repurchase agreement transactions are treated as
financing transactions for financial reporting purposes.

As part of a proposed rehabilitation plan for Fidelity Mutual Life Insurance
Company ("Fidelity"), on January 11, 1995 the Insurance Company signed a
definitive purchase agreement with the Pennsylvania Insurance Commissioner and
Fidelity to invest up to $45 million for a minority (49.9%) interest in a
Fidelity subsidiary insurance holding company. In addition, the Company had
agreed to purchase $25 million of Senior Notes of such company. The Company
was informed by the Pennsylvania Insurance Commissioner, that in response to
the significant improvement in the invested assets of Fidelity, she has
reopened the process to select an equity investor for the recapitalization and
rehabilitation of Fidelity. The Company disagreed with the Commissioner's
actions and commenced litigation which was settled in the second quarter of
1997. As part of the settlement, the Company received $1.7 million.

F-32
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

D. Federal Income Taxes

E. New Accounting Pronouncements

In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" (SFAS No.
127). SFAS No. 127 amends SFAS No. 125 by deferring for one year the effective
date of paragraph 15 of SFAS No. 125, addressing secured borrowings and
collateral, and for repurchase agreement, dollar roll, security lending and
similar transactions, of paragraphs 9 through 12 and 237(b) of SFAS No. 125.
SFAS No. 127 is effective for certain transactions occurring after December
31, 1997, and must be applied prospectively. The Company adopted SFAS 125 and
127 effective January 1998. There was no effect on the Company's financial
position from the adoption of SFAS 125 and 127.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes
standards for displaying comprehensive income and its components in a full set
of general-purpose financial statements. Effective January 1998, the Company
adopted SFAS 130. Total comprehensive income (loss) for the periods ended June
30, 1998 and 1997 was $37.41 million and $30.38 million, respectively. The
difference between net income and comprehensive income (loss) was the change
in unrealized investment gains (losses) which arose during the period.

Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 is effective for fiscal
years beginning after December 15, 1997. The Company's current definition of
its operating segments did not change.

In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" (SFAS 132), which revises employers' disclosures
about pension and other postretirement benefit plans to require standardized
disclosures for pensions and other postretirement benefits, additional
disclosure of information on changes in the benefit obligations and fair
values of plan assets, and elimination of certain disclosures that were deemed
no longer useful. It does not change the measurement or recognition of those
plans. SFAS 132 is effective for fiscal years beginning after December 15,
1997.

F-33
<PAGE>

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It also establishes
specific conditions that must be met in order for a derivative to be
recognized as a hedge of certain exposures. The Company has not yet completed
its analysis to determine the impact of this statement on the Company's
financial statements. SFAS 133 is effective for fiscal years beginning after
June 15, 1999.

2. INVESTMENTS

Investments in U.S. Government & Government Agencies with an aggregate
carrying value of $479,476,000 represent investments owned in any one issuer
that aggregate 10% or more of Shareholders' Equity as of June 30, 1998.

Securities with a carrying value of approximately $5.6 million were on
deposit with various state insurance departments to comply with applicable
insurance laws.

3. NOTES PAYABLE

Notes payable at June 30, 1998 and December 31, 1997 consist of $50 million,
9 1/2% Senior Notes ("Senior Notes") due December 15, 2000. Interest is
payable June 15 and December 15. Debt issue costs are being amortized on the
interest method over the term of the notes. The total principal is due on
December 15, 2000. The senior notes are callable after December 14, 1998. The
Company intends to call and refinance the senior notes during the fourth
quarter of 1998.

The Company has one bank line of credit in the amount of $25,000,000 and
provides for interest on borrowings based on market indices. At June 30, 1998
the Company had $23,000,000 outstanding under the line of credit.

4. INCOME TAXES

The valuation allowance relates principally to investment writedowns
recorded for financial reporting purposes, which have not been recognized for
income tax purposes, due to the uncertainty associated with their
realizability for income tax purposes. Changes in the valuation allowance for
the six months ended June 30, 1998 reflect the reduction in the deferred tax
asset as of June 30, 1998. The Company's effective tax rates for the six
months ended June 30, 1998 and 1997 were 34.1% and 31.3%, respectively.

F-34
<PAGE>

Schedule II

PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

(in thousands)

<TABLE>
<CAPTION>
December 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Assets:
Investment in subsidiaries at equity......................... $445,469 $512,257
Cash in bank................................................. 69 29
Real estate, net............................................. 41 38
Fixed maturities, available for sale......................... 10,041 11,038
Investments, common stocks................................... 2,502 2,193
Short term investments....................................... 4,089 2,695
Other invested assets........................................ 14,747 42,593
Deferred debt issue costs.................................... 1,169 874
Other assets................................................. 3,774 3,829
-------- --------
Total assets................................................. $481,901 $575,546
======== ========

Liabilities and shareholders' equity:
Liabilities:
Accounts payable, accrued expenses and taxes................ $ 1,433 $ 898
Notes payable, long term.................................... 50,000 50,000
Short term note payable..................................... 5,000 20,000
Other liabilities........................................... 2,405 1,994
-------- --------
Total liabilities............................................ 58,838 72,892
Total Shareholders' Equity................................... 423,063 502,654
-------- --------
Total liabilities and shareholders' equity................... $481,901 $575,546
======== ========
</TABLE>

Sch-1
<PAGE>

Schedule II

PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF INCOME

(in thousands)

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Income from rents.................................. $ 739 $ 739 $ 739
Investment income.................................. 620 3,435 5,460
Realized investment gains (losses)................. 271 1,932 (933)
Other income....................................... 0 0 720
------- ------- -------
Total Revenues..................................... 1,630 6,106 5,986
------- ------- -------

Expenses:
Operating and administrative....................... 803 2,459 517
Interest........................................... 5,045 5,049 5,850
------- ------- -------
Total Expenses..................................... 5,848 7,508 6,367
------- ------- -------
Loss before federal income taxes and equity in
income of subsidiaries............................ (4,218) (1,402) (381)
Federal income tax benefit......................... (2,851) (1,667) (926)
------- ------- -------
Income (loss) before equity in income of
subsidiaries...................................... (1,367) 265 545
Equity in income of subsidiaries before deducting
dividends received................................ 50,425 54,256 60,747
------- ------- -------
Net income......................................... $49,058 $54,521 $61,292
======= ======= =======
</TABLE>

Sch-2
<PAGE>

Schedule II

PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

(in thousands)

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net income.......................................... $49,058 $54,521 $61,292
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Realized investment (gains) losses................. (271) (1,932) 933
Depreciation and amortization...................... 299 299 299
Equity in undistributed profits of subsidiary
companies......................................... (45,425) (54,256) (60,747)
Deferred Federal income taxes...................... (845) 609 (99)
Dividends from subsidiaries........................ 5,000 15,000 24,800
Changes in:
Accrued investment income.......................... (279) (1,409) 165
Accounts payable and accrued expenses.............. 658 1,288 (536)
Other assets and liabilities....................... (3,733) 1,308 (751)
------- ------- -------
Net Cash Provided By (Used In) Operating
Activities......................................... 4,462 15,428 25,356
------- ------- -------

Investing Activities:
Purchase of fixed maturities........................ (492) (8,301) (1,988)
Sale of fixed maturities............................ 4,737 9,016 1,000
Common stock acquisitions........................... 0 (1,529) 0
Common stock sales.................................. 0 1,974 0
Other invested asset additions...................... 0 (10,760) (37,846)
Other invested asset distributions.................. 0 0 10,000
Decrease (increase) in short-term investments....... (3,390) 800 1,394
------- ------- -------
Net Cash Provided By (Used In) Investing
Activities......................................... 885 (8,800) (27,440)
------- ------- -------

Financing Activities:
Dividends to shareholders........................... (3,526) (4,967) (7,194)
Proceeds from line of credit........................ 0 5,000 15,000
Repurchase of common stock.......................... (1,623) (7,038) (5,762)
------- ------- -------
Net Cash Provided By (Used In) Financing
Activities......................................... (5,149) (7,005) (2,044)
------- ------- -------
Increase (Decrease) in Cash......................... 168 (377) (40)
Cash at Beginning of Year........................... 278 446 69
------- ------- -------
Cash at End of Year................................. $ 446 $ 69 $ 29
======= ======= =======
</TABLE>

Sch-3
<PAGE>

Schedule III

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INSURANCE INFORMATION

(in thousands)

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column F-1 Column G Column H Column I Column J
-------- ----------- ------------ -------- -------- -------- ------------- ---------- ---------- ------------ ---------
Future Benefits,
Policy Claims,
Benefits, Losses
Losses, Interest
Claims, Loss Other Credited
Expenses, Policy Mortality, to Account Amortization
Deferred and Claims Surrender and Balances of Deferred
Policy Policyholder and Other Charges Net and Policy Other
Acquisition Account Unearned Benefits Premium to Investment Settlement Acquisition Operating
Segment Costs Balances Premiums Payable Revenue Policyholders Income Expenses Costs Expenses
------- ----------- ------------ -------- -------- -------- ------------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1997
Life Insurance... $ 7,647 $ 128,994 $ 0 $281 $ 3,973 $1,530 $ 11,416 $ 12,114 $1,100 $ 2,738
Annuity.......... 30,037 1,585,682 0 0 19,655 458 180,401 124,431 5,481 5,405
Accident and
Health........... 0 24 2 0 3 0 1 8 0 19
-------- ---------- --- ---- ------- ------ -------- -------- ------ -------
Total........... $ 37,684 $1,714,700 $ 2 $281 $23,631 $1,988 $191,818 $136,553 $6,581 $ 8,162
======== ========== === ==== ======= ====== ======== ======== ====== =======
Year Ended
December 31, 1996
Life Insurance... $ 6,466 $ 124,766 $ 0 $110 $ 4,240 $1,488 $ 10,733 $ 13,076 $ 880 $ 4,325
Annuity.......... 33,317 1,553,518 0 0 8,461 602 175,445 110,855 6,270 6,836
Accident and
Health........... 0 21 2 0 4 0 2 (1) 0 27
-------- ---------- --- ---- ------- ------ -------- -------- ------ -------
Total........... $ 39,783 $1,678,305 $ 2 $110 $12,705 $2,090 $186,180 $123,930 $7,150 $11,188
======== ========== === ==== ======= ====== ======== ======== ====== =======
Year Ended
December 31, 1995
Life Insurance... $ 6,674 $ 120,232 $ 0 $116 $ 4,404 $1,378 $ 9,487 $ 11,411 $ 811 $ 3,696
Annuity.......... 26,656 1,562,415 0 0 3,780 556 161,291 112,081 4,632 5,771
Accident and
Health........... 0 34 2 0 4 0 2 4 0 23
-------- ---------- --- ---- ------- ------ -------- -------- ------ -------
Total........... $ 33,330 $1,682,681 $ 2 $116 $ 8,188 $1,934 $170,780 $123,496 $5,443 $ 9,490
======== ========== === ==== ======= ====== ======== ======== ====== =======
<CAPTION>
Column A Column K
-------- --------
Premiums
Segment Written
------- --------
<S> <C>
Year Ended
December 31, 1997
Life Insurance... 0
Annuity.......... 0
Accident and
Health........... $ 3
Total...........
Year Ended
December 31, 1996
Life Insurance... 0
Annuity.......... 0
Accident and
Health........... $ 4
Total...........
Year Ended
December 31, 1995
Life Insurance... 0
Annuity.......... 0
Accident and
Health........... $ 5
Total...........
</TABLE>

Sch-4
<PAGE>

Schedule IV

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

REINSURANCE

(in thousands)

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- --------- --------- -------- ----------
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
-------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Life Insurance in Force....... $823,257 $476,248 $452,480 $799,489 56.60
======== ======== ======== ======== =====
Premiums:
Life Insurance............... $ 8,065 $ 4,512 $ 420 $ 3,973 10.57
Annuity...................... 19,655 0 0 19,655 0
Accident and Health
Insurance................... 3 0 0 3 0
-------- -------- -------- --------
Total...................... $ 27,723 $ 4,512 $ 420 $ 23,631
======== ======== ======== ========
Year Ended December 31, 1996
Life Insurance in Force....... $864,809 $517,484 $473,779 $821,104 57.50
======== ======== ======== ======== =====
Premiums:
Life Insurance............... $ 8,292 $ 4,518 $ 466 $ 4,240 10.52
Annuity...................... 8,461 0 0 8,461 0
Accident and Health
Insurance................... 4 0 0 4 0
-------- -------- -------- --------
Total...................... $ 16,757 $ 4,518 $ 466 $ 12,705
======== ======== ======== ========
Year Ended December 31, 1995
Life Insurance in Force....... $933,735 $573,324 $446,079 $806,490 55.31
======== ======== ======== ======== =====
Premiums:
Life Insurance............... $ 8,472 $ 4,527 $ 459 $ 4,404 10.42
Annuity...................... 3,780 0 0 3,780 0
Accident and Health
Insurance................... 4 0 0 4 0
-------- -------- -------- --------
Total...................... $ 12,256 $ 4,527 $ 459 $ 8,188
======== ======== ======== ========
</TABLE>

Note: Reinsurance assumed consists entirely of Servicemen's Group Life
Insurance.

Sch-5
<PAGE>

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We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained
in this Prospectus Supplement and the accompanying Prospectus. You must not
rely on unauthorized information or representations.

This Prospectus Supplement and the accompanying Prospectus do not offer to
sell or ask for offers to buy any of the securities in any jurisdiction where
it is unlawful, where the person making the offer is not qualified to do so,
or to any person who can not legally be offered the securities.

The information in this Prospectus Supplement and the accompanying Prospectus
is current only as of the date on the front of each document, and may change
after such date. For any time after the cover dates of this Prospectus Supple-
ment and the accompanying Prospectus, we do not represent that our affairs are
the same as described or that the information in this Prospectus Supplement or
the accompanying Prospectus is correct--nor do we imply those things by deliv-
ering this Prospectus Supplement and the accompanying Prospectus or selling
securities to you.
----------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Prospectus Supplement
<S> <C>
Summary.................................................................. S-2
Use of Proceeds.......................................................... S-5
Capitalization........................................................... S-6
Underwriting............................................................. S-7
Third-Quarter 1998 Results............................................... S-9
Experts.................................................................. S-33
Prospectus
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 14
Consolidated Ratio of Earnings to Fixed Charges.......................... 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 32
Management............................................................... 54
Description of Notes..................................................... 56
Certain United States Federal Income Tax Considerations.................. 73
ERISA Matters............................................................ 79
Plan of Distribution..................................................... 80
Legal Matters............................................................ 81
Experts.................................................................. 81
Glossary of Selected Insurance Terms..................................... 82
Index to Financial Statements............................................ F-1
</TABLE>

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Presidential Life Corporation

$100,000,000

7 7/8% Senior Notes
due 2009

--------------------------

PROSPECTUS SUPPLEMENT

--------------------------

BT Alex. Brown

Salomon Smith Barney

February 18, 1999

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