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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
    FORM 10-Q    (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _____________ to ____________
 Commission File Number 1-16561 ANNUITY AND LIFE RE (HOLDINGS), LTD. (Exact Name of Registrant as Specified in Its Charter)
 Bermuda
    
    66-0619270(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 Cumberland House, 1 Victoria Street, Hamilton, Bermuda
    
    HM11(Address of Principal Executive Offices)
    
    (Zip Code)
 441-296-7667(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o The number of the registrants Common Shares (par value $1.00 per share)
outstanding as of November 5, 2004 was 26,338,528.




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##### Table of Contents



INDEX TO FORM 10-Q PAGEPART IFINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets September 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Operations Three Months and Nine Months ended September 30, 2004 and September 30, 2003
    
    
    2Condensed Consolidated Statements of Comprehensive Loss Three Months and Nine Months ended September 30, 2004 and September 30, 2003
    
    
    3Condensed
Consolidated Statements of Changes in Stockholders Equity Nine Months ended September 30, 2004 and September 30, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2004 and September 30, 2003
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4.
    
    Controls and Procedures
    
    
    42PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    43Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    44Item 6.
    
    Exhibits
    
    
    46Signatures
    
    
    
    
    47RULE 13a-14(a)15d-14(a) CERTIFICATION OF CEORULE 13a-14(a)15d-14(a) CERTIFICATION OF CFOSECTION 1350 CERTIFICATION OF CEOSECTION 1350 CERTIFICATION OF CFO




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PART I
FINANCIAL INFORMATION 
 Item 1.Condensed Consolidated Financial Statements ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (U.S. dollars)
 September 30, 2004
    
    December 31, 2003(Unaudited)AssetsCash and cash equivalents
    
    $
    56,933,773
    
    
    $
    80,068,310Fixed maturity investments at fair value (amortized cost of
$81,880,490 and $115,594,199 at September 30, 2004 and December 31,
2003)
    
    
    83,287,548
    
    
    
    117,812,445Funds withheld at interest
    
    
    596,544,390
    
    
    
    667,824,819Accrued investment income
    
    
    1,033,470
    
    
    
    1,491,170Receivable for reinsurance ceded
    
    
    82,627,663
    
    
    
    88,480,172Other reinsurance receivables
    
    
    3,656,664
    
    
    
    4,580,745Deferred policy acquisition costs
    
    
    95,787,457
    
    
    
    68,942,628Other assets
    
    
    752,990
    
    
    
    682,050Total Assets
    
    $
    920,623,955
    
    
    $
    1,029,882,339LiabilitiesReserves for future policy benefits
    
    $
    151,673,217
    
    
    $
    161,105,541Interest sensitive contracts liability
    
    
    621,979,101
    
    
    
    670,717,546Other reinsurance liabilities
    
    
    15,381,098
    
    
    
    55,826,940Accounts payable and accrued expenses
    
    
    5,519,109
    
    
    
    7,059,733Total Liabilities
    
    
    794,552,525
    
    
    
    894,709,760Stockholders EquityPreferred shares (par value $1.00; 50,000,000 shares authorized;
no shares outstanding)
    
    
    
    
    
    
    Common shares (par value $1.00; 100,000,000 shares authorized;
26,395,928 and 26,454,195 shares outstanding at September 30, 2004
and December 31, 2003)
    
    
    26,395,928
    
    
    
    26,454,195Additional paid-in capital
    
    
    334,041,944
    
    
    
    334,418,029Stock warrants
    
    
    1,350,000
    
    
    
    1,250,000Unamortized stock-based compensation
    
    
    (781,376
    )
    
    
    (1,509,022
    )Accumulated other comprehensive income
    
    
    1,038,094
    
    
    
    1,840,849Accumulated deficit
    
    
    (235,973,160
    )
    
    
    (227,281,472
    )Total Stockholders Equity
    
    
    126,071,430
    
    
    
    135,172,579Total Liabilities and Stockholders Equity
    
    $
    920,623,955
    
    
    $
    1,029,882,339
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -1-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited and in U.S. dollars)
 For the Nine Months EndedFor the Three Months Ended September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003RevenuesNet premiums
    
    $
    9,906,337
    
    
    $
    28,657,263
    
    
    $
    34,565,859
    
    
    $
    148,586,899Investment income, net of related expenses
    
    
    4,780,211
    
    
    
    16,250,225
    
    
    
    17,875,012
    
    
    
    30,143,651Net realized investment (losses) gains
    
    
    (84,868
    )
    
    
    (52,025
    )
    
    
    456,172
    
    
    
    6,508,019Net change in fair value of embedded derivatives
    
    
    565,939
    
    
    
    2,808,427
    
    
    
    1,692,113
    
    
    
    14,845,749Surrender fees and other revenues
    
    
    1,024,405
    
    
    
    1,667,997
    
    
    
    3,609,905
    
    
    
    6,061,022Total Revenues
    
    
    16,192,024
    
    
    
    49,331,887
    
    
    
    58,199,061
    
    
    
    206,145,340Benefits and ExpensesClaim and policy benefits
    
    
    5,669,394
    
    
    
    19,075,004
    
    
    
    24,683,101
    
    
    
    178,589,650Interest credited to interest sensitive products
    
    
    5,513,653
    
    
    
    7,642,151
    
    
    
    10,865,545
    
    
    
    16,731,452Policy acquisition costs and other insurance
expenses
    
    
    5,693,745
    
    
    
    22,796,448
    
    
    
    18,529,269
    
    
    
    119,928,722Operating expenses
    
    
    2,410,937
    
    
    
    3,605,189
    
    
    
    12,446,874
    
    
    
    15,873,678Total Benefits and Expenses
    
    
    19,287,729
    
    
    
    53,118,792
    
    
    
    66,524,789
    
    
    
    331,123,502Loss before cumulative effect of a change in
accounting principle (Note 5)
    
    
    (3,095,705
    )
    
    
    (3,786,905
    )
    
    
    (8,325,728
    )
    
    
    (124,978,162
    )Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (365,960
    )
    
    
    Net Loss
    
    $
    (3,095,705
    )
    
    $
    (3,786,905
    )
    
    $
    (8,691,688
    )
    
    $
    (124,978,162
    )Loss per common share before cumulative effect
of a change in accounting principle per common
shareBasic
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.32
    )
    
    $
    (4.83
    )Diluted
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.32
    )
    
    $
    (4.83
    )Cumulative effect of a change in accounting
principle per common shareBasic
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Diluted
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Net loss per common shareBasic
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.33
    )
    
    $

    (4.83
    )Diluted
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.33
    )
    
    $
    (4.83
    )
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -2-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (Unaudited and in U.S. dollars)
 For the Three Months EndedSeptember 30,
    
    For the Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss for the period
    
    $
    (3,095,705
    )
    
    $
    (3,786,905
    )
    
    $
    (8,691,688
    )
    
    $
    (124,978,162
    )Other comprehensive loss:Unrealized holding gains
(loss) on securities
arising during the
period
    
    
    1,722,029
    
    
    
    (482,029
    )
    
    
    (346,583
    )
    
    
    2,556,717Less
reclassification
adjustment for
realized (loss)
gains in net loss
    
    
    (84,868
    )
    
    
    (52,025
    )
    
    
    456,172
    
    
    
    6,508,019Other comprehensive loss
    
    $
    1,806,897
    
    
    $
    (430,004
    )
    
    $
    (802,755
    )
    
    $
    (3,951,302
    )Total comprehensive loss
    
    $
    (1,288,808
    )
    
    $
    (4,216,909
    )
    
    $
    (9,494,443
    )
    
    $
    (128,929,464
    )
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -3-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (Unaudited and in U.S. dollars)
 For the Nine Months Ended September 30,2004
    
    2003Preferred shares par value $1.00Balance at beginning and end of period
    
    $
    
    
    
    $
    Common shares par value $1.00Balance at beginning of period
    
    $
    26,454,195
    
    
    $
    26,106,328Issuance of shares
    
    
    
    
    
    
    575,000(Cancellation) of shares
    
    
    (58,267
    )
    
    
    (207,600
    )Balance at end of period
    
    $
    26,395,928
    
    
    $
    26,473,728Additional paid-in capitalBalance at beginning of period
    
    $
    334,418,029
    
    
    $
    335,334,932Issuance of shares
    
    
    15,000
    
    
    
    353,250(Cancellation) of shares
    
    
    (391,085
    )
    
    
    (1,206,572
    )Balance at end of period
    
    $
    334,041,944
    
    
    $
    334,481,610Notes receivable from stock salesBalance at beginning of period
    
    $
    
    
    
    $
    (1,626,493
    )Repayments
    
    
    
    
    
    
    1,250,000Interest collected on notes receivable
    
    
    
    
    
    
    420,491Accrued interest during period
    
    
    
    
    
    
    (43,998
    )Balance at end of period
    
    $
    
    
    
    $
    Unamortized stock based compensationBalance at beginning of period
    
    $
    (1,509,022
    )
    
    $
    (2,514,693
    )(Issuance) of stock based compensation
    
    
    
    
    
    
    (928,250
    )Cancellation of stock based compensation
    
    
    449,352
    
    
    
    1,414,172Amortization of stock based
compensation
    
    
    278,294
    
    
    
    295,786Balance at end of period
    
    $
    (781,376
    )
    
    $
    (1,732,985
    )Stock WarrantsBalance at beginning of period
    
    $
    1,250,000
    
    
    $
    Issuance of warrants
    
    
    100,000
    
    
    
    1,250,000Balance at end of period
    
    $
    1,350,000
    
    
    $
    1,250,000Accumulated other comprehensive incomeBalance at beginning of period
    
    $
    1,840,849
    
    
    $
    6,162,525Net unrealized (losses) on securities
    
    
    (802,755
    )
    
    
    (3,951,302
    )Balance at end of period
    
    $
    1,038,094
    
    
    $
    2,211,223Accumulated DeficitBalance at beginning of period
    
    $
    (227,281,472
    )
    
    $
    (95,125,888
    )Net loss
    
    
    (8,691,688
    )
    
    
    (124,978,162
    )Balance at end of period
    
    $
    (235,973,160
    )
    
    $
    (220,104,050
    )Total Stockholders Equity
    
    $
    126,071,430
    
    
    $
    142,579,526
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -4-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited and in U.S. dollars)
 For the Nine Months Ended September 30,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (8,691,688
    )
    
    $
    (124,978,162
    )Adjustments to reconcile net (loss) to cash used by operating activities:Net realized investment (gains)
    
    
    (456,172
    )
    
    
    (6,508,019
    )Net change in fair value of embedded derivatives
    
    
    (1,692,113
    )
    
    
    (14,845,749
    )Amortization of stock based compensation
    
    
    278,294
    
    
    
    295,786Stock warrants expense
    
    
    100,000
    
    
    
    1,250,000Cumulative effect of a change in accounting principle
    
    
    365,960
    
    
    
    Changes in:Accrued investment income
    
    
    457,700
    
    
    
    1,057,414Deferred policy acquisition costs
    
    
    9,309,181
    
    
    
    113,069,242Other reinsurance receivables
    
    
    6,776,590
    
    
    
    22,412,502Other assets
    
    
    (70,940
    )
    
    
    1,543,664Reserves for future policy benefits
    
    
    (7,553,564
    )
    
    
    (82,228,475
    )Interest sensitive contracts, net of funds withheld
    
    
    (14,164,633
    )
    
    
    8,020,675Other reinsurance liabilities
    
    
    (40,445,842
    )
    
    
    (13,126,127
    )Accounts payable
    
    
    (1,540,624
    )
    
    
    (3,822,299
    )Net cash used by operating activities
    
    
    (57,327,851
    )
    
    
    (97,859,548
    )Cash flows from investing activitiesProceeds from sales and maturity of fixed maturity investments
    
    
    53,741,511
    
    
    
    329,135,148Purchase of fixed maturity investments
    
    
    (19,548,197
    )
    
    
    (271,973,762
    )Net cash provided by investing activities
    
    
    34,193,314
    
    
    
    57,161,386Cash flows from financing activitiesInterest accrued on notes receivable
    
    
    
    
    
    
    (43,998
    )Interest collected on notes receivable
    
    
    
    
    
    
    420,491Repayments of notes receivable
    
    
    
    
    
    
    1,250,000Net cash provided by financing activities
    
    
    
    
    
    
    1,626,493Decrease in cash and cash equivalents
    
    
    (23,134,537
    )
    
    
    (39,071,669
    )Cash and cash equivalents, beginning of period
    
    
    80,068,310
    
    
    
    152,930,908Cash and cash equivalents, end of period
    
    $
    56,933,773
    
    
    $
    113,859,239Non-Cash disclosures: amounts recorded in connection with the cumulative
effect of a change in accounting principleDeferred policy acquisition costs
    
    $
    (36,154,010
    )
    
    $
    Reserves for future policy benefits
    
    
    (1,878,760
    )
    
    
    Interest sensitive contracts, net of funds withheld
    
    
    38,398,730
    
    
    
    Cumulative effect of a change in accounting principle
    
    $
    365,960
    
    
    $
    
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -5-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Annuity and Life Re (Holdings), Ltd. (Holdings) was incorporated on
December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned subsidiaries:
Annuity and Life Reassurance, Ltd., which is licensed under the laws of Bermuda
as a long term insurer; and Annuity and Life Re America, Inc., an insurance
holding company based in the United States, and Annuity and Life Reassurance
America, Inc., a life insurance company domiciled in the United States.
Holdings, Annuity and Life Reassurance, Annuity and Life Re America and Annuity
and Life Reassurance America are collectively referred to herein as the
Company. 2. Going Concern Basis of Presentation The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) for interim
financial information and in accordance with Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto contained in the Companys Form 10-K for
the fiscal year ended December 31, 2003, as amended. The accounting policies
used in preparing these unaudited condensed consolidated financial statements
are consistent with those described in Note 3 to the Companys audited
consolidated financial statements for the fiscal year ended December 31, 2003.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included in these financial statements. The results of
operations for the three and nine months ended September 30, 2004 are not
necessarily indicative of results that may be expected for any other interim
period or for the full year. The accompanying unaudited condensed consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
However, the Company has incurred significant operating losses during the last
three fiscal years and has reduced its operations significantly through the
novation, termination and recapture of many of its life and annuity reinsurance
agreements. The Company plans to continue to receive premiums and pay claims
under its remaining reinsurance treaties; however, it is not currently
underwriting any new treaties or accepting any new business from its existing
treaties. In addition, the Company continues to use substantial amounts of
cash to fund its operations, primarily due to significant cash outlays required
under its annuity reinsurance agreement with Transamerica Occidental Life
Insurance Company (Transamerica). While the Companys management believes
that it has sufficient cash available to support its anticipated cash needs for
the next twelve months, if the Company is not able to reduce its operating
expenses and negotiate the recapture or termination of its agreement with
Transamerica, the Companys cash position will continue to deteriorate. A large portion of the Companys cash and investments is posted as
collateral and therefore cannot be used to fund its operations. The Company is
required to post collateral for the statutory reserves ceded to it by U.S.
based insurers and reinsurers. As of September 30, 2004, after giving effect to
the recapture of the Companys only remaining guaranteed minimum death benefit
(GMDB) and guaranteed minimum income benefit (GMIB) reinsurance agreement
with Connecticut General Life -6-




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##### Table of Contents



Insurance Company (CIGNA), the Company had satisfied the collateral
requirements of all of its ceding companies. A summary of the assets pledged as
collateral and security as of September 30, 2004 and December 31, 2003,
respectively, is as follows: September 30, 2004
    
    December 31, 2003Cash and investments pledged
as security for the letters of credit
    
    $
    47,400,000
    
    
    $
    56,000,000Cash and investments held in trust for
the benefit of ceding companies
    
    $
    29,500,000
    
    
    $
    96,000,000Cash and investments of US subsidiary unavailable
for liquidity or collateral needs of Bermuda subsidiary
    
    $
    51,400,000
    
    
    $
    49,000,000
 The Company is exploring strategic alternatives, including, but not
limited to, a merger, sale, joint venture or other comparable transaction, none
of which may be available to the Company, or which may only be available on
unfavorable terms. There can be no assurance that the Company will be able to
improve its results of operations, financial condition or liquidity. If the
Company is unsuccessful in reducing its operating costs, negotiating the
recapture or termination of the Transamerica agreement, or pursuing a strategic
alternative on favorable terms, the Company likely will continue to experience
negative cash flows and may be required to wind up its operations, sell its
assets, restructure its business, or liquidate. These factors, and the
contingencies described in Note 9, raise substantial doubt about the Companys
ability to continue as a going concern. The accompanying unaudited condensed
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern. 3. Loss per Common Share The following table sets forth the computation of basic and diluted loss
per common share for the three and nine months ended September 30: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Loss before cumulative
effect of a change in
accounting principle
    
    $
    (3,095,705
    )
    
    $
    (3,786,905
    )
    
    $
    (8,325,728
    )
    
    $
    (124,978,162
    )Cumulative effect of a
change in accounting
principle (Note 5)
    
    
    
    
    
    
    
    
    
    
    (365,960
    )
    
    
    Net loss
    
    $
    (3,095,705
    )
    
    $
    (3,786,905
    )
    
    $
    (8,691,688
    )
    
    $
    (124,978,162
    )Basic:Weighted average number
of common shares
outstanding
    
    
    25,945,328
    
    
    
    25,893,861
    
    
    
    25,856,995
    
    
    
    25,848,999Net loss per share
before cumulative effect
of a change in
accounting principle
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.32
    )
    
    $
    (4.83
    )Cumulative effect of a
change in accounting
principle per common
share
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Net loss per common share
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.33
    )
    
    $
    (4.83
    )Diluted:
 -7-




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##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Weighted average number
of common shares
outstanding
    
    
    25,945,328
    
    
    
    25,893,861
    
    
    
    25,856,995
    
    
    
    25,848,999Net loss per share
before cumulative effect
of a change in
accounting principle
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.32
    )
    
    $
    (4.83
    )Cumulative effect of a
change in accounting
principle per common
share
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Net loss per common share
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.33
    )
    
    $
    (4.83
    )
 The calculation of the diluted loss per common share does not include the
incremental number of shares from the assumed exercise of options and warrants,
or the vesting of unvested restricted stock grants. At September 30, 2004,
5,690,032 warrants, 745,702 options, and 434,767 shares of restricted stock
were outstanding. The inclusion of these potential common shares would be
considered antidilutive due to the decrease in loss per common share resulting
from the conversion, exercise, or contingent issuance of these securities. The following table sets forth the pro forma computation of basic and
diluted loss per common share after accounting for stock option grants made
prior to the Companys January 1, 2003 adoption of the prospective method
described in Statement of Financial Accounting Standards (SFAS) No. 148 for
the three month and nine month periods ended September 30, 2004 and 2003: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss  as reported
    
    $
    (3,095,705
    )
    
    $
    (3,786,905
    )
    
    $
    (8,691,688
    )
    
    $
    (124,978,162
    )Pro forma effect on net (loss)
of applying fair value
accounting to pre January 1,
2003 option grants
    
    
    (144,295
    )
    
    
    (345,248
    )
    
    
    (508,773
    )
    
    
    (1,440,849
    )Net loss  pro forma
    
    $
    (3,240,000
    )
    
    $
    (4,132,153
    )
    
    $
    (9,200,461
    )
    
    $
    (126,419,011
    )Loss per common share as
reported:Basic
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.33
    )
    
    $
    (4.83
    )Diluted
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.33
    )
    
    $
    (4.83
    )Pro forma effect on net loss
per common share of applying
fair value accounting to pre
January 1, 2003 option grants:Basic
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )Pro forma loss per common share:Basic
    
    $
    (0.13
    )
    
    $
    (0.16
    )
    
    $
    (0.35
    )
    
    $
    (4.89
    )Diluted
    
    $
    (0.13
    )
    
    $
    (0.16
    )
    
    $
    (0.35
    )
    
    $
    (4.89
    )
 -8-




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##### Table of Contents



4. Business Segments The Company separately tracks financial results of the Companys life and
annuity operations in segments. Each segment is defined by a dominant risk
characteristic inherent in all products in that segment. The life segment
consists of all products where the dominant risk characteristic is mortality
risk. The annuity segment comprises all products where the dominant risk
characteristic is investment risk, including those products that provide
minimum guarantees on variable annuity products. In addition, since January 1,
2001, certain of the Companys modified coinsurance and coinsurance funds
withheld annuity reinsurance agreements have features that constitute embedded
derivatives that require bifurcation and separate accounting under SFAS 133 
Accounting for Derivative Instruments and Hedging Activities. The change in the
fair value of these embedded derivatives is included in the annuity segment. Both the life and annuity segments have specific assets, liabilities,
stockholders equity, revenue, benefits and expenses that apply only to them.
The corporate segment contains all stockholders equity not otherwise deployed
to the life or annuity segment. In addition, the corporate segment includes all
capital gains and losses from sales of securities in the Companys portfolio
and investment income on undeployed invested assets. Operating expenses are
allocated to the segments proportionately based upon the amount of
stockholders equity deployed to the segment. Costs associated with the
Companys efforts to raise capital and pursue other strategic alternatives and
anticipated costs of settling the shareholder class action lawsuit have been
completely allocated to the corporate segment. The following table displays
several key measurements for each of the Companys business segments: Three Months Ended
    
    Life
    
    AnnuitySeptember 30, 2004
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedRevenues
    
    $
    10,620,367
    
    
    $
    5,026,576
    
    
    $
    545,081
    
    
    $
    16,192,024Benefits and Expenses
    
    
    8,016,909
    
    
    
    9,781,795
    
    
    
    1,489,025
    
    
    
    19,287,729Segment Income (Loss)
    
    $
    2,603,458
    
    
    $
    (4,755,219
    )
    
    $
    (943,944
    )
    
    $
    (3,095,705
    )Total Assets
    
    $
    197,754,315
    
    
    $
    642,979,101
    
    
    $
    79,890,539
    
    
    $
    920,623,955
 Three Months Ended
    
    Life
    
    AnnuitySeptember 30, 2003
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedRevenues
    
    $
    30,013,563
    
    
    $
    19,107,200
    
    
    $
    211,124
    
    
    $
    49,331,887Benefits and Expenses
    
    
    29,434,795
    
    
    
    22,548,719
    
    
    
    1,135,278
    
    
    
    53,118,792Segment Income (Loss)
    
    $
    578,768
    
    
    $
    (3,441,519
    )
    
    $
    (924,154
    )
    
    $
    (3,786,905
    )Total Assets
    
    $
    273,604,371
    
    
    $
    730,598,264
    
    
    $
    77,216,650
    
    
    $
    1,081,419,285
 Nine Months Ended
    
    Life
    
    AnnuitySeptember 30, 2004
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedRevenues
    
    $
    35,750,909
    
    
    $
    19,948,919
    
    
    $
    2,499,233
    
    
    $
    58,199,061Benefits and Expenses
    
    
    32,238,504
    
    
    
    24,584,137
    
    
    
    9,702,148
    
    
    
    66,524,789Segment Income
(Loss) before
cumulative effect of
a change in
accounting principle
    
    $
    3,512,405
    
    
    $
    (4,635,218
    )
    
    $
    (7,202,915
    )
    
    $
    (8,325,728
    )Cumulative effect of
a change in
accounting principle
    
    $
    
    
    
    $
    (365,960
    )
    
    $
    
    
    
    $
    (365,960
    )
 -9-




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##### Table of Contents



Nine Months Ended
    
    Life
    
    AnnuitySeptember 30, 2004
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedSegment Income (Loss)
    
    $
    3,512,405
    
    
    $
    (5,001,178
    )
    
    $
    (7,202,915
    )
    
    $
    (8,691,688
    )Total Assets
    
    $
    197,754,315
    
    
    $
    642,979,101
    
    
    $
    79,890,539
    
    
    $
    920,623,955
 Nine Months Ended
    
    Life
    
    AnnuitySeptember 30, 2003
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedRevenues
    
    $
    147,690,979
    
    
    $
    50,977,130
    
    
    $
    7,477,231
    
    
    $
    206,145,340Benefits and Expenses
    
    
    231,596,707
    
    
    
    95,353,065
    
    
    
    4,173,730
    
    
    
    331,123,502Segment (Loss) Income
    
    $
    (83,905,728
    )
    
    $
    (44,375,935
    )
    
    $
    3,303,501
    
    
    $
    (124,978,162
    )Total Assets
    
    $
    273,604,371
    
    
    $
    730,598,264
    
    
    $
    77,216,650
    
    
    $
    1,081,419,285
 5. Accounting Standards Emerging Issues Task Force The Emerging Issues Task Force of the FASB issued EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments in late 2003. It contains two aspects that impact the Company.
Firstly, it provides details regarding disclosures about unrealized losses on
available-for-sale debt and equity securities accounted for under FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. These disclosures were effective in annual financial statements
for fiscal years ended after December 15, 2003 and, accordingly, were provided
in the Companys financial statements for the year ended December 31, 2003.
Secondly, it provides additional guidance for evaluating whether an investment
is other-than-temporarily impaired. This guidance was scheduled to be effective
for reporting periods beginning after June 30, 2004. However, the FASB has
since determined that a delay in the effective date of these provisions was
necessary until it can issue additional guidance on the application of EITF
Issue No. 03-1. The Company will assess whether this guidance will have a
material impact on the Companys results of operations or financial condition
once it is released. Variable Interest Entities In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (as
amended in December 2003, FIN 46), an interpretation of Accounting Research
Bulletin No. 51. FIN 46 expands upon and strengthens existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. A variable
interest entity is any legal structure used for business purposes that either
does not have equity investors with voting rights or has equity investors that
do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to entities created before January 31,
2003 in the first fiscal year or interim period beginning after March 15, 2004.
The effect of the adoption of this new accounting pronouncement did not have a
significant impact on the Companys condensed consolidated financial
statements. AICPA Statement of Position (SOP) 03-1 In July 2003, the Accounting Standards Executive Committee of the American
Institute of CPAs (AICPA) issued Statement of Position (SOP) 03-1,
Accounting and Reporting by Insurance Enterprises -10-




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##### Table of Contents



for Certain Non-Traditional Long-Duration Contracts and for Separate
Accounts. The SOP is effective for financial statements for fiscal years
beginning after December 15, 2003 and provides guidance on accounting and
reporting by insurance enterprises for certain nontraditional long-duration
contracts and for separate accounts. The SOP changed the manner in which life
insurance companies account for certain types of insurance and reinsurance
contracts. The SOP provides guidance for reserving for contracts with guaranteed
minimum death and guaranteed minimum income benefits. The SOP requires
projections of a wide number of future economic scenarios that impact the
present value of premiums earned and claims paid. Based on these projections
and historical experience, a Benefit Ratio is determined. The reserve is then
determined by applying the Benefit Ratio to premiums received and then
deducting claims paid, both with interest. The SOP also provides guidance for
reserving for annuity agreements with more than one potential account balance.
These types of exposures are reserved for based upon the highest contractually
determinable balance for each policyholder, without consideration of surrender
fees. On January 1, 2004, the Company adopted this new accounting standard. At
that time, the Company had a combined GMDB/GMIB contract with CIGNA and an
annuity reinsurance agreement with Transamerica that were both affected by the
adoption of the new SOP. The CIGNA contract has since been recaptured,
although the Transamerica agreement remains in place. The cumulative effect of
the change in accounting principle was a net loss of $365,960. As a result of
adopting the SOP, the amount of reserves carried for the Companys GMDB/GMIB
reinsurance agreement with CIGNA was reduced by $1,878,760, favorably impacting
the Companys reported net income. Also as a result of the SOP, the Company
increased its reserves for interest sensitive contracts liability for its
Transamerica contract by $38,398,730 to $611,486,170, and increased its
deferred policy acquisition costs for that contract by $36,154,010 to
$65,907,500. The impact of the adoption of the SOP on the Companys accounting
for the Transamerica annuity reinsurance agreement was a net charge to income
of $2,244,720. While this new SOP does not change managements view of the
profitability of the Transamerica agreement over the long term, the Company
does anticipate that this new standard will increase the volatility of its
income for this agreement on a quarterly basis. The Companys annuity reinsurance agreement with Transamerica, which is
one of the Companys two remaining annuity reinsurance agreements, contains
minimum interest guarantee provisions that take effect when the policyholder
dies, annuitizes or surrenders their policy. During the nine months ending
September 30, 2004 and 2003, the Company paid approximately $8.1 million and
$13.0 million, respectively, for lifetime minimum interest guarantees. The
following table summarizes key information about the Companys exposure to
minimum interest guarantees. Risk Information
    
    AmountAccount Value
    
    $
    556,780,879Minimum Guarantee
    
    
    70,429,357Market Value Adjustment
    
    
    (5,231,135
    )Interest Sensitive Contracts Liability
    
    $
    621,979,101Weighted Average Attained Age of Policyholders
    
    74 years
 The Companys two remaining annuity reinsurance agreements are modified
coinsurance agreements. As a result, the invested assets funding the Companys
annuity obligations are held and -11-




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##### Table of Contents



managed by the insurer issuing the underlying policies. The assets funding
the Companys annuity obligations under those agreements are described in the
following table: % of TotalType of Security
    
    Market Value
    
    Market ValueInvestment grade convertible bonds
    
    $
    330,483,850
    
    
    
    53.9
    %Investment grade U.S. corporate bonds
    
    
    168,047,687
    
    
    
    27.4
    %U.S. Government bonds
    
    
    49,056,871
    
    
    
    8.0
    %Mortgage-backed securities
    
    
    36,940,135
    
    
    
    6.0
    %Below investment grade U.S. corporate bonds
    
    
    28,756,244
    
    
    
    4.7
    %Total invested assets
    
    
    613,284,787
    
    
    
    100.0
    %Accrued investment income
    
    
    4,916,273Total market value, including accrued
investment income
    
    $
    618,201,060
 6. Related Party Transactions XL Capital Ltd and XL Life Ltd Michael P. Esposito, Jr., a director of the Company, currently serves as
the non-executive Chairman of the Board of XL Capital Ltd (XL Capital). Henry
C.V. Keeling is a director of the Company and currently serves as an officer of
XL Capital and is the Chief Executive Officer of XL Re Ltd, a subsidiary of XL
Capital. Robert M. Lichten, a director of the Company, serves as a director of
a United States-based subsidiary of XL Capital. XL Capital is a major
shareholder of the Company. On December 31, 2002, the Company entered into a transaction with XL Life
Ltd (XL Life), a subsidiary of XL Capital, pursuant to which the Company
transferred certain blocks of life reinsurance business to XL Life. Under the
agreement with XL Life, the Company novated five blocks of life reinsurance
business to XL Life, which in turn entered into a 50% quota share reinsurance
agreement with the Company with respect to four of those blocks of business.
The Company has also historically been a party to various insurance and
reinsurance relationships with XL Life and its affiliates, including an excess
of loss reinsurance policy related to minimum interest guarantee payments under
the Companys annuity reinsurance agreement with Transamerica. The Company and
XL Life and its affiliate agreed to mutually discharge their respective rights
and obligations under all of the parties insurance and reinsurance
relationships in a comprehensive settlement effective as of July 1, 2003. Under
the terms of the comprehensive settlement, the Company paid $6.0 million to XL
Life and was released from any and all obligations to XL Life and its affiliate
under all of the insurance and reinsurance agreements among the parties. As
part of the comprehensive settlement, the Company was obligated to pay an
additional $2.0 million to XL Life if prior to June 30, 2004 the Companys
stock traded above $2.00 per share for a period of 20 out of any 30 consecutive
trading days and the Company raised an aggregate $35.0 million of equity or
debt. Because these two events did not occur prior to June 30, 2004, the
Company was not required to make any such payment to XL Life and is no longer
obligated to do so. -12-




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##### Table of Contents



Indemnification Advances In accordance with the Companys Amended and Restated Bye-laws, the
Company indemnifies its officers and directors to the fullest extent
permissible under Bermuda law. Pursuant to the Bye-laws, the Company will make
advances for payment of the expenses incurred in connection with defending any
action for which indemnification has properly been sought. In connection with a
purported shareholder class action lawsuit (as discussed in Note 9) filed
against the Company and certain of its current and former officers and
directors, the Company had, as of September 30, 2004, made advances of
approximately $140,000 and $53,000 to John F. Burke, its Chief Executive
Officer and a director, and Frederick S. Hammer, the non-executive Chairman of
its Board of Directors, respectively, for payment of their expenses related to
defending this lawsuit. Advances to Mr. Burke during the nine months ended
September 30, 2004 were approximately $37,000. Advances to Mr. Hammer during
the nine months ended September 30, 2004 were approximately $4,000. There were
no advances for legal defense costs paid during the three months ended
September 30, 2004 to either Mr. Burke or Mr. Hammer. 7. Restricted Stock In 2002, the Board of Directors adopted a Restricted Stock Plan under
which it may grant common shares to key employees. The aggregate number of
common shares that may be granted under the Restricted Stock Plan is 1,200,000,
and the Compensation Committee of the Board of Directors administers the plan.
Since the inception of the plan, the Company has issued 976,000 shares of
restricted stock under the plan. As a result of certain employees terminating
their employment with the Company, 227,133 shares of restricted stock were
cancelled in 2003 and 58,267 shares of restricted stock were cancelled in the
first three quarters of 2004. The following table summarizes the vesting
schedule for the shares of restricted stock issued to current employees and
outstanding as of September 30, 2004: EmployeeSharesOutstanding at
    
    Shares Vested
    
    Shares
    
    Shares
    
    SharesSeptember 30,
    
    at September
    
    Vesting in
    
    Vesting in
    
    Vesting inGrant Date
    
    2004
    
    30, 2004
    
    2004
    
    2005
    
    2006February 13, 2002
    
    
    53,100
    
    
    
    
    
    
    
    
    
    
    
    53,100
    
    
    
    September 30, 2002
    
    
    95,000
    
    
    
    63,333
    
    
    
    
    
    
    
    31,667
    
    
    
    February 28, 2003
    
    
    200,000
    
    
    
    66,666
    
    
    
    
    
    
    
    66,667
    
    
    
    66,667June 25, 2003
    
    
    325,000
    
    
    
    108,334
    
    
    
    
    
    
    
    108,333
    
    
    
    108,333Total
    
    
    673,100
    
    
    
    238,333
    
    
    
    
    
    
    
    259,767
    
    
    
    175,000
 The fair value as determined at the date of grant of the restricted stock
awards that were outstanding on September 30, 2004 was approximately $1,850,000
and is reflected in the Companys balance sheet as common shares and additional
paid-in-capital. The fair value of the outstanding restricted stock is being
amortized on a straight-line basis over the three-year vesting period. Based on
the vesting of the restricted stock, and offset partially by cancellations of
restricted stock, approximately $216,000 was expensed in the nine months ended
September 30, 2004. The unamortized balance of outstanding restricted stock is
reflected in the balance sheet as a component of unamortized stock-based
compensation and was approximately $600,000 at September 30, 2004. -13-




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##### Table of Contents



8. Vulnerability Due to Concentrations The Company has a significant deferred annuity reinsurance agreement with
Transamerica. Due to the size of this agreement, there is a material
concentration of net investment income, interest credited to interest sensitive
products, funds withheld at interest, deferred policy acquisition costs and
interest sensitive contract liabilities. At September 30, 2004 and December 31, 2003, approximately $537 million
and $604 million, respectively, of the Companys funds withheld at interest
receivable and $560 million and $602 million, respectively, of the Companys
interest sensitive contracts liability related to its reinsurance agreement
with Transamerica. Also, at September 30, 2004 and December 31, 2003,
approximately $63 million and $33 million, respectively, of the deferred policy
acquisition costs asset related to its reinsurance agreement with Transamerica.
The reinsurance agreement is a modified coinsurance retrocessional agreement
covering policies issued by Indianapolis Life Insurance Company (Indianapolis
Life). Transamericas agreement with Indianapolis Life is also structured on a
modified coinsurance basis, thus Indianapolis Life maintains ownership and
control of the assets supporting the Companys obligations to Transamerica. At
September 30, 2004, Transamerica had financial strength or claims paying
ratings of A+, AA, Aa3 and AA+ (with a negative outlook) from A.M. Best,
Standard & Poors, Moodys Ratings and Fitch Ratings, respectively.
Indianapolis Life had financial strength or claims paying ratings of A by A.M.
Best, A3 by Moodys Ratings, and A+ from Standard & Poors at September 30,
2004. During the nine months ended September 30, 2004 and 2003, the Company
recorded approximately $8.1 million and $13.0 million, respectively, of minimum
interest guarantee payments in connection with the Transamerica annuity
reinsurance agreement. The amount of deferred acquisition costs recorded as an
asset on the Companys balance sheet related to the Transamerica agreement is
based on a series of assumptions related to the investment performance of the
assets supporting its liabilities under the agreement, as well as future lapse
rates for the underlying policies. These assumed lapse rates include
assumptions regarding future full surrenders, partial withdrawals,
annuitizations and policyholder deaths. These assumptions have a direct impact
on the amount of expected future minimum interest guarantee payments and on the
Companys estimated expected gross profits on the agreement and, therefore, on
the recoverability of the deferred acquisition costs carried on its balance
sheet. The Company believes that the assumptions related to investment
performance and lapse rates are reasonable. However, there may be differences
between the Companys assumptions and the actual events and circumstances that
occur in the future, and those differences could be material. If actual results
are materially different from the Companys assumptions, the Company could be
required to write off additional deferred acquisition costs, which would have a
significant adverse impact on the Companys net income in future periods. As a result of the recapture or termination of many of the Companys
reinsurance agreements, certain of the Companys remaining agreements, which
previously did not represent a significant percentage of the Companys
business, have become more prominent. For the three and nine months ended
September 30, 2004, the Company recorded income of approximately $2.1 million
and $3.3 million, respectively, related to its life reinsurance agreement with
ERC Life. Premiums associated with this agreement for the three and nine months
ended September 30, 2004 were approximately $4.5 million and $13.4 million,
respectively. For the three and nine months ended September 30, 2004, the
Company recorded losses of approximately $0.7 million and $1.2 million,
respectively, related to its life reinsurance agreement with Fidelity &
Guarantee Life. Premiums associated with this agreement for the three and nine
months ended September 30, 2004 were approximately $0.5 million and $6.6
million, respectively. For the three and nine months ended September 30, 2004,
the Company recorded losses of approximately -14-




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##### Table of Contents



$0.7 million and $2.6 million, respectively, related to its life
reinsurance agreement with National States Life. Premiums associated with this
agreement for the three and nine months ended September 30, 2004 were
approximately $2.8 million and $8.3 million, respectively. The Companys United States domiciled operating subsidiary, Annuity and
Life Reassurance America, was purchased from a subsidiary of SwissRe on June 1,
2000. Immediately prior to the acquisition, 100% of Annuity and Life
Reassurance Americas life and annuity policies were reinsured with Reassure
America Life Insurance Company (Reassure), a subsidiary of SwissRe, under an
indemnity co-insurance agreement. Following the acquisition, the policies
continue to be 100% reinsured with Reassure; however, Annuity and Life
Reassurance America remains the primary carrier. Reassure is required to
indemnify Annuity and Life Reassurance America for any losses associated with
these policies. Reserves ceded under the reinsurance agreement with Reassure
amounted to approximately $82.4 million and $88.2 million at September 30, 2004
and December 31, 2003, respectively. As of September 30, 2004, Reassure was
rated A+ (g) (superior) by A.M. Best. 9. Contingencies On July 28, 2004, CIGNA, the ceding company under the Companys only
remaining GMDB/GMIB reinsurance agreement, drew $11 million on a letter of
credit that had been issued for CIGNAs benefit. As of June 30, 2004, CIGNA was
seeking $49 million of collateral in addition to the $11 million of collateral
the Company had previously provided in the form of a fully collateralized
letter of credit. The Company did not agree that the aggregate $60 million
collateral requirement asserted by CIGNA was required to be posted and did not
post any additional collateral for this agreement. On October 26, 2004,
Annuity and Life Reassurance, Ltd., a wholly owned subsidiary of the Company,
entered into a Commutation and Release Agreement with CIGNA providing for the
recapture by CIGNA of the GMDB/GMIB agreement. The Commutation and Release
Agreement also provides for a mutual release by each of the parties of all
past, present and future claims under the GMDB/GMIB agreement, including all
obligations for claims and premiums that had accrued under the agreement since
July 1, 2004. The parties also agreed to a mutual release of all claims under
the letter of credit, and that CIGNA will retain the $11 million it previously
drew under the letter of credit. In addition, the Company issued CIGNA a
warrant dated as of September 30, 2004 to acquire one million of its common
shares at an exercise price of $1.00 per share. The warrant expires on
September 30, 2014. After giving effect to the Commutation and Release Agreement with CIGNA,
as of September 30, 2004, the Company had satisfied the collateral requirements
of all of its ceding companies. On and since December 4, 2002, certain of the Companys shareholders,
seeking to act as class representatives, filed lawsuits against the Company and
certain of its present and former officers and directors in the United States
District Court for the District of Connecticut seeking unspecified monetary
damages. The plaintiffs claim that the defendants violated certain provisions
of the United States securities laws by making various alleged material
misstatements and omissions in public filings and press releases. The
plaintiffs filed a single consolidated amended complaint in July 2003, adding
as defendants XL Capital Ltd and two additional directors. On October 1, 2003,
the Company answered the amended and consolidated complaint and denied
liability on the claims the plaintiffs have asserted. In January 2004, the
court ordered that a related action that the plaintiffs filed against the KPMG
LLP (United States) and KPMG in Bermuda be consolidated with the action against
the Company. In February 2004, the court denied certain individual defendants
motions to dismiss the action. In March 2004, the court denied motions to
dismiss filed by certain other individual defendants and XL Capital Ltd. Also
in March 2004, KPMG LLP (United States) and KPMG in Bermuda filed motions to
dismiss the action. The court has not yet ruled on KPMG LLPs (United States),
KPMG in Bermudas and one individual -15-




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defendants respective motions to dismiss. The individual defendants
motion to dismiss will become moot if the settlement discussed below is
consummated. On July 20, 2004, the Company announced that it had reached an agreement
in principle with the plaintiffs, subject to full documentation by the parties
to the settlement, notice to the class, court approval and other steps required
to consummate a class action settlement, to settle the lawsuit. In August 2004,
the parties to the settlement executed and filed a Stipulation setting forth
their settlement agreement, and sought court approval. The parties to the
settlement are the plaintiffs and the class (which consists, subject to certain
exclusions, of persons who purchased the Companys common shares between March
15, 2000 and November 19, 2002), the Company, all individual defendants and XL
Capital, Ltd. The settlement is without any admission of liability or
wrongdoing. The Company, along with its directors and officers liability
carrier, and XL Capital, Ltd. have agreed to pay an aggregate of $16.5 million.
The Companys share of the settlement is $2.5 million in cash, which it paid
into escrow in August 2004, and an additional $2.5 million in common shares
(subject to a cap of 19.9% of the Companys outstanding shares), although the
Company has reserved the right to elect to pay this portion in cash. In October 2004, the court ordered that notice of the settlement be given
to class members, set deadlines for class members to exclude themselves from
the class or file objections to the settlement, and scheduled a Settlement
Fairness Hearing for January 2005. The settlement cannot be consummated until
and unless the court approves it. On October 8, 2003, the Company was served with a statutory demand for
$640,000 from Imagine Group Holdings Limited (Imagine), a Bermuda based
reinsurance company, which was subsequently withdrawn. Imagine has since
instituted a civil proceeding in the Bermuda Supreme Court against the Company,
alleging that the Company is obligated to reimburse it for $640,000 of expenses
incurred by Imagine in connection with a proposed December 2002 capital raising
transaction that was not consummated. On March 11, 2004, the Company filed an
amended defense with the court to which Imagine responded on April 26, 2004.
The Company does not believe that Imagine is entitled to reimbursement of these
expenses under the applicable agreement and is defending itself against
Imagines claims. As of June 30, 2004, the Company was involved in arbitration proceedings
with Transamerica. The arbitration related to Transamericas allegation that
the Company, as of October 31, 2003, owed $17.6 million under its annuity
reinsurance agreement with Transamerica. On February 3, 2004, the Company paid
Transamerica $12.6 million representing the net amount the Company believed was
due under the reinsurance agreement as of October 31, 2003 after deducting $5.0
million for investment related expenses that the Company believes was owed to
it by Transamerica. Transamerica pursued arbitration with the Company,
asserting that the $5.0 million offset was not justified and that it owed
Transamerica that amount and interest on the amounts that Transamerica
previously alleged were due.
In addition, through October 31, 2003, the Company had received monthly
settlement reports from Transamerica prepared on a basis that the Company
believes conformed with the reinsurance agreement between the parties. For the
period subsequent to October 31, 2003, the Company had only received settlement
reports from Transamerica on a basis that Transamerica alleged was appropriate
but which the Company believed was not consistent with the reinsurance
agreement. The principal difference related to how realized gains and losses
related to the invested assets supporting the annuity obligations were settled
between the parties. Transamerica had not provided the Company with realized
gain and loss information on the basis the Company believed was appropriate. As
a result, in preparing its financial statements the Company adjusted the
amounts reported to it by Transamerica in the monthly settlement reports for
periods subsequent to October 31, 2003 to reflect what the Company believed was
the appropriate treatment of realized capital gains and losses. -16-




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On July 2, 2004, the Company and Transamerica agreed to settle all
disputes relating to the arbitration proceedings between the two parties.
Pursuant to the terms of the settlement agreement, Transamerica and the Company
agreed to calculate monthly settlements under their reinsurance agreement in a
manner the Company believes is consistent with the original terms of the
agreement. Transamerica also agreed to the Companys $5.0 million offset of
amounts owed to Transamerica at October 31, 2003. On July 8, 2004, the Company
paid Transamerica approximately $8.7 million, representing amounts due under
the reinsurance agreement as of April 30, 2004. On August 6, 2004, the Company
paid Transamerica approximately $2.6 million, representing amounts due under
the reinsurance agreement as of May 31, 2004. Although the Company and
Transamerica have agreed to a method for computing future monthly settlements
under the reinsurance agreement, the potential for significant net monthly
settlement payments in the future from the Company to Transamerica remains. As
of September 30, 2004, approximately $4.6 million was outstanding to
Transamerica representing amounts due under the reinsurance agreement for the
period of June 2004 through August 2004. The United States Internal Revenue Service (IRS) is currently conducting
an audit of the Companys United States based subsidiaries. Those companies
currently have a significant tax based net operating loss carryforward. In
addition, the IRS has requested certain information and documents related to
the Companys Bermuda based operations. While the Companys United States based
subsidiaries have complied with the IRS requests for information, both the
Company and its Bermuda operating subsidiary have declined to supply the IRS
with the information it has requested based on the IRS lack of jurisdiction
over those entities. If the IRS were to determine that the Company or its
Bermuda operating subsidiary were engaged in business in the United States,
those entities could be subject to United States tax at regular corporate rates
on their taxable income that is attributable to a permanent establishment, if
any, in the United States plus an additional 30% branch profits tax on such
income remaining after the regular tax. Such taxes, if levied, could have an
adverse effect on the Companys business. 10. Stock Warrants On June 30, 2003, the Company issued warrants to purchase an aggregate one
million common shares of the Company at an exercise price of $1.25 per share to
Hartford Life, the ceding company under the Companys then largest guaranteed
minimum death benefit reinsurance agreement. The warrants were issued in
connection with the recapture of that agreement and expire on June 30, 2013,
and are currently exercisable. At June 30, 2003, the fair value of these
warrants, using a Black-Scholes pricing model, was estimated at $1,250,000,
which was included in a charge associated with the recapture that the Company
recorded during the second quarter of 2003 as a component of Claim and policy
benefits expense. The expense of issuing these warrants is presented as Stock
warrants in the stockholders equity section of the Companys Condensed
Consolidated Balance Sheet as at September 30, 2004. In connection with the recapture of the Companys GMDB/GMIB reinsurance
agreement with CIGNA on October 26, 2004, the Company issued CIGNA a warrant
dated as of September 30, 2004 to acquire one million common shares of the
Company at an exercise price of $1.00 per share. The warrant expires on
September 30, 2014 and is currently exercisable. At September 30, 2004, the
fair value of this warrant, using a Black-Scholes pricing model, was estimated
at $100,000, which was included in a charge associated with the recapture that
the Company recorded during the third quarter of 2004 as a component of Claim
and policy benefits expense. The expense of issuing this warrant is presented
as Stock warrants in the stockholders equity section of the Companys
Condensed Consolidated Balance Sheet as at September 30, 2004. -17-




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations General Annuity and Life Re (Holdings), Ltd. was incorporated on December 2, 1997
under the laws of Bermuda. We provide annuity and life reinsurance to select
insurers and reinsurers through our wholly-owned subsidiaries: Annuity and Life
Reassurance, Ltd., which is licensed under the insurance laws of Bermuda as a
long term insurer; and Annuity and Life Re America, Inc., an insurance holding
company based in the United States, and its subsidiary, Annuity and Life
Reassurance America, Inc., a life insurance company authorized to conduct
business in over 40 states of the United States and the District of Columbia.
We acquired Annuity and Life Reassurance America on June 1, 2000. For more
information regarding the business and operations of our company and its
subsidiaries, please see our Annual Report on Form 10-K for the year ended
December 31, 2003, as amended. Our company has encountered significant difficulties during the last three
years. In addition to reporting significant operating losses for those years,
we have reduced our operations significantly through the novation, termination
and recapture of many of our life and annuity reinsurance agreements. We plan
to continue to receive premiums and pay claims under our remaining reinsurance
treaties; however, we are not currently underwriting any new treaties or
accepting any new business from our existing treaties. In addition, we
continue to use substantial amounts of cash to fund our operations, primarily
due to the significant cash outlays required under our annuity reinsurance
agreement with Transamerica Occidental Life Insurance Company (Transamerica).
While we believe that we have sufficient cash available to support our
anticipated cash needs for the next twelve months, if we are not able to reduce
our operating expenses and negotiate the recapture or termination of our
agreement with Transamerica, our cash position will continue to deteriorate. A large portion of our cash and investments is posted as collateral and
therefore cannot be used to fund our operations. We are required to post
collateral for the statutory reserves ceded to us by U.S. based insurers and
reinsurers. During 2002, 2003, and a portion of 2004, we did not have
sufficient available cash and investments to post as collateral, but were able
to negotiate the recapture or termination of most of our reinsurance agreements
during 2003. As of September 30, 2004, after giving effect to the recapture of
our only remaining guaranteed minimum death benefit (GMDB) and guaranteed
minimum income benefit (GMIB) reinsurance agreement with Connecticut General
Life Insurance Company (CIGNA), we had satisfied the collateral requirements
of all of our ceding companies. (See Note 9 to our unaudited condensed
consolidated financial statements.) The New York Stock Exchange suspended trading in our common shares prior
to the market opening on Friday July 30, 2004. The NYSEs action was taken in
view of the fact we had again fallen below the NYSEs continued listing
standards, as the average closing price of our common shares had been less than
$1.00 over a consecutive 30-trading-day period. We were previously below this
standard from April through October 2003. On August 17, 2004, our common shares
began trading on the OTC Bulletin Board under the ticker symbol ANNRF.OB. We
have submitted an application for the listing of our common shares on the
NASDAQ SmallCap Market; however the NASDAQ has raised questions regarding our
qualification for listing that we may be unable to address satisfactorily. We
cannot assure you that we will be able to list our common shares for trading on
the NASDAQ SmallCap Market, or on any other national exchange or automated
quotation system, which will adversely affect the public market for and
liquidity of our common shares, and may adversely affect any capital raising or
other strategic transactions we may choose to pursue in the future.




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As of June 30, 2004, we were involved in arbitration proceedings with
Transamerica related to Transamericas allegation that, as of October 31, 2003,
we owed $17.6 million under our annuity reinsurance agreement with
Transamerica. On February 3, 2004, we paid Transamerica $12.6 million
representing the net amount we believed was due under the reinsurance agreement
as of October 31, 2003 after deducting $5.0 million for investment related
expenses that we believed was owed to us by Transamerica. Transamerica pursued
arbitration with us, asserting that the $5.0 million offset was not justified
and that we owed Transamerica that amount and interest on the amounts that
Transamerica previously alleged were due. In addition, through October 31,
2003, we had received monthly settlement reports from Transamerica prepared on
a basis that we believe conformed with the reinsurance agreement between us.
For the period subsequent to October 31, 2003, we have only received settlement
reports from Transamerica on a basis that Transamerica alleged was appropriate,
but which we believed was not consistent with the reinsurance agreement. The
principal difference was how realized gains and losses related to the invested
assets supporting the annuity obligations were settled between us. Transamerica
had not provided us with realized gain and loss information on the basis we
believed was appropriate. As a result, in preparing our financial statements,
we had adjusted the amounts reported to us by Transamerica in the monthly
settlement reports for periods subsequent to October 31, 2003 to reflect what
we believed was the appropriate treatment of realized capital gains and losses. On July 2, 2004, Transamerica agreed to settle all disputes relating to
the arbitration proceedings between us. Pursuant to the terms of the settlement
agreement, Transamerica agreed to calculate monthly settlements under the
reinsurance agreement in a manner we believe is consistent with the original
terms of the agreement. Transamerica also agreed to our $5.0 million offset of
amounts owed to Transamerica at October 31, 2003. On July 8, 2004, we paid
Transamerica approximately $8.7 million, representing amounts due under the
reinsurance agreement as of April 30, 2004. On August 6, 2004, we paid
Transamerica approximately $2.6 million, representing amounts due under the
reinsurance agreement as of May 31, 2004. Although Transamerica has agreed
with us to a method for computing future monthly settlements under the
reinsurance agreement, the potential for significant monthly settlement
payments from us to Transamerica in future periods remains. As of September 30,
2004, approximately $4.6 million was outstanding to Transamerica representing
amounts due under the reinsurance agreement for the period of June 2004 through
August 2004. We have been attempting to engage Transamerica, and ultimately
Indianapolis Life Insurance Company (Indianapolis Life), the primary
insurance company under the Transamerica agreement, in discussions aimed at
improving investment returns from the convertible bond portfolio supporting the
liabilities under this agreement and potentially redesigning the reinsured
product to reduce the minimum interest guarantee exposure to us. Although
certain changes have been implemented in the composition of the investment
portfolio, if we are not successful in convincing Transamerica and Indianapolis
Life to restructure the portfolio further and/or to redesign the product, we
may incur additional losses in the future. We also intend to seek negotiations
with Transamerica regarding the recapture or termination of the agreement,
although there can be no assurance that the agreement can be terminated or
recaptured on terms favorable to us or at all. Our remaining life reinsurance agreements continue to be reinsurance of
ordinary life insurance, primarily for mortality risk. Profitability of our
life reinsurance line depends in large part on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a long time
horizon, they are less predictable over shorter periods and are subject to
fluctuation from quarter to quarter and year to year, particularly given the
relatively small size of our in force business as a result of recaptures and
terminations in previous periods. Significant fluctuations from period to
period could adversely affect the results of our operations, as occurred in
2003 and 2002. At September 30, 2004 and -2-




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December 31, 2003, the total face amount of our life insurance in force
was approximately $15.3 billion and $17.5 billion, respectively. Our remaining annuity products are reinsurance of general account fixed
deferred annuities. Profitability of the annuity reinsurance line is primarily
dependent on earning a spread between the interest rate earned on the assets
under management and the interest rate credited to the policyholder. This
product line is market and interest rate sensitive. Fluctuations in the general
level of interest rates, fixed income markets, and equity markets from period
to period may cause fluctuations in the results of our operations. The combined
effects of poor market performance and excessive surrender rates can adversely
impact this product line, such as occurred during the last three fiscal years.
At September 30, 2004 and December 31, 2003, our liability for annuity
reinsurance agreements amounted to approximately $622 million and $671 million,
respectively. Because our financial results are heavily dependent on three life
reinsurance agreements and two annuity reinsurance agreements, large
fluctuations in any one of these contracts could cause volatility in our
overall financial results. On January 1, 2004, we adopted AICPA Statement of Position (SOP) 03-1. The
SOP requires us to record the largest contractually determinable amount payable
to the policyholder of each underlying policy comprising our Interest sensitive
contract liabilities as our reserve for those policies, rather than simply
recording reserves based solely on the policyholder account values. The
computation of amounts due policyholders under our reinsurance contract with
Transamerica includes a market value adjustment and, to the extent the market
value adjustment would require payments to policyholders in excess of the
minimum guarantee amount under the policies, the reserve required under the SOP
is directly influenced by changes in the value of the underlying assets. The
SOP modified the accounting for liabilities recorded in connection with our
reinsurance contracts, but did not modify the accounting for the assets
supporting the liabilities. As a result, changes in our reserve levels
resulting from underlying asset value changes will not be offset with
corresponding changes in our Funds withheld asset values. This mismatch will
cause volatility in net income on a quarterly basis, but we believe that it
will have no effect on the underlying profitability of the Transamerica
agreement over the long term. To the extent that the minimum guarantee payable
under the policy exceeds the payment that would be required as a result of the
market value adjustment, the reserves required under the SOP would be based
upon the minimum guarantee and the mismatch between liabilities and assets is
less significant. If we computed our reserves as if the amounts payable to the
policyholders under the Transamerica contract exceeded the minimum guarantee
amount, a 1% increase (decrease) in underlying asset values would cause a $5
million charge (benefit) to net income. In addition to the increased net income volatility the new SOP will cause,
it also adversely impacts our tangible book value, which is GAAP book value
less deferred acquisition costs. Upon its adoption, the SOP required an
increase in our liabilities of approximately $36.6 million and an increase in
deferred acquisition costs of approximately $36.2 million. While the net impact
on our GAAP book value was minor, our tangible book value was reduced by $1.38
per share as of January 1, 2004, primarily because the increase in our deferred
acquisition costs was excluded from the tangible book value computation, while
the increase in our liabilities was not. If the SOP were applied as of December
31, 2003, our tangible book value would have been $1.12 per share, as opposed
to $2.50 per share. At September 30, 2004, our tangible book value was $1.15
per share. Our GAAP book value at September 30, 2004 was $4.78 per share, as
compared to $5.11 per share at December 31, 2003. We are exploring strategic alternatives, including, but not limited to, a
merger, sale, joint venture or other comparable transaction, none of which may
be available to us, or which may only be available on -3-




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unfavorable terms. There can be no assurance that we will be able to
improve our results of operations, financial condition or liquidity. If we are
unsuccessful in reducing our operating costs, negotiating the recapture or
termination of the Transamerica agreement, or pursuing a strategic alternative
on favorable terms, we likely will continue to experience negative cash flows
and may be required to wind up our operations, sell our assets, restructure our
business, or liquidate. These factors, and the contingencies described in Note
9 to our condensed consolidated financial statements, raise substantial doubt
about our ability to continue as a going concern. The accompanying unaudited
condensed consolidated financial statements do not include any adjustments that
might be necessary should we be unable to continue as a going concern. For a
more detailed discussion of certain factors that could materially and adversely
affect our financial condition and results of operations, please see 
Forward-Looking and Cautionary Statements. Critical Accounting Policies Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require our management to make estimates and assumptions that affect the
amounts of our assets, liabilities, stockholders equity and net income. We
believe that the following critical accounting policies, as well as those set
forth in our Form 10-K for the year ended December 31, 2003, as amended, detail
the more significant estimates and assumptions used in the preparation of our
consolidated financial statements. Deferred Policy Acquisition Costs.The costs of acquiring new business,
principally allowances, which vary with and are primarily related to the
production of new business, are deferred. For traditional life and annuity
policies with life contingencies, deferred policy acquisition costs are charged
to expense using assumptions consistent with those used in computing policy
reserves. Assumptions as to anticipated premiums are estimated at the date of
the policy issuance, or the effective date of the most recent premium rate
increase, and are consistently applied during the life of the contracts.
Deviations from estimated experience are reflected in earnings in the period
such deviations occur. For these contracts, the amortization periods are
generally the estimated life of the policies. We terminated or recaptured
several of our reinsurance agreements during 2003, which caused us to incur
significant deferred acquisition cost write-downs. While we intend to seek
negotiations with Transamerica regarding the recapture or termination of our
annuity reinsurance agreement, we believe that other termination or recapture
activity will be limited in the future. We will, however, consider transactions
that are otherwise economically beneficial to us, which may require write downs
of deferred acquisition costs. In preparing our financial statements, we make assumptions about our
proportionate share of future investment income that will be earned from the
investment of premiums received from underlying policyholders by our ceding
companies and about future rates of lapse of policies underlying our annuity
reinsurance contracts. These assumptions have a direct impact on the amount of
expected future lifetime minimum interest guarantee (LMIG) payments and our
estimated expected gross profits on these annuity reinsurance contracts and,
therefore, on the recoverability of the deferred acquisition costs carried on
our balance sheet for these contracts. While these estimates are based upon
historical results and information provided to us by our cedents, actual
results could differ (and, in the past, have differed) materially from our
estimates for a variety of reasons, including the failure of our ceding
companies to report timely information regarding material developments under
our reinsurance agreements. Such differences could be material to our future
results. If our assumptions for investment returns prove to be inaccurate, or
if lapse rates exceed our assumptions, we may be required to make additional
LMIG payments and record additional charges, which would adversely impact our
earnings. -4-




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In determining the level of our deferred acquisition costs related to our
Transamerica contract at September 30, 2004, we assumed future total returns on
convertible bonds of 8.01% for 2004 and each year thereafter. Additionally, we
assumed future average total returns of 6.24% for 2004 and each year thereafter
for the other asset classes in which policyholder premiums have been invested.
We also assumed a future lapse rate for the underlying policies of
approximately 21% in 2004, 18% in 2005 and annual rates of 12% to 17%
thereafter. These assumed lapse rates include assumptions regarding full
surrenders, partial withdrawals, annuitizations and policyholder deaths.
Consistent with our accounting policies, we review the key assumptions used in
determining the carrying value of our deferred acquisition cost each quarter. A
change in these assumptions could result in additional charges that would
adversely impact future earnings. If our assumptions for total returns prove to
be inaccurate, or if lapse rates exceed our assumptions, we may be required to
make additional LMIG payments and record additional write downs of deferred
acquisition costs, which would adversely impact future earnings. Assuming no
change in lapse assumptions, the net impact of a 100 basis point decrease in
our total return assumptions in all future years would have required an
additional write down of deferred acquisition costs of approximately
$17,300,000 as of September 30, 2004. Assuming no change in our total return
assumptions, a 1% increase in our lapse assumptions on our Transamerica annuity
agreement in all future years would have required an additional write down of
deferred acquisition costs of approximately $4,500,000 as of September 30,
2004. Embedded Derivatives.We have concluded that there is an embedded
derivative within the Funds withheld at interest receivable related to one of
our annuity reinsurance contracts written on a modified coinsurance basis that
requires bifurcation and separate accounting under Statement of Financial
Accounting Standards No. 133  Accounting for Derivative Instruments and
Hedging Activities. This embedded derivative is similar to a total return swap
arrangement on the underlying assets held by our ceding company under the
agreement. The fair value of the embedded derivative is classified as part of
our Funds withheld asset on our balance sheet. We have developed a cash flow
model with the assistance of outside advisors to arrive at an estimate of the
fair value of this total return swap that uses various assumptions regarding
future cash flows under the affected annuity reinsurance agreement. The fair
value of the embedded derivative is influenced by changes in credit risk,
changes in expected future cash flows under the annuity reinsurance agreement
and interest rates. The change in fair value of the embedded derivative is
recorded in our statement of operations as Net change in fair value of embedded
derivatives, which is a non-cash item. The change in fair value of the embedded derivative also impacts the
emergence of expected gross profits for purposes of amortizing deferred
acquisition costs associated with the contract. The application of this
accounting policy has increased the volatility of our reported earnings. While
we have made an estimate of the fair value of the embedded derivative using a
model that we believe to be appropriate and based upon reasonable assumptions,
the assumptions used are subjective and may require adjustment in the future.
In addition, as industry standards for estimating the fair value of embedded
derivatives develop, it is possible that we may modify our methodology. Changes
in our assumptions and industry standards could have a significant impact on
the fair value of the embedded derivative and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives contained in our
Transamerica annuity reinsurance agreement because we acquired this agreement
prior to the transition date elected by us under SFAS 133, as amended. Because
of the nature of the assets underlying our Transamerica agreement, which were
roughly 60% convertible bonds at September 30, 2004, the bifurcation and
separate accounting for the embedded derivatives contained in that contract
could add significant volatility to our reported results. Recognition of Revenues and Expenses.Reinsurance premium revenues from
life products with mortality risk are recognized when due from the
policyholders. Premiums from universal life and -5-




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investment-type contracts are recorded on our balance sheet as interest
sensitive contracts liability. Revenues from these investment-type contracts
consist of income earned on the assets and amounts assessed during the period
against policyholders account balances for mortality charges, policy
administration charges and surrender charges. Items that are charged to expense
represent interest credited to policyholder accounts and other benefits in
excess of related policyholders account balances, including LMIG payments. We
make estimates at the end of each reporting period regarding premiums and
benefits for ceding companies who do not report such information in a timely
manner. These estimates can have a significant effect on the amounts we report
in our financial statements. Reserves for Policy Benefits, Including Claims Incurred but not Reported
(IBNR) and Interest Sensitive Contracts Liability.The development of reserves
for policy benefits and for claims incurred but not reported for our life
reinsurance contracts requires us to make estimates and assumptions regarding
mortality, lapse, persistency, expense and investment experience. Such
estimates are primarily based on historical experience and information provided
by ceding companies. Actual results could differ, and in the past have
differed, materially from those estimates. We monitor actual experience, and
where circumstances warrant, will revise our assumptions and the related
reserve estimates. Historically, we reinsured certain minimum guarantees associated with
variable annuity agreements through our combined GMDB/GMIB agreement with
CIGNA. Our obligations for the CIGNA GMDB/GMIB agreement were reflected on our
balance sheet as Reserves for future policy benefits. This agreement was
recaptured by CIGNA; and under the terms of the recapture, the parties agreed
to a mutual release of all past, present and future claims under the GMDB/GMIB
agreement, including all obligations for claims and premiums that had accrued
under the agreement since July 1, 2004. Our obligations arising from our fixed
annuity reinsurance agreements come from our reinsurance agreement with
Transamerica and a second smaller annuity reinsurance agreement. Our
obligations for these fixed annuity contracts are reflected on our balance
sheet as Interest sensitive contracts liability. On January 1, 2004, we
adopted the AICPA Statement of Position (SOP) 03-1 to account for our combined
GMDB/GMIB agreement with CIGNA and our annuity reinsurance agreement with
Transamerica. AICPA Statement of Position (SOP) 03-1.In July 2003, the Accounting
Standards Executive Committee of the AICPA issued Statement of Position (SOP)
03-1, Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Contracts and for Separate Accounts, which
provides guidance on accounting and reporting by insurance enterprises for
certain nontraditional long-duration contracts and for separate accounts. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. We adopted the SOP as of January 1, 2004. On January 1, 2004, we had a combined GMDB/GMIB contract with CIGNA and an
annuity reinsurance agreement with Transamerica, both of which were affected by
the adoption of this new SOP. The contract with CIGNA has since been
recaptured, although the Transamerica agreement remains in place. The SOP
provides guidance for reserving for contracts with guaranteed minimum death and
guaranteed minimum income benefits. The SOP requires projections of a wide
number of future economic scenarios that impact the present value of premiums
earned and claims paid. Based on these projections and historical experience, a
Benefit Ratio is determined. The reserve is then determined by applying the
Benefit Ratio to premiums received and then deducting claims paid, both with
interest. The SOP also provides guidance for reserving for annuity agreements
with more than one potential account balance. These types of exposures are
reserved for based upon the highest contractually determinable balance for each
policyholder, without consideration of surrender fees. Upon adoption of the SOP
on January 1, 2004, we recorded a one-time transition adjustment to our carried
reserves for interest sensitive contracts liability and deferred acquisition
costs asset for the Transamerica annuity reinsurance -6-




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agreement, and future policy benefits for the CIGNA contract. The impact
of our adoption of the SOP is discussed below in Operating Results. While
this new SOP does not change managements view of the profitability of the
Transamerica agreement over the long term, we do anticipate that this new
standard will increase the volatility of our income for this agreement on a
quarterly basis. If actual events differ significantly from the underlying estimates and
assumptions used by us in the application of any of the aforementioned
accounting policies, there could be a material adverse effect on our results of
operations and financial condition. Operating Results Net Loss.For the three months ended September 30, 2004, we had a net
loss of $(3,095,705), or $(0.12) per basic and fully diluted common share, as
compared with a net loss of $(3,786,905), or $(0.15) per basic and fully
diluted common share, for the three months ended September 30, 2003. For the
nine months ended September 30, 2004, we had a net loss, after the cumulative
effect of a change in accounting principle, of $(8,691,688), or $(0.33) per
basic and fully diluted common share, as compared to net loss of
$(124,978,162), or $(4.83) per basic and fully diluted common share, for the
nine months ended September 30, 2003. As discussed elsewhere in this report, on October 26, 2004, CIGNA agreed
to recapture its GMDB/GMIB agreement with us. The parties agreed to a mutual
release of all past, present and future claims under the GMDB/GMIB agreement,
including all obligations for claims and premiums that had accrued under the
agreement since July 1, 2004. The parties also agreed to a mutual release of
all claims under the letter of credit that we had posted as collateral under
the GMDB/GMIB agreement, and that CIGNA will retain the $11,000,000 it
previously drew under the letter of credit. In addition, on October 26, 2004,
we issued CIGNA a warrant dated as of September 30, 2004 to acquire one million
of our common shares at an exercise price of $1.00 per share. The warrant
expires on September 30, 2014. The impact of the recapture in the third quarter
of 2004, net of reserves released for GMDB and GMIB risks, was a charge of
approximately $2,421,000. Our net loss during the three months ended September 30, 2004 was
primarily due to the $2,421,000 charge for the settlement of the recapture
agreement with CIGNA as well as a loss of approximately $2,059,000 from our
annuity reinsurance agreement with Transamerica. This agreement is our largest
annuity reinsurance agreement, and represented approximately $537 million, or
approximately 90%, of our Funds withheld at interest receivable as of September
30, 2004. A loss of approximately $699,000 from our second largest life
reinsurance agreement and a loss of approximately $338,000 from our second
largest annuity reinsurance agreement were also incurred during the period.
These losses were partially offset by income of approximately $2,087,000 on our
life reinsurance agreement with ERC. In the nine months ended September 30, 2004, our loss before cumulative
effect of a change in accounting principle was $(8,325,728). Included in this
loss is the $5,000,000 accrual for the anticipated settlement of the
shareholder lawsuit and a loss of approximately $2,965,000 from our annuity
reinsurance agreement with Transamerica. The loss from our Transamerica
agreement reflects a $5,000,000 benefit from the settlement of our dispute with
Transamerica, offset by the amortization of deferred policy acquisition costs
and LMIG payments. A loss of approximately $1,539,000 on our GMDB/ GMIB
contract with CIGNA (including the impact of the recapture charge in the third
quarter of 2004 of approximately $2,421,000), a loss of approximately
$1,243,000 from our second largest life reinsurance agreement, and a loss of
approximately $352,000 from our second largest annuity reinsurance agreement
were also incurred during the nine months ended September 30, 2004. Costs
associated with capital raising efforts and the pursuit of other strategic
alternatives of approximately $962,000 also -7-




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contributed to the loss for the period. These losses were partially
offset by income of approximately $3,325,000 on our life reinsurance agreement
with ERC during the nine months ended September 30, 2004. In the nine months ended September 30, 2004, the cumulative effect of a
change in accounting principle due to the adoption of Statement of Position
(SOP) 03-1 was a net loss of $365,960. Upon the adoption of the SOP on January
1, 2004, the amount of Reserves for future policy benefits relating to our
GMDB/GMIB agreement with CIGNA was reduced by $1,878,760, favorably impacting
our reported net income during the nine months ended September 30, 2004. The
impact of the adoption of the SOP on our accounting for the Transamerica
annuity reinsurance agreement was a net charge of $2,244,720 as a result of an
increase in interest sensitive contracts liability of $38,398,730, partially
offset by an increase in deferred policy acquisition costs of $36,154,010. The losses during the three and nine months ended September 30, 2003 were
primarily the result of losses associated with recaptures and terminations of
life and annuity reinsurance agreements and adverse claims experience under our
life reinsurance agreements. During the nine months ended September 30, 2003,
we recorded charges in connection with the recapture and termination of a
number of our life and annuity reinsurance agreements, including those with the
Ohio National Life Insurance Company, Hartford Life, and XL Life Ltd. As a
result of these and all other recaptures and terminations, we incurred charges
of approximately $86,000,000 for the nine months ended September 30, 2003.
These charges reflect the effect of a $9,000,000 benefit resulting from the
comprehensive settlement between XL Life Ltd and the Company in the third
quarter of 2003. Net Premiums. Net premium revenue for the three and nine month periods
ended September 30, 2004 was $9,906,337 and $34,565,859, a decrease of 65% and
77%, respectively, from net premium revenue of $28,657,264 and $148,586,899
for the three and nine month periods ended September 30, 2003. Substantially
all premium revenue was derived from traditional ordinary life reinsurance
agreements. The decline in premium revenue reflects the significant reduction
of business in force resulting from the recapture and termination of life
reinsurance agreements in 2003. At September 30, 2004, the total face amount of
life insurance in force decreased to approximately $15.3 billion, as compared
with approximately $30.0 billion at September 30, 2003. Our now largest life
reinsurance agreement represented approximately $7.6 billion of life insurance
in force at September 30, 2004 and approximately $13.4 million of premium
revenue for the nine months ended September 30, 2004. Net Investment Income. Total net investment income for the three and nine
month periods ended September 30, 2004 was $4,780,211 and $17,875,012,
respectively, as compared with $16,250,225 and $30,143,651, respectively, for
the three and nine month periods ended September 30, 2003. Net investment
income is comprised of income earned on our general account assets and income
earned on assets held and managed by our reinsurance cedents under modified
coinsurance contracts, which we refer to as Funds withheld. Investment income
earned on Funds withheld declined significantly from the comparable prior
periods. Net investment income earned on our general account assets for the three
and nine month periods ended September 30, 2004 was approximately $1,194,000
and $4,145,000, respectively, as compared to $1,100,000 and $4,408,000,
respectively, for the three and nine month periods ended September 30, 2003.
The average annualized yield rate earned on our general account assets for the
three and nine months ended September 30, 2004 was approximately 3.53% and
3.11%, respectively, as compared with approximately 2.01% and 2.45%,
respectively, for the three and nine months ended September 30, 2003. The
increase in the effective yield rate was largely due to moving a greater
portion of our invested assets from cash and its equivalents to longer duration
investments during the second quarter of 2004, but the -8-




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impact was offset by the lower level of invested assets in the three and nine
months ended September 30, 2004, as compared to the comparable prior periods in
2003. The 2003 yield rate is lower as it reflects our decision to invest funds
supporting our letters of credit in cash equivalents in an effort to maximize
our collateral funding ability and to minimize the impact of changing interest
rates on our collateral obligations. Net investment income earned on Funds withheld for the three and nine
month periods ended September 30, 2004 was approximately $3,586,000 and
$13,730,000, respectively, as compared to approximately $15,151,000 and
$24,623,000, respectively, for the three and nine month periods ended September
30, 2003. The decrease in investment income on our Funds withheld during the
three months ended September 30, 2004 was primarily due to a decreased asset
base underlying our annuity reinsurance agreements, which was largely the
result of four such annuity agreements being recaptured in 2003, as well as
realized capital losses on the Funds withheld assets. The average annualized
yield rates earned on Funds withheld were approximately 2.36% and 2.95%,
respectively, for the three and nine months ended September 30, 2004, as
compared with 4.73% and 3.10%, respectively, for the three and nine months
ended September 30, 2003. For purposes of calculating the average yield rates
earned on our Funds withheld at interest, we include our share of the
investment income and net realized capital gains and losses as reported to us
through our settlements with our ceding companies. Net Realized Investment (Losses) Gains.Net realized investment (losses)
gains for the three and nine month periods ended September 30, 2004 were
$(84,868) and $456,172, respectively, as compared with net realized investment
(losses) gains of $(52,025) and $6,508,019, respectively, for the three and
nine month periods ended September 30, 2003. The realized losses in the three
months ended September 30, 2004 were due to weakening bond prices caused by
increases in interest rates and our decision to sell some of the securities
that were more sensitive to future interest rate movements. The relatively high
level of net realized investment gains for the nine months ended September 30,
2003 reflected the significant sales from our investment portfolio in 2003 in
connection with the termination and recapture of a number of our reinsurance
agreements and to meet the collateral requirements of certain of our ceding
companies. Although we have begun to move a greater portion of our invested
assets into longer duration investments, we plan to continue to hold a
relatively large portion of our assets in short duration investments until
interest rates rise or we conclude they are not going to rise in the
foreseeable future. However, we will adjust our investment strategy based on
developments in the markets and our business and those adjustments may result
in realized gains or losses being recognized. We make decisions concerning the
sales of invested assets based on a variety of market, business and other
factors. Net Change in the Fair Value of Embedded Derivatives. Under SFAS 133, we
are required to bifurcate and separately account for the embedded derivatives
contained in one of our annuity reinsurance contracts. For the three and nine
month periods ended September 30, 2004, the net change in fair value of our
embedded derivatives was an unrealized gain of $565,939 and $1,692,113,
respectively. For the three and nine month periods ended September 30, 2003,
the net change in fair value of our embedded derivatives was an unrealized gain
of $2,808,427 and $14,845,749, respectively. Since the end of the third
quarter of 2003, we had one annuity reinsurance agreement with embedded
derivatives that we were required to bifurcate and account for separately. The
net change in fair value of our embedded derivatives during the three month
period ended September 30, 2003 largely reflects the termination of an annuity
reinsurance agreement with an affiliate of XL Life in the third quarter of 2003
as part of our comprehensive settlement with XL Life. The primary reason for
the net change in fair value of our embedded derivatives for the nine month
period ended September 30, 2003 was the termination of certain of our annuity
reinsurance agreements, including our agreement with Ohio National. Widening
credit spreads and bond defaults in the portfolio of assets supporting this
agreement had caused unrealized -9-




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losses in our embedded derivatives in prior periods, which were reversed
upon termination of the reinsurance agreement. Surrender Fees and Other Revenue.Surrender fees and other revenue for
the three and nine month periods ended September 30, 2004 were $1,024,405 and
$3,609,905, respectively, as compared with $1,667,997 and $6,061,022,
respectively, for the three and nine month periods ended September 30, 2003.
This income is primarily derived from surrender fees related to our fixed
annuity agreement with Transamerica. The decrease in revenue is mainly due to a
smaller policyholder base resulting in a lower absolute level of withdrawals.
Lower surrender fee rates charged to the policyholders upon surrendering their
policies also contributed to the decrease in surrender fees. Claims and Policy Benefits.Claims and policy benefits include both life
and variable annuity benefits, including GMDB, GMIB and, during the first half
of 2003, enhanced earnings benefits (EEB). Claims and policy benefits for
the three months ended September 30, 2004 and 2003 were $5,669,394 and
$19,075,004, or 57% and 67% of net premiums, respectively. For the nine months
ended September 30, 2004 and 2003, claims and policy benefits were $24,683,101
and $178,589,650, or 71% and 120% of net premiums, respectively. The absolute
decline in claims and policy benefits compared to the same periods in 2003 was
the result of the significant reduction of life insurance in force from
approximately $30.0 billion at September 30, 2003 to approximately $15.3
billion at September 30, 2004, as well as the termination of our GMDB agreement
with Hartford Life in 2003 and the recapture and termination of other life and
annuity reinsurance agreements, including the comprehensive settlement with XL
Life. While the recaptures of life reinsurance agreements have reduced claims
and policy benefits in 2004, they may increase volatility in the level of
claims and policy benefits as a percentage of premiums in the future. Interest Credited to Interest Sensitive Products. Interest credited to
Interest sensitive contract products, which are liabilities we assume under
certain annuity reinsurance agreements, was $5,513,653 and $10,865,545,
respectively, for the three and nine month periods ended September 30, 2004, as
compared with $7,642,151 and $16,731,452, respectively, for the three and nine
month periods ended September 30, 2003. Included in Interest credited to
interest sensitive contracts liabilities for the three and nine month periods
ended September 30, 2004 are LMIG payments of approximately $2,652,000 and
$8,063,000, respectively, as compared to LMIG payments of approximately
$3,196,000 and $13,022,000, respectively, for the three and nine months ended
September 30, 2003. The reduction in LMIG payments in 2004 was primarily due to
improving lapse experience and total returns on our annuity reinsurance
agreement with Transamerica during 2003 and the first quarter of 2004. Policy Acquisition Costs and Other Insurance Expenses. Policy acquisition
costs and other insurance expenses, consisting primarily of allowances and
amortization and write downs of deferred policy acquisition costs, for the
three and nine month periods ended September 30, 2004 were $5,693,745 and
$18,529,269, respectively, as compared with $22,796,448 and $119,928,722,
respectively, for the three and nine month periods ended September 30, 2003.
The decrease for the three and nine months ended September 30, 2004 reflects
the reduction in the size of our book of business during 2003. In addition,
policy acquisition costs and other insurance expenses for the three and nine
month periods ended September 30, 2003 included the net write down of deferred
acquisition costs associated with the recapture and termination of contracts of
approximately $4,660,000 and $78,870,000, respectively. Operating Expenses. Operating expenses for the three month period ended
September 30, 2004 were $2,410,937 or 15.4% of total revenue (excluding the net
change in fair value of embedded derivatives), as compared with $3,605,189 or
7.7% of total revenue (excluding the net change in fair value of embedded
derivatives) for the three month period ended September 30, 2003. Operating -10-




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expenses for the nine month period ended September 30, 2004 were $12,446,874 or
22.0% of total revenue (excluding the net change in fair value of embedded
derivatives), as compared to $15,873,678 or 8.3% of total revenue (excluding
the net change in fair value of embedded derivatives) for the nine month period
ended September 30, 2003. This proportionate increase in expenses for the three
and nine months ended September 30, 2004 reflects the accrual of $5,000,000 for
the anticipated settlement of the purported shareholder class action lawsuit
plus increased professional and consulting fees partially offset by reduced
employee compensation costs. Segment Results We separately track financial results of our life and annuity operations
in segments. Each segment is defined by the dominant risk characteristic
inherent in products in that segment. The life segment consists of all products
where the dominant risk characteristic is mortality risk. The annuity segment
comprises all products where the dominant risk characteristic is investment
risk. In addition, one of our remaining modified coinsurance annuity
reinsurance agreements has features that constitute an embedded derivative that
requires bifurcation and separate accounting under SFAS 133  Accounting for
Derivative Instruments and Hedging Activities. The change in the fair value of
this embedded derivative is included in the annuity segment. Both the life and
annuity segments have specific assets, liabilities, stockholders equity,
revenue, benefits and expenses that apply only to them. The corporate segment
contains all stockholders equity not otherwise deployed to the life or annuity
segment. In addition, the corporate segment includes all capital gains and
losses from sales of securities in our portfolio and investment income on
undeployed invested assets. Operating expenses are generally allocated to the
segments proportionately based upon the amount of stockholders equity deployed
to the segment. Costs associated with our efforts to raise capital and pursue
other strategic alternatives and the anticipated costs of settling the
purported shareholder class action lawsuit have been completely allocated to
the corporate segment. Segment results are reported in Note 4 to our unaudited
condensed consolidated financial statements. Life Segment.Our life reinsurance segment is the reinsurance of ordinary
life insurance, primarily for mortality risks. Ordinary life reinsurance
generally is the reinsurance of individual term life insurance policies, whole
life insurance policies and joint and survivor insurance policies on a yearly
renewable term basis. In addition, we reinsured the mortality risk inherent in
universal life insurance policies, variable universal life insurance policies
and variable life insurance policies. Our life segment is our largest segment as measured by revenues. Life
segment income for the three months ended September 30, 2004 was $2,603,458, as
compared with $578,768 for the three months ended September 30, 2003. Segment
income for the nine months ended September 30, 2004 was $3,512,405, as compared
to segment loss of $(83,905,728) for the nine months ended September 30, 2003.
In the three and nine months ended September 30, 2004, our largest life
reinsurance agreement produced approximately $2,087,000 and $3,325,000,
respectively, of income. Segment loss in the nine months ended September 30,
2003 reflected charges for recaptures of life reinsurance agreements of
approximately $54,600,000, as well as reported claims under our life
reinsurance agreements that exceeded our expectations in 2003. The $54,600,000
charge reflects the effect of a $9,000,000 benefit for the recapture of several
reinsurance agreements with XL Life. Segment revenues for the three months ended September 30, 2004 declined
65% to $10,620,367 from $30,013,563 in the third quarter of 2003. Segment
revenues for the nine months ended September 30, 2004 declined 76% to
$35,750,909 from $147,690,979 for the first nine months of 2003. These
declines reflect our reduced levels of life reinsurance in force as a result of
recaptures of life reinsurance agreements during 2003. In addition, net
investment income attributable to the life segment -11-




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for the first nine months of 2004 decreased approximately $2,500,000, as
compared with the first nine months of 2003, primarily reflecting a reduction
in invested assets allocated to the life segment as a result of the
terminations and recaptures in 2003. Segment policy benefits and expenses decreased 73% to $8,016,909 for the
three months ended September 30, 2004, as compared with $29,434,795 for the
three months ended September 30, 2003. Segment policy benefits and expenses for
the nine months ended September 30, 2004 decreased 86% to $32,238,504, as
compared to $231,596,707 for the nine months ended September 30, 2003, which
included charges for recaptures of life reinsurance agreements in 2003 of
approximately $54,600,000. The balance of the decline in 2004 is attributable
to the significant reduction in life insurance in force compared to the
comparable periods during 2003 as well as reported claims under our life
reinsurance agreements that had exceeded our expectations during 2003. While
the recaptures of life reinsurance agreements during 2003 have reduced claims
and policy benefits in the first nine months of 2004, they may increase
volatility in the level of claims and policy benefits as a percentage of
premiums in the future. Annuity Segment.Our annuity reinsurance segment is the reinsurance of
general account fixed deferred annuities and certain minimum guarantees arising
from variable annuities. With respect to the general account fixed annuities we
reinsure, our agreements generally relate to individual general account single
premium deferred annuity policies, which involve the tax-deferred accumulation
of interest on a single premium paid by the policyholder (accumulation phase
policies). Accumulation phase policies are subject primarily to investment risk
and persistency (lapse) risk. Historically, we have also reinsured certain
guarantees associated with variable annuity agreements, including GMDB and
GMIB. As of September 30, 2004, we no longer reinsure any GMDB or GMIB due to
the recapture of our reinsurance agreement with CIGNA. Our annuity segment contains the majority of our assets and exposes us to
significant net income volatility from three sources. First, under SFAS 133 
Accounting for Derivative Instruments and Hedging Activities; we must value the
embedded derivative associated with one of our annuity reinsurance agreements.
This unrealized change in the value of the derivative is reported in our income
statement each quarter. The change in the value of the derivative can be large,
and is driven by financial market conditions, most notably credit risk related
changes. Second, as a result of our adoption of AICPA Statement of Position
(SOP) 03-1, changes in our reserve levels for our Transamerica annuity
reinsurance agreement resulting from underlying asset value changes will not be
offset with corresponding changes in our Funds withheld asset values, which
will cause volatility in net income. To the extent that the minimum guarantee
payable under the policies underlying the Transamerica agreement exceeds the
payment that would be required as a result of the market value adjustment in
those policies, the reserves required under the SOP would be based upon the
minimum guarantee and the mismatch between liabilities and assets is less
significant. If we computed our reserves as if the amounts payable to the
policyholders under the Transamerica contract exceeded the minimum guarantee
amount, a 1% increase (decrease) in underlying asset values would cause a $5
million charge (benefit) to net income. Third, our Transamerica annuity
reinsurance contract has exhibited volatility in the past due to write downs of
our deferred acquisition cost balance which were based upon managements
estimates of future investment performance and lapse experience. While we
believe these estimates are reasonable, they are estimates of future events and
may prove to be inaccurate. If such assumptions turn out to be inaccurate, we
could be required to write off additional deferred acquisition costs, which
would have a significant adverse impact on our net income in future periods.
Our annuity reinsurance contract with Transamerica, which represented 90% of
our annuity segment assets at September 30, 2004, is not expected to generate
significant income in the future. - 12 -




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Segment loss was $(4,755,219) for the three months ended September 30,
2004, as compared with a loss of $(3,441,519) for the three month period ended
September 30, 2003. During the three months ended September 30, 2004, we
incurred a $2,421,000 charge in connection with the recapture of our GMDB/GMIB
reinsurance agreement with CIGNA, as well as losses of approximately $2,059,000
from our annuity reinsurance agreement with Transamerica and approximately
$338,000 from our second largest annuity reinsurance agreement. For the nine months ended September 30, 2004, segment loss before the
cumulative effect of a change in accounting principle was $(4,635,218), as
compared to a loss of $(44,375,935) for the nine months ended September 30,
2003. The loss for the nine months ended September 30, 2004 reflects a loss of
approximately $2,965,000 incurred on our annuity agreement with Transamerica, a
loss of approximately $1,539,000 incurred on our GMDB/GMIB contract with CIGNA,
and a loss of $352,000 from our second largest annuity reinsurance agreement.
The loss from our Transamerica agreement reflects a $5,000,000 benefit from the
settlement of our dispute with Transamerica, offset by the amortization of
deferred policy acquisition costs and LMIG payments. Upon the adoption of the
SOP on January 1, 2004, the amount of reserves for future policy benefits for
our GMDB/GMIB reinsurance agreement with CIGNA was reduced by $1,878,760,
favorably impacting net income. The impact of the adoption of the SOP on our
accounting for the Transamerica annuity reinsurance agreement was a cumulative
charge of $2,244,720 as a result of an increase in Interest sensitive contracts
liability of $38,398,730 partially offset by an increase in deferred policy
acquisition costs of $36,154,010. The cumulative effect of a change in
accounting principle was a net loss of $365,960, resulting in net segment loss
of $(5,001,178) for the nine months ended September 30, 2004. The loss for the nine months ended September 30, 2003 reflected a
$38,800,000 charge related to costs of recaptures and associated experience
during the first nine months of 2003. This charge included the recapture of
our then largest GMDB agreement and the termination of our then second largest
deferred annuity reinsurance agreement and the termination of two annuity
reinsurance agreements with XL Life. Total revenue for our annuity segment declined 74% to $5,026,576 for the
three months ended September 30, 2004, as compared with $19,107,200 for the
three months ended September 30, 2003. This decline is due to a reduction in
investment income of approximately $10,553,000, the decrease in net change in
the fair value of embedded derivatives of approximately $2,242,000, as well as
lower surrenders fees of approximately $634,000 for the three month period
ended September 30, 2004 as compared with the three months ended September 30,
2003. Total revenue for our annuity segment declined 61% to $19,948,919 for the
nine months ended September 30, 2004, as compared with $50,977,129 for the nine
months ended September 30, 2003. This decline is due to a decrease in embedded
derivative gains of approximately $13,154,000, as well as a reduction in
investment income of approximately $10,893,000 and reduced surrender fees from
our Transamerica annuity reinsurance agreement which decreased by approximately
$3,395,000 for the nine months ended September 30, 2004 as compared to the nine
months ended September 30, 2003. Policy benefits and expenses for the annuity segment declined 57% to
$9,781,795 for the three months ended September 30, 2004, as compared with
$22,548,719 for the three months ended September 30, 2003. These expenses
declined 74% to $24,584,137 for the nine months ended September 30, 2004, as
compared with $95,353,065 for the nine months ended September 30, 2003. The
primary components of these expenses are interest credited to policyholders,
LMIG payments, payments and reserve changes for minimum guarantees associated
with variable annuity contracts and write downs and amortization of deferred
acquisition costs. The decline in policy benefits and expenses is primarily due
the termination of several of our annuity reinsurance agreements during 2003.
In addition, as a result of a smaller base of - 13 -




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policyholders, improved investment returns and lower lapse rates on the
Transamerica annuity reinsurance agreement, LMIG payments under the contract
declined from approximately $13,022,000 for the first nine months of 2003 to
approximately $8,063,000 for the first nine months of 2004. Policy benefits and
expenses for the nine months ended September 30, 2003 included a charge of
$20,400,000 for the recapture of our then largest GMDB contract. Corporate Segment. The corporate segment includes all of our capital
gains and losses, investment income on undeployed invested assets, costs
associated with our efforts to raise capital and pursue other strategic
alternatives, costs relating to the anticipated settlement of the purported
shareholder class action lawsuit and a proportionate share of operating
expenses based upon how stockholders equity is deployed to the life and
annuity segments. As a result, the corporate segment, while small relative to
our total company, will likely have volatile results. Segment losses of $(943,944) and $(7,202,915) were incurred for the three
and nine months ended September 30, 2004, as compared with a loss of $(924,154)
and income of $3,303,501 for the three and nine months ended September 30,
2003. Revenues increased by 158% to $545,081 for the three month period ended
September 30, 2004, as compared with $211,124 for the three month period ended
September 30, 2003, and declined by 67% to $2,499,233 for the nine month period
ended September 30, 2004, as compared with $7,477,231 for the nine month period
ended September 30, 2003. The decline in segment revenue for the nine months
ended September 30, 2004 is primarily due to net realized investment gains of
$456,172 as compared to net realized investment gains of $6,508,019 for the
nine months ended September 30, 2003. The relatively high level of net
realized investment gains for the nine months ended September 30, 2003
reflected the significant sales from our investment portfolio in 2003 in
connection with the termination and recapture of a number of our reinsurance
agreements and to meet the collateral requirements of certain of our ceding
companies. Segment benefits and expenses increased to $1,489,025 for the three months
ended September 30, 2004, as compared with $1,135,278 for the three months
ended September 30, 2003. Segment benefits and expenses increased significantly
to $9,702,148 for the nine months ended September 30, 2004, as compared with
$4,173,730 for the nine months ended September 30, 2003. This increase
primarily reflects the $5,000,000 accrual for the anticipated settlement of the
purported shareholder class action lawsuit, as well as increased consulting
fees in connection with our efforts to pursue strategic alternatives in the
first nine months of 2004. Financial Condition Investments At September 30, 2004 and December 31, 2003, virtually all of our invested
assets, including cash and cash equivalents, were posted as collateral to
secure our obligations under reinsurance agreements and letter of credit
facilities or were required to maintain the statutory capital and surplus
requirements of our U.S. operating subsidiary. At September 30, 2004, our
invested assets, including cash and cash equivalents, had an aggregate fair
value of $140,221,321, as compared with an aggregate fair value of $197,880,755
at December 31, 2003. The decline in our invested assets during the first nine
months of 2004 was due to a $22,100,000 payment we made in connection with the
settlement of the recapture of our life reinsurance agreement with Metropolitan
Life Insurance Companies, payments of $23,800,000 to Transamerica under our
annuity reinsurance agreement, and an $11,000,000 payment made in connection
with the recapture of our combined GMDB/GMIB reinsurance agreement with CIGNA.
At September 30, 2004, unrealized gains totaled $1,038,094, as compared to
unrealized gains of $1,840,849 at December 31, 2003. At September 30, 2004 and
December 31, 2003, the weighted average - 14 -




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duration of the fixed income securities included in our invested assets
was 3.0 and 3.9 years, respectively, and the weighted average investment
quality rating was AA at the end of each period. Our investments are governed by investment guidelines established and
approved by our Board of Directors. Our investment objectives are to achieve
above average risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of liquidity in our
portfolio and match the cash flows of our investments to our related insurance
liabilities. Our investment guidelines require our overall fixed income
portfolio to maintain a minimum weighted average credit quality of A and
limit investment in fixed income securities that are non-rated or below
investment grade at the time of purchase to an aggregate of $3,000,000. In the
first nine months of 2004, we invested approximately $900,000 in securities
that were non-rated at the time of their purchase. While any investment carries
some risk, the risks associated with non-rated or lower-rated securities
generally are greater than the risks associated with investment grade
securities. A fixed income security rated A by Standard & Poors is
considered to be somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than higher rated issuers; however, the
issuers capacity to meet its financial commitment on the security is still
considered to be strong. We currently do not invest in any fixed income
securities in emerging markets. At September 30, 2004, 1.2% of our fixed income securities consisted of
below investment-grade securities. At December 31, 2003, there were no below
investment-grade securities held in the portfolio. The market value of
non-rated securities held at September 30, 2004 was approximately $1,000,000.
The fair value of below investment-grade and non-rated investments varies
depending on economic and market conditions, the level of interest rates and
the perceived creditworthiness of the issuer. As noted above, our investment
guidelines require our overall fixed income portfolio to maintain a minimum
weighted average credit quality of A and limit the amount of our investments
in fixed income securities that are non-rated or below investment grade at the
time of purchase. We monitor the creditworthiness of the portfolio as a whole,
and when the fair market value of a security declines for reasons other than
changes in interest rates or other perceived temporary conditions, the security
is written down to its fair value. At September 30, 2004, there were no
impaired securities in our portfolio. At September 30, 2004, mortgage-backed securities represented
approximately 4% of our invested assets, including cash and cash equivalents,
as compared with approximately 11% at December 31, 2003. Investors in these
securities are compensated primarily for reinvestment risk rather than credit
quality risk. Investments in mortgage-backed securities include collateralized
mortgage obligations (CMOs) and mortgage-backed pass-through securities.
Mortgage-backed securities generally are collateralized by mortgages issued by
the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation. Of these,
only GNMA mortgages are backed by the full faith and credit of the U.S.
government. Credit risk generally is not a consideration when investing in
agency mortgage backed securities. Our mortgage backed securities portfolio
had a weighted average investment quality rating of AAA at both September 30,
2004 and December 31, 2003. At September 30, 2004, approximately 31% of our mortgage-backed investment
portfolio consisted of securities with planned repayment schedules, as compared
with 7% at December 31, 2003. These investments are designed to amortize in a
more predictable manner by shifting the primary risk of prepayment of the
underlying collateral to investors in other tranches of the CMO. - 15 -




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The following table summarizes our investment results (excluding
investment income on assets held and managed by our ceding companies or others
on their behalf) for the periods indicated: Investment Results Nine months Ended September 30,
    
    Twelve Months Ended December 31,2004
    
    2003
    
    2003
    
    2002
    
    2001(Dollars in thousands)Total invested assets,
including cash and
equivalents (1)
    
    $
    140,221
    
    
    $
    212,670
    
    
    $
    197,881
    
    
    $
    306,346
    
    
    $
    423,780Investment income, net
of related expenses
    
    $
    4,145
    
    
    $
    4,508
    
    
    $
    5,924
    
    
    $
    25,931
    
    
    $
    20,165Effective annualized
yield rate (2)
    
    
    3.53
    %
    
    
    2.45
    %
    
    
    2.53
    %
    
    
    5.28
    %
    
    
    5.74
    %Realized investment gains
    
    $
    456
    
    
    $
    6,508
    
    
    $
    6,407
    
    
    $
    19,749
    
    
    $
    1,230
   (1)
    
    Fair value at end of the indicated period.(2)
    
    The effective yield rate equals (i) net investment income divided by
(ii) the average of total adjusted invested assets (fixed maturities at
amortized cost, including assets on deposit with reinsurers) at the end
of each calendar quarter included in the indicated period. Funds Withheld at Interest Our remaining two annuity reinsurance agreements cover individual single
premium deferred annuity policies and are structured as modified coinsurance
arrangements. In this type of arrangement, the ceding company invests the
premiums received from policyholders or engages an investment manager to do so,
credits interest to policyholders accounts, processes surrenders and engages
in other administrative activities. The ceding company is also required to
carry reserves for these annuity policies based upon certain statutory rules in
the state in which the ceding company is domiciled. The underlying investments
purchased with the premiums received from policyholders support these statutory
reserves. Historically, when a ceding company enters into an annuity reinsurance
contract structured as a modified coinsurance arrangement with us, a portion of
the ceding companys liability to the policyholders or, in the case of a
retrocessional arrangement, the primary insurer, is ceded to us. Our remaining
modified coinsurance arrangements are on a quota share basis, so the portion
that is ceded to us is a fixed percentage of the liabilities arising from the
underlying policies. Our share of the ceding companys liability is included on
our balance sheet as Interest sensitive contracts liabilities. However,
unlike other reinsurance arrangements in which we receive cash or investments
as consideration for assuming a portion of the ceding companys liability,
under these types of arrangements, we have established a receivable called
Funds withheld at interest that is equal to our fixed portion of the
statutory reserves carried by the ceding company. We are allocated our share of
the investment income and realized capital gains and losses that arise from the
securities in the investment portfolio underlying the statutory reserve. At September 30, 2004, our Funds withheld at interest receivable related
to our annuity reinsurance contracts had a carrying value of approximately $592
million. Our agreement with Transamerica accounted for approximately 90% of our
Funds withheld at interest receivable at September 30, 2004, as compared to 91%
at December 31, 2003. At September 30, 2004, the assets held and managed by our
ceding companies under our annuity reinsurance contracts had a combined market
value of $618 million and were invested in convertible bonds and fixed income
securities having a weighted average credit quality of A- and a weighted
average duration of 4.4 years. At December 31, 2003, these assets had a
weighted average credit quality of A- and a weighted average duration of 5.9
years. In - 16 -




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addition, at September 30, 2004, approximately 4.7% of such assets were
invested in below investment grade securities, as compared with 5.5% of such
assets at December 31, 2003. The average yield rates earned on the assets held and managed by our
ceding companies was approximately 2.36% and 2.95% for the three and nine
months ended September 30, 2004, as compared to approximately 4.73% and 3.10%
for the three and nine month periods ended September 30, 2003. The average
yield rate earned on the invested premiums funding our annuity obligations to
Transamerica was approximately 2.55% and 3.03% for the three and nine months
ended September 30, 2004. The average yield rate earned on the invested
premiums funding our annuity obligations for the other annuity reinsurance
agreement was approximately 4.94% and 4.98% for the three and nine months ended
September 30, 2004. For purposes of calculating the average yield rate earned
on assets held and managed by our ceding companies, we include our share of the
investment income and net realized capital gains and losses as reported to us
through our settlements with our ceding companies, although we recently
resolved a dispute with Transamerica regarding the method by which realized
gains and losses are settled under our reinsurance agreement. Transamerica Our annuity reinsurance contract with Transamerica is our largest annuity
reinsurance contract and, as of September 30, 2004, approximately $537 million,
or 90%, of our Funds withheld at interest receivable; approximately $560
million, or 90%, of our Interest sensitive contracts liability; and
approximately $63 million of the Deferred policy acquisition costs assets on

our balance sheet related to this contract. As a result of the changes to our
remaining book of business during 2003, especially the termination of our
annuity reinsurance agreement with Ohio National, we expect that the assets and
liabilities associated with the Transamerica contract will continue to
represent a significant portion of our total assets and liabilities in future
periods. While we expect that our adoption of the AICPA SOP 03-1 on January 1,
2004 will increase the volatility of our income for the contract on a quarterly
basis, we do not expect the Transamerica contract to generate significant
income over the long term. The amount of deferred acquisition costs we record
as an asset on our balance sheet related to the Transamerica contract is based
on a series of assumptions related to the investment performance of the assets
supporting our liabilities under the contract, as well as future lapse rates
for the underlying policies. These assumed lapse rates include assumptions
regarding future full surrenders, partial withdrawals, annuitizations and
policyholder deaths. While we believe the investment and lapse estimates to be
reasonable, they are estimates of future events and we cannot assure you that
they will prove to be accurate. If such assumptions turn out to be inaccurate,
we could be required to write off additional deferred acquisition costs, which
would have a significant adverse impact on our net income in future periods. At September 30, 2004, the assets funding the policyholder obligations
under the Transamerica agreement had an average credit quality of A- and an
average duration of 4.4 years, as compared with an average credit quality of
A- and an average duration of 6.1 years at December 31, 2003. The contract
is a retrocessional arrangement covering VisionMark fixed annuity products
issued by Indianapolis Life Insurance Company, the primary insurance company.
The assets underlying the Transamerica contract are managed by AmerUS Capital
Management, the investment manager appointed by Indianapolis Life. At
September 30, 2004 and December 31, 2003, AmerUS Capital Management had
invested approximately 60% and 64%, respectively of the premiums paid in
connection with the underlying policies in investment grade convertible bonds
and had invested the remaining premiums in investment grade bonds, government
bonds, high yield bonds and mortgage-backed securities. The value of
convertible bonds is a function of their investment value (determined by
comparing their yield with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege) and their
conversion value (at market value, if converted into the underlying common
stock). To the extent - 17 -




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the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible bonds will be increasingly
influenced by their conversion value. Consequently, the value of convertible
bonds may be influenced by changes in the equity markets. While convertible
bonds would typically be expected to produce lower investment income than other
fixed income securities, convertible bonds provide the potential for higher
total returns through the underlying equity component of the bonds, which are
passed on to VisionMark policyholders through the total return adjustment upon
surrender of the policies. As with the holders of other single premium deferred annuity policies, a
VisionMark policyholder is guaranteed a return of premiums paid plus a
guaranteed minimum interest rate of 3% to 3.5% per annum over the life of the
policy. During the nine months ended September 30, 2004 and September 30, 2003,
we paid approximately $8,063,000 and $13,022,000, respectively, under our
annuity reinsurance contract with Transamerica to cover our proportionate share
of the shortfall that arose because the net investment returns on the assets
related to these policies substantially underperformed the minimum interest
guarantees for surrendered policies. According to data provided to us by Transamerica, at September 30, 2004,
the assets held by Indianapolis Life and managed by AmerUS Capital were
comprised of the following: % of TotalType of Security
    
    Book Value(1)
    
    Market Value
    
    Market ValueInvestment grade convertible bonds
    
    $
    321,741,770
    
    
    $
    330,483,850
    
    
    
    60.2
    %Investment grade U.S. corporate bonds
    
    
    110,618,138
    
    
    
    113,027,909
    
    
    
    20.5
    %Mortgage-backed securities
    
    
    32,104,904
    
    
    
    31,928,841
    
    
    
    5.8
    %Below investment grade U.S. corporate bonds
    
    
    26,336,443
    
    
    
    27,332,106
    
    
    
    5.0
    %U.S. Government bonds
    
    
    46,432,674
    
    
    
    46,592,312
    
    
    
    8.5
    %Total invested assets
    
    $
    537,233,929
    
    
    $
    549,365,017
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    3,993,542Total market value, including accrued
investment income
    
    
    
    
    
    $
    553,358,559
   (1)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
Transamerica. We believe this presents a better understanding of
potential future returns and cash flows under the contract. - 18 -




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According to data provided to us by Transamerica, at September 30, 2004,
the credit ratings of the assets (excluding accrued investment income) held by
Indianapolis Life and managed by AmerUS Capital were approximately as follows: % of TotalRatings(1)
    
    Book Value(2)
    
    Market Value
    
    Market ValueAAA
    
    $
    67,398,612
    
    
    $
    67,504,485
    
    
    
    12.3
    %AA
    
    
    50,320,151
    
    
    
    50,028,083
    
    
    
    9.1
    %A
    
    
    127,896,584
    
    
    
    128,057,594
    
    
    
    23.3
    %BBB
    
    
    265,282,137
    
    
    
    276,442,750
    
    
    
    50.3
    %BB and below
    
    
    26,336,443
    
    
    
    27,332,106
    
    
    
    5.0
    %Total invested assets
    
    $
    537,233,929
    
    
    $
    549,365,017
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    3,993,542Total market value,
including accrued
investment income
    
    
    
    
    
    $
    553,358,559
   (1)
    
    As assigned by Standard & Poors, or, if unrated by Standard
& Poors, based on an equivalent rating assigned by the National
Association of Insurance Commissioners.(2)
    
    Book values are statutory book values reported to us by the
ceding company for the underlying investments and represent the
value of our Funds withheld at interest receivable. We present
statutory book values in the above table because that is the basis
upon which we settle with Transamerica. We believe this presents a
better understanding of potential future returns and cash flows
under the contract. According to data provided to us by Transamerica, at September 30, 2004,
the maturity distribution of the assets held by Indianapolis Life and managed
by AmerUS Capital was approximately as follows: % of TotalMaturity
    
    Book Value(1)
    
    Market Value
    
    Book ValueWithin one year
    
    $
    26,454,836
    
    
    $
    26,553,376
    
    
    
    4.8
    %From one to five years
    
    
    84,687,058
    
    
    
    84,576,573
    
    
    
    15.4
    %From six to ten years
    
    
    119,293,732
    
    
    
    120,693,784
    
    
    
    22.0
    %More than ten years
    
    
    306,798,303
    
    
    
    317,541,285
    
    
    
    57.8
    %Total all years
    
    $
    537,233,929
    
    
    $
    549,365,017
    
    
    
    100.0
    %
   (1)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
Transamerica. We believe this presents a better understanding of
potential future returns and cash flows under the contract. Other Annuity Reinsurance Contract At September 30, 2004, we had one other annuity reinsurance agreement. At
September 30, 2004, the assets funding the policyholder obligations under this
agreement had an average credit quality of A- and an average duration of
approximately 3.85 years, as compared with an average credit quality of A and
an average duration of approximately 3.95 years at December 31, 2003. - 19 -




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According to information provided by the ceding company under this annuity
reinsurance contract, at September 30, 2004, the assets held and managed by
this ceding company were comprised of the following: % of TotalType of Security
    
    Book Value(1)
    
    Market Value
    
    Market ValueInvestment grade US corporate bonds
    
    $
    52,313,568
    
    
    $
    55,019,778
    
    
    
    86.1
    %Mortgage-backed securities
    
    
    4,412,390
    
    
    
    5,011,294
    
    
    
    7.8
    %Government bonds
    
    
    2,464,560
    
    
    
    2,464,560
    
    
    
    3.9
    %Below investment grade bonds
    
    
    1,431,798
    
    
    
    1,424,138
    
    
    
    2.2
    %Total invested assets
    
    $
    60,622,316
    
    
    $
    63,919,770
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    922,731Total market value, including
accrued investment income
    
    
    
    
    
    $
    64,842,501
   (1)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
the ceding company under the contract. We believe this presents a
better understanding of potential future returns and cash flows under
the contract. According to information provided by the ceding company under this annuity
reinsurance agreement, at September 30, 2004, the credit ratings of the assets
(excluding accrued investment income) held and managed by the ceding company
were approximately as follows: % of TotalRatings(1)
    
    Book Value(2)
    
    Market Value
    
    Market ValueAAA
    
    $
    4,672,844
    
    
    $
    4,654,738
    
    
    
    7.3
    %AA

    
    
    4,719,503
    
    
    
    4,903,352
    
    
    
    7.7
    %A
    
    
    17,758,896
    
    
    
    18,864,083
    
    
    
    29.5
    %BBB
    
    
    32,039,275
    
    
    
    34,073,459
    
    
    
    53.3
    %BB and below
    
    
    1,431,798
    
    
    
    1,424,138
    
    
    
    2.2
    %Total invested assets
    
    $
    60,622,316
    
    
    $
    63,919,770
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    922,731Total market value,
including accrued
investment income
    
    
    
    
    
    $
    64,842,501
   (1)
    
    As assigned by Standard & Poors, or, if unrated by Standard &
Poors, based on an equivalent rating assigned by the National
Association of Insurance Commissioners.(2)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
the ceding company under the contract. We believe this presents a
better understanding of potential future returns and cash flows under
the contract. According to information provided by the ceding company under this annuity
reinsurance agreement, at September 30, 2004, the maturity distribution of the
assets held and managed by the ceding company was approximately as follows: - 20 -




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% of TotalMaturity
    
    Book Value(1)
    
    Market Value
    
    Book ValueWithin one year
    
    $
    6,270,386
    
    
    $
    6,353,257
    
    
    
    9.9
    %From one to five years
    
    
    25,718,748
    
    
    
    27,540,531
    
    
    
    43.1
    %From six to ten years
    
    
    20,636,421
    
    
    
    21,617,649
    
    
    
    33.8
    %More than ten years
    
    
    7,996,761
    
    
    
    8,408,334
    
    
    
    13.2
    %Total all years
    
    $
    60,622,316
    
    
    $
    63,919,770
    
    
    
    100.0
    %
   (1)
    
    Book values are those statutory book values reported to us by the
ceding company for the underlying investments and represent the value
of our Funds withheld at interest receivable. We present statutory book
values in the above table because that is the basis upon which we
settle with the ceding company under the contract. We believe this
presents a better understanding of potential future returns and cash
flows under the contract. Liquidity and Capital Resources Our liquidity and capital resources are a measure of our overall financial
strength and our ability to generate cash flows from our operations to meet our
operating and growth needs. Our principal sources of funds are premiums
received, net investment income, proceeds from investments called, redeemed or
sold and cash and short-term investments. Our principal obligations and uses of
the funds are to post collateral for the statutory reserves ceded to us by U.S.
based insurers and reinsurers, the payment of policy benefits, acquisition and
operating expenses and the purchase of investments. Under the terms of our
reinsurance agreements, we are required to provide letters of credit or fund
trust accounts with liquid assets to satisfy the collateral requirements of our
ceding companies. At September 30, 2004 and December 31, 2003, letters of
credit totaling $35,500,000 and $53,700,000, respectively, had been issued in
the ordinary course of our business by our bankers in favor of certain ceding
insurance companies (including our U.S. operating subsidiary) to provide
security and meet regulatory requirements. At September 30, 2004 and December
31, 2003, cash and investments of approximately $47,400,000 and $56,800,000,
respectively, were pledged as collateral for letters of credit. At September
30, 2004 and December 31, 2003, cash and investments of $29,500,000 and
$96,000,000, respectively, were held in trust for the benefit of certain of our
ceding insurance companies to provide security and to meet regulatory
requirements. We have two reinsurance operating subsidiaries, the largest of which is
based in and operates out of Bermuda. Our other reinsurance-operating
subsidiary is based in and operates out of the United States. Our Bermuda
operating subsidiary reinsures a large portion of the reinsurance business
written by our U.S. operating subsidiary. The primary purpose of this
reinsurance is to provide reinsurance capacity to our U.S. operating subsidiary
so that it can compete in its market place. Our Bermuda operating subsidiary
also has made capital infusions into the U.S. operating subsidiary to allow the
U.S. company to maintain targeted statutory surplus levels and to provide cash
and securities as collateral for the reinsurance cessions the U.S. operating
subsidiary makes to the Bermuda operating company. At September 30, 2004,
approximately $51,400,000 of our cash and cash equivalents and fixed income
securities were held by the U.S. operating subsidiary and were not available to
us or our Bermuda operating subsidiary to fund our liquidity or collateral
needs. On July 28, 2004, CIGNA, the ceding company under our only remaining
GMDB/GMIB reinsurance agreement, drew $11 million on a letter of credit that
had been issued for CIGNAs benefit. As of June 30, 2004, CIGNA was seeking $49
million of collateral in addition to the $11 million of collateral we had
previously provided in the form of a fully collateralized letter of credit. We
did not - 21 -




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agree that the aggregate $60 million collateral requirement asserted by CIGNA
was required to be posted and did not post any additional collateral for this
agreement. On October 26, 2004, our wholly owned subsidiary, Annuity and Life
Reassurance, Ltd., entered into a Commutation and Release Agreement with CIGNA
providing for the recapture by CIGNA of the GMDB/GMIB agreement. The
Commutation and Release Agreement also provides for a mutual release by each of
the parties of all past, present and future claims under the GMDB/GMIB
agreement, including all obligations for claims and premiums that had accrued
under the agreement since July 1, 2004. The parties also agreed to a mutual
release of all claims under the letter of credit, and that CIGNA will retain
the $11 million it previously drew under the letter of credit. In addition, we
issued CIGNA a warrant to acquire one million of our common shares at an
exercise price of $1.00 per share. The warrant expires on September 30, 2014. After giving effect to the Commutation and Release Agreement with CIGNA,
as of September 30, 2004, we had satisfied all the collateral requirements of
our remaining ceding companies. As of June 30, 2004, we were involved in arbitration proceedings with
Transamerica. The arbitration related to Transamericas allegation that, as of
October 31, 2003, we owed $17.6 million under our annuity reinsurance agreement
with them. On February 3, 2004, we paid Transamerica $12.6 million,
representing the net amount we believed was due under the reinsurance agreement
as of October 31, 2003 after deducting $5.0 million for investment related
expenses that we believe was owed to us by Transamerica. Transamerica had been
pursuing arbitration with us, asserting that the $5.0 million offset is not
justified and that we owed it that amount and interest on the amounts that
Transamerica previously alleged were due. In addition, through October 31,
2003, we had received monthly settlement reports from Transamerica on a basis
that we believe conformed to the reinsurance agreement between us. For the
period subsequent to October 31, 2003, we had only received settlement reports
from Transamerica prepared on a basis that Transamerica alleged was
appropriate, but which we believed was not consistent with the reinsurance
agreement. The principal difference related to how realized gains and losses
related to the invested assets supporting the annuity obligations were settled
between us. Transamerica had not provided us with realized gain and loss
information on the basis we believed was appropriate. As a result, in preparing
our financial statements, we adjusted the amounts reported to us by
Transamerica in the monthly settlement reports for periods subsequent to
October 31, 2003 to reflect what we believed was the appropriate treatment of
realized capital gains and losses. On July 2, 2004, Transamerica agreed to settle all disputes relating to
the arbitration proceedings between us. Pursuant to the terms of the settlement
agreement, we agreed to calculate monthly settlements under our reinsurance
agreement in a manner we believe is consistent with the original terms of the
agreement. Transamerica also agreed to our $5.0 million offset of amounts owed
to Transamerica at October 31, 2003. On July 8, 2004, we paid Transamerica
approximately $8.7 million, representing amounts due under the reinsurance
agreement as of April 30, 2004. On August 6, 2004, we paid Transamerica
approximately $2.6 million, representing amounts due under the reinsurance
agreement as of May 31, 2004. Although Transamerica has agreed with us to a
method for computing future monthly settlements under the reinsurance
agreement, the potential for significant monthly settlement payments from us to
Transamerica in future periods remains. As of September 30, 2004, approximately
$4.6 million was outstanding to Transamerica representing amounts due under the
reinsurance agreement for the period of June 2004 through August 2004. At September 30, 2004, our total capitalization, which consisted entirely
of equity, was $126,071,430. During 2001, our Board of Directors approved a
share repurchase program of up to an aggregate of $25,000,000 of our common
shares from time to time in the future if market conditions so dictate. As of
September 30, 2004, no shares had been repurchased under this program. - 22 -




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We continue to use substantial amounts of cash to fund our operations,
primarily due to significant cash outlays required under our annuity
reinsurance agreement with Transamerica, continuing costs associated with
maintaining our public company status and increased compliance costs related to
the Sarbanes-Oxley Act. Through September 30, 2004, we incurred $221,000 of
fees in connection with our preparation for compliance with section 404 of the
Sarbanes-Oxley Act of 2002. We also continue to incur a relatively high level
of operating expenses, including increased professional and consulting fees
relating to our analysis and pursuit of possible strategic alternatives that
may be available to us and to our continuing current and periodic reporting
requirements under United States securities laws. As the result of the
recapture or termination of many of our reinsurance agreements, our insurance
premium and investment revenue base during 2004 has decreased significantly as
compared to prior periods. Our investment income has also declined during 2004,
reflecting lower overall levels of invested assets in our general account, as
well as a decreased asset base underlying our annuity reinsurance agreements.
Consequently, our operating expenses as a percentage of our total revenue
(excluding the net change in fair value of embedded derivatives) have also been
increasing. If we are unable to generate sufficient revenue from our operations
to satisfy our obligations and fund our operating expenses, it would have a
material adverse effect on our financial condition, and we may be required to
liquidate our operations. For the nine months ended September 30, 2004, we utilized $57,327,851 of
our cash and equivalents to fund operating activities, as compared with using
cash and equivalents of $86,149,537 from our operating activities for the nine
months ended September 30, 2003. The utilization of our cash and equivalents
during the first nine months of 2004 primarily reflects a $22,100,000 payment
of unearned premiums associated with the recapture of our life reinsurance
agreement with the Metropolitan Life Insurance Companies, payments of
$23,800,000 to Transamerica, and an $11,000,000 payment of policy benefits
associated with the recapture of our GMDB/GMIB reinsurance agreement with
CIGNA. We have no material commitments for capital expenditures as of September
30, 2004. We plan to continue to receive premiums and pay claims under our
remaining reinsurance treaties; however, we are not currently underwriting any
new treaties or accepting any new business from our existing treaties. We are
exploring strategic alternatives, including, but not limited to, a merger,
sale, joint venture or other comparable transaction, none of which may be
available to us, or which may only be available on unfavorable terms. There
can be no assurance that we will be able to improve our results of operations,
financial condition or liquidity. If we are unsuccessful in reducing our
operating costs, negotiating the recapture or termination of the Transamerica
agreement, or pursuing a strategic alternative on favorable terms, we likely
will continue to experience negative cash flows and may be required to wind up
our operations, sell our assets, restructure our business, or liquidate. Both we and our Bermuda operating subsidiary, Annuity and Life
Reassurance, are required to comply with the provisions of the Bermuda
Companies Act that regulate the payment of dividends and the making of
distributions from contributed surplus. Under the Act, neither we nor Annuity
and Life Reassurance may declare or pay a dividend, or make a distribution out
of contributed surplus, if there are reasonable grounds for believing that: (i)
the relevant company is, or would be after the payment, unable to pay its
liabilities as they become due; or (ii) the realizable value of the relevant
companys assets would thereby be less than the aggregate of its liabilities
and its issued share capital and share premium accounts. As of and since
December 31, 2002, we have not declared a dividend to shareholders and we do
not expect to declare or pay dividends to shareholders in the near future. The
declaration and payment of future dividends to holders of our common shares
will be at the discretion of our Board of Directors and will depend upon our
earnings and financial condition, capital requirements of our subsidiaries, the
ability of our operating subsidiaries to pay dividends to us, regulatory
considerations and other factors the Board of Directors deems relevant. - 23 -




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Forward-Looking and Cautionary Statements This report, together with other statements and information we may
provide, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements may include, but are not limited to, projections
of revenues, income or loss, capital expenditures, plans for future operations
and financing needs or plans, as well as assumptions relating to the foregoing.
The words expect, project, estimate, predict, anticipate, believe
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements include these expressions.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance and achievements could differ materially from those set
forth in, contemplated by or underlying the forward-looking statements. Factors
that could materially and adversely affect our operations and financial
condition and/or cause our actual results of operations or financial condition
to differ from those expressed or implied in our forward-looking statements
include, but are not necessarily limited to, our ability to meet the
obligations associated with our current business and to fund our continuing
operations; our ability to reduce or otherwise satisfy our collateral
obligations; our ability to pursue strategic alternatives on favorable terms;
the outcome of pending legal proceedings involving us; our ability to obtain
adequate financial ratings; the ability of our cedents to manage successfully
assets they hold on our behalf; our success in managing our investments; our
ability to list our common shares for trading on a national exchange or
automated quotation system; changes in mortality, morbidity and claims
experience; our ability to make accurate estimates and assumptions regarding
future mortality, persistency, lapses, expenses and investment performance
based upon historical results and information provided to us by our cedents;
our ability to underwrite business; unanticipated withdrawal or surrender
activity; changes in market conditions, including changes in interest rate
levels; the competitive environment; the impact of recent and possible future
terrorist attacks and the U.S. governments response thereto; our ability to
attract and retain clients; the loss of a key executive; regulatory changes
(such as changes in U.S. tax law and insurance regulation that directly affect
the competitive environment for our products); and a prolonged economic
downturn. Investors are also directed to consider the risks and uncertainties
discussed in other documents we have filed with the Securities and Exchange
Commission, and in particular, our Annual Report on Form 10-K for the year
ended December 31, 2003, as amended. We do not undertake to update any
forward-looking statement that may be made from time to time by or on our
behalf. 
 Item 3.Quantitative and Qualitative Disclosures about Market Risk Except as noted below with respect to the impact of our adoption of AICPA
SOP 03-1 effective January 1, 2004, there have been no material changes since
December 31, 2003 with respect to our market risk exposure described in our
Annual Report on Form 10-K for the year ended December 31, 2003, as amended.
Please refer to Item 7A: Quantitative and Qualitative Disclosures about Market
Risk in our Annual Report on Form 10-K for the year ended December 31, 2003,
as amended. On January 1, 2004, we adopted AICPA Statement of Position (SOP) 03-1. One
requirement of the SOP is for us to record the largest contractually
determinable amount payable to the policyholder of each underlying policy
comprising our Interest sensitive contract liabilities as our reserve for those
policies, rather than simply recording reserves based solely on the
policyholder account values. The computation of amounts due policyholders under
our reinsurance contract with Transamerica includes a market value adjustment
and, to the extent the market value adjustment would require payments to
policyholders in excess of the minimum guarantee amount under the policies, the
reserve required under the SOP is directly influenced by changes in the value
of the underlying assets. The SOP modified the accounting for liabilities
recorded in connection with our reinsurance contracts, but did not modify the - 24 -




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accounting for the assets supporting the liabilities. As a result, changes
in our reserve levels resulting from underlying asset value changes will not be
offset with corresponding changes in our Funds withheld asset values. This
mismatch will cause volatility in net income on a quarterly basis, but we
believe it will have no effect on the underlying profitability of the
Transamerica contract over the long term. To the extent that the minimum
guarantee payable under the policy exceeds the payment that would be required
as a result of the market value adjustment, the reserves required under the SOP
would be based upon the minimum guarantee and the mismatch between liabilities
and assets is less significant. If we computed our reserves as if the amounts
payable to the policyholders under the Transamerica contract exceeded the
minimum guarantee amount, a 1% increase (decrease) in underlying asset values
would cause a $5 million charge (benefit) to net income. On October 26, 2004, our wholly owned subsidiary, Annuity and Life
Reassurance, Ltd., entered into a Commutation and Release Agreement with CIGNA
providing for the recapture by CIGNA of the GMDB/GMIB agreement. As of December
31, 2003, we had established reserves of $11,000,000 related to these types of
minimum guarantees associated with variable annuity products. Upon the
Companys adoption of SOP 03-1 on January 1, 2004, the amount of reserves for
future policy benefits relating to minimum guarantees associated with variable
annuity products was reduced by $1,878,760. Reserves were $8,976,700 at the
time of the recapture by CIGNA. As of September 30, 2004, we had no established
reserves related to these types of minimum guarantees associated with variable
annuity products due to the recapture of the only remaining contract reinsuring
these risks. 
 Item 4.Controls and Procedures In a letter dated March 24, 2004, KPMG in Bermuda, the Companys
independent auditor for the year ended December 31, 2003, advised the Companys
management and the Audit Committee of the Companys Board of Directors of a
reportable condition under standards established by the American Institute of
Certified Public Accountants. The reportable condition related primarily to the
size of the Companys financial department and the complexity of the accounting
process for the Companys annuity reinsurance contract with Transamerica. KPMG
recommended that the Company simplify the accounting process for the contract
and strengthen its review procedures to include quarterly reconciliations of a
single set of accounting records to settlement reports provided by Transamerica
and independent reviews of accounting entries relating to the contract. As of the end of the period covered by this Form 10-Q, the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Companys disclosure
controls and procedures. Included in this evaluation were considerations of the
points raised in KPMGs letter. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the points raised in
KPMGs letter were not indicative of a deficiency in the Companys system of
disclosure controls and procedures and that the Companys disclosure controls
and procedures were effective. However, in response to KPMGs letter, the
Company has instituted a process requiring formal review of each entry in its
general ledger relating to its Transamerica contract by both its Chief
Executive Officer and Chief Financial Officer, and has modified its procedures
to better document the completion of such reviews. The Company has also engaged
an internationally recognized consulting firm to provide additional financial
oversight to the Company in high-risk areas. These efforts are in addition to
the process of reviewing, assessing, and formalizing the Companys internal
controls in light of the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, which the Company had commenced prior to the receipt of KPMGs March
24, 2004 letter. During the third quarter of 2004, the Company strengthened its internal
controls related to the segregation of duties in its bank statement
reconciliation procedure. The Company is also in the process - 25 -




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of strengthening its internal controls over wire transfers, which the
Company anticipates will be completed in the fourth quarter. Other than the foregoing, there
have been no other changes in the Companys internal controls over financial
reporting during the period ended September 30, 2004 that materially affected,
or are reasonably likely to materially affect, the Companys internal controls
over financial reporting. - 26 -




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PART II OTHER INFORMATION 
 Item 1.Legal Proceedings On and since December 4, 2002, certain of our shareholders, seeking to act
as class representatives, filed lawsuits against us and certain of our present
and former officers and directors in the United States District Court for the
District of Connecticut seeking unspecified monetary damages. The plaintiffs
claim that the defendants violated certain provisions of the United States
securities laws by making various alleged material misstatements and omissions
in public filings and press releases. The plaintiffs filed a single
consolidated amended complaint in July 2003, adding as defendants XL Capital
Ltd and two additional directors. On October 1, 2003, we answered the amended
and consolidated complaint and denied liability on the claims the plaintiffs
have asserted. In January 2004, the court ordered that a related action that
the plaintiffs filed against KPMG LLP (United States) and KPMG in Bermuda be
consolidated with the action against us. In February 2004, the court denied
certain individual defendants motions to dismiss the action. In March 2004,
the court denied motions to dismiss filed by certain other individual
defendants and XL Capital Ltd. Also in March 2004, KPMG LLP (United States) and
KPMG in Bermuda filed motions to dismiss the action. The court has not yet
ruled on KPMG LLPs (United States), KPMG in Bermudas and one individual
defendants respective motions to dismiss. The individual defendants motion to
dismiss will become moot if the settlement discussed below is consummated. On July 20, 2004, we announced that we had reached an agreement in
principle with the plaintiffs, subject to full documentation by the parties to
the settlement, notice to the class, court approval and other steps required to
consummate a class action settlement, to settle the lawsuit. In August 2004,
the parties to the settlement executed and filed a Stipulation setting forth
their settlement agreement, and sought court approval. The parties to the
settlement are the plaintiffs and the class (which consists, subject to certain
exclusions, of persons who purchased our common shares between March 15, 2000
and November 19, 2002), us, all individual defendants and XL Capital, Ltd.
The settlement is without any admission of liability or wrongdoing. We, along
with our directors and officers liability carrier and XL Capital Ltd., have
agreed to pay an aggregate of $16.5 million. Our share of the settlement is
$2.5 million in cash, which we paid into escrow in August 2004, and an
additional $2.5 million in common shares (subject to a cap of 19.9% of our
outstanding shares), although we have reserved the right to elect to pay this
portion in cash. In October 2004, the court ordered that notice of the settlement be given
to class members, set deadlines for class members to exclude themselves from
the class or file objections to the settlement, and scheduled a Settlement
Fairness Hearing for January 2005. The settlement cannot be consummated until
and unless the court approves it. As of June 30, 2004, we were involved in arbitration proceedings with
Transamerica Occidental Life Insurance Company (Transamerica). The
arbitration related to Transamericas allegation that, as of October 31, 2003,
we owed $17.6 million under our annuity reinsurance agreement with them. On
February 3, 2004, we paid Transamerica $12.6 million, representing the net
amount we believed was due under the reinsurance agreement as of October 31,
2003 after deducting $5.0 million for investment related expenses that we
believe was owed to us by Transamerica. Transamerica pursued arbitration with
us, asserting that the $5.0 million offset was not justified and that we owed
it that amount and interest on the amounts that Transamerica previously alleged
were due. In addition, through October 31, 2003, we had received monthly
settlement reports from Transamerica prepared on a basis that we believe - 27 -




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conformed with the reinsurance agreement between us. For the period
subsequent to October 31, 2003, we had only received settlement reports from
Transamerica prepared on a basis that Transamerica alleged was appropriate, but
which we believed was not consistent with the reinsurance agreement. The
principal difference related to how realized gains and losses related to the
invested assets supporting the annuity obligations were settled between us.
Transamerica had not provided us with realized gain and loss information on the
basis we believed was appropriate. As a result, in preparing our financial
statements, we adjusted the amounts reported to us by Transamerica in the
monthly settlement reports for periods subsequent to October 31, 2003 to
reflect what we believed was the appropriate treatment of realized capital
gains and losses. On July 2, 2004, Transamerica agreed to settle all disputes relating to
the arbitration proceedings between us. Pursuant to the terms of the settlement
agreement, we agreed to calculate monthly settlements under our reinsurance
agreement in a manner we believe is consistent with the original terms of the
agreement. Transamerica also agreed to our $5.0 million offset of amounts owed
to Transamerica at October 31, 2003. On July 8, 2004, we paid Transamerica
approximately $8.7 million, representing amounts due under the reinsurance
agreement as of April 30, 2004. On August 6, 2004, we paid Transamerica
approximately $2.6 million, representing amounts due under the reinsurance
agreement as of May 31, 2004. Although Transamerica has agreed with us to a
method for computing future monthly settlements under the reinsurance
agreement, the potential for significant monthly settlement payments from us to
Transamerica in future periods remains. As of September 30, 2004, approximately
$4.6 million was outstanding to Transamerica representing amounts due under the
reinsurance agreement for the period of June 2004 through August 2004. On October 8, 2003, we were served with a statutory demand for $640,000
from Imagine Group Holdings Limited (Imagine), a Bermuda based reinsurance
company, which was subsequently withdrawn. Imagine has since instituted a civil
proceeding in the Bermuda Supreme Court against us, alleging that we are
obligated to reimburse it for $640,000 of expenses it incurred in connection
with a proposed December 2002 capital raising transaction that was not
consummated. On March 11, 2004, we filed an amended defense with the court to
which Imagine responded on April 26, 2004. We do not believe that Imagine is
entitled to reimbursement of these expenses under the applicable agreement and
intend to defend ourselves against Imagine Res claims. There are no other material arbitration or other legal proceedings
currently in process in which we are involved. - 28 -




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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds The following table summarizes our equity security repurchases during the
three months ended September 30, 2004: Total Number of
    
    Approximate DollarTotal
    
    
    
    
    
    Share Purchased
    
    Value of Shares thatNumber of
    
    Average
    
    as part of Publicly
    
    May Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plans
    
    Under thePeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    Plans or Programs (1)July 1  July 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000August 1  August 31, 2004
    
    
    

    
    
    
    
    
    
    
    
    
    
    $
    25,000,000September 1  September
30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000
   (1)
    
    During 2001, our Board of Directors approved a share repurchase program
to allow us to repurchase up to an aggregate $25,000,000 of our common
shares in the future if market conditions so dictate. As of September 30,
2004, no shares had been repurchased under the program. The Annual Meeting of Shareholders of the Company was held on August 5,
2004. The following matters were voted upon at the Annual Meeting, and
received the votes set forth below:  (a)
    
    All of the following persons were nominated to serve as
directors and received the number of votes set forth opposite their
respective name: FOR
    
    WITHHELDMartin A. Berkowitz
    
    
    19,509,481
    
    
    
    253,772Michael P. Esposito, Jr.
    
    
    19,495,204
    
    
    
    268,049Robert P. Johnson
    
    
    19,526,881
    
    
    
    236,372Jeffrey D. Watkins
    
    
    19,519,681
    
    
    
    243,572
  (b)
    
    A proposal to ratify the appointment of Marcum & Kliegman LLP as the
Companys independent accountants for the 2004 fiscal year was approved,
having received 19,304,706 votes FOR and 427,047 votes AGAINST, with
31,500 abstentions and broker non-votes.(c)
    
    A proposal to consolidate the Companys common shares within a range of
one-for-two to one-for-twenty was approved and to grant authority to the
Companys Board of Directors to determine the final terms and effective
time of such consolidation was approved, having received 13,845,061 votes
FOR and 5,902,878 votes AGAINST, with 15,314 abstentions and broker
non-votes.(d)
    
    The shareholders approved a proposal to amend the Companys byelaws to
authorize the Board of Directors to determine the final terms and
effective time of the consolidation of share capital approved in (c)
above, with the proposal having received 13,892,509 votes FOR and
5,849,130 votes AGAINST, with 21,614 abstentions and broker non-votes. - 29 -




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Item 6.Exhibits 10.1 Commutation and Release Agreement, by and between Annuity & Life
Reassurance, Ltd. and Connecticut General Life Insurance Company, dated October
26, 2004 (incorporated herein by reference to Exhibit 99.1 to the Companys
Form 8-K filed on October 28, 2004). 10.2 Annuity and Life Re (Holdings), Ltd. Common Stock Purchase Warrant,
issued to Connecticut General Life Insurance Company, dated as of September 30,
2004 (incorporated herein by reference to Exhibit 99.2 to the Companys Form
8-K filed on October 28, 2004). 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer.32.1
    
    Section 1350 Certification of the Companys Chief Executive Officer.32.2
    
    Section 1350 Certification of the Companys Chief Financial Officer.
 ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ANNUITY AND LIFE RE (HOLDINGS), LTD./s/ John F. BurkeName: John F. BurkeDate: November 8, 2004
    
    Title: Chief Executive Officer/s/ John W. LockwoodName: John W. LockwoodDate: November 8, 2004
    
    Title: Chief Financial Officer
 - 30 -




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Exhibit Index 10.1
    
    Commutation and Release Agreement, by and between Annuity & Life
Reassurance, Ltd. and Connecticut General Life Insurance Company, dated
October 26, 2004 (incorporated herein by reference to Exhibit 99.1 to the
Companys Form 8-K filed on October 28, 2004).10.2
    
    Annuity and Life Re (Holdings), Ltd. Common Stock Purchase Warrant,
issued to Connecticut General Life Insurance Company, dated as of
September 30, 2004 (incorporated herein by reference to Exhibit 99.2 to
the Companys Form 8-K filed on October 28, 2004).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive
Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial
Officer.32.1
    
    Section 1350 Certification of the Companys Chief Executive Officer.32.2
    
    Section 1350 Certification of the Companys Chief Financial Officer.
 - 31 -