##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, DC 20549




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Form 10-Q



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|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
    September 30, 2003                                       
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 1-16561

ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Bermuda                                                            |  | Not applicable                       
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (IRS Employer
    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,
2003 was 26,473,728.



---






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##### 



INDEX TO FORM 10-Q

|           |  |                                                                                                                                      |    |      |    | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|           |  |                                                                                                                                      |    | Page
|           |  |                                                                                                                                      |    |     
|           |  | PART I
    FINANCIAL INFORMATION                                                                                                     |    |      |    | 
|          
|Item 1.    |  | Unaudited Consolidated Financial Statements                                                                                          |    |      |    | 
|           |  | Consolidated Balance Sheets September 30, 2003
    and December 31, 2002                                                             |    |      | 1  | 
|           |  | Consolidated Statements of Operations Three
    Months and Nine Months ended September 30, 2003 and
    September 30, 2002           |    |      | 2  | 
|           |  | Consolidated Statements of Comprehensive (Loss)
    Three Months and Nine Months ended September 30, 2003 and
    September 30, 2002 |    |      | 3  | 
|           |  | Consolidated Statements of Cash Flows Nine Months
    ended September 30, 2003 and September 30, 2002                                |    |      | 4  | 
|           |  | Consolidated Statements of Changes in
    Stockholders Equity Nine Months ended September 30,
    2003 and September 30, 2002       |    |      | 5  | 
|           |  | Notes to Unaudited Consolidated Financial
    Statements                                                                             |    |      | 6  | 
|          
|Item 2.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                            |    |      | 19 | 
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                       |    |      | 39 | 
|          
|Item 4.    |  | Controls and Procedures                                                                                                              |    |      | 41 | 
|           |  | PART II
    OTHER INFORMATION                                                                                                        |    |      |    | 
|Item 1.    |  | Legal Proceedings                                                                                                                    |    |      | 42 | 
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                            |    |      | 42 | 
|Item 5.    |  | Other Information                                                                                                                    |    |      | 43 | 
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                     |    |      | 44 | 
|Signatures |  |                                                                                                                                      | 45 |     



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##### 



PART I

FINANCIAL INFORMATION



|        |                                                
|------- | -----------------------------------------------
|Item 1. | Unaudited Consolidated Financial
    Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONSOLIDATED BALANCE SHEETS


(U.S. dollars)


|                                                                                                                                                                 |                                            |               |              |               |  |   |               |               | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------- | ------------ | ------------- |  | - | ------------- | ------------- | 
|                                                                                                                                                                 |                                            | September 30, |              | December 31, 
|                                                                                                                                                                 |                                            | 2003          |              | 2002         
|                                                                                                                                                                 |                                            |               |              |              
|                                                                                                                                                                 |                                            | (Unaudited)   |              |              
|Assets                                                                                                                                                           |                                            |               |              |               |  |   |               |              
|Cash and cash equivalents                                                                                                                                        |                                            | $             | 113,859,239  |               |  | $ | 152,930,908   |              
|Fixed maturity investments at fair value
    (amortized cost of $96,058,034 and $146,487,903 at
    September 30, 2003 and December 31, 2002)                    |                                            |               | 98,810,759   |               |  |   | 153,415,429   |              
|Funds withheld at interest                                                                                                                                       |                                            |               | 695,573,638  |               |  |   | 1,427,093,380 |              
|Accrued investment income                                                                                                                                        |                                            |               | 1,083,924    |               |  |   | 2,141,338     |              
|Receivable for reinsurance ceded                                                                                                                                 |                                            |               | 89,506,699   |               |  |   | 93,669,173    |              
|Other reinsurance receivables                                                                                                                                    |                                            |               | 6,775,426    |               |  |   | 25,025,453    |              
|Deferred policy acquisition costs                                                                                                                                |                                            |               | 74,844,406   |               |  |   | 187,913,648   |              
|Other assets                                                                                                                                                     |                                            |               | 965,194      |               |  |   | 2,508,858     |              
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              
|                                                                                                                                                                 | Total Assets                               |               | $            | 1,081,419,285 |  |   | $             | 2,044,698,187 | 
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              
|Liabilities                                                                                                                                                      |                                            |               |              |               |  |   |               |              
|Reserves for future policy benefits                                                                                                                              |                                            | $             | 187,391,334  |               |  | $ | 269,619,809   |              
|Interest sensitive contracts liability                                                                                                                           |                                            |               | 700,977,967  |               |  |   | 1,443,143,080 |              
|Other reinsurance liabilities                                                                                                                                    |                                            |               | 38,013,037   |               |  |   | 51,139,164    |              
|Accounts payable and accrued expenses                                                                                                                            |                                            |               | 8,637,124    |               |  |   | 12,459,423    |              
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              
|                                                                                                                                                                 | Total Liabilities                          |               | $            | 935,019,462   |  |   | $             | 1,776,361,476 | 
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              
|Stockholders Equity                                                                                                                                             |                                            |               |              |               |  |   |               |              
|Preferred shares (par value $1.00; 50,000,000
    shares authorized; no shares outstanding)                                                                      |                                            | $             |             |               |  | $ |              |              
|Common shares (par value $1.00; 100,000,000
    shares authorized; 26,473,728 and 26,106,328 shares outstanding
    at September 30, 2003 and December 31, 2002) |                                            |               | 26,473,728   |               |  |   | 26,106,328    |              
|Additional paid-in capital                                                                                                                                       |                                            |               | 334,481,610  |               |  |   | 335,334,932   |              
|Notes receivable from stock sales                                                                                                                                |                                            |               |             |               |  |   | (1,626,493    | )            
|Unamortized stock grant compensation                                                                                                                             |                                            |               | (1,732,985   | )             |  |   | (2,514,693    | )            
|Stock warrants                                                                                                                                                   |                                            |               | 1,250,000    |               |  |   |              |              
|Accumulated other comprehensive income                                                                                                                           |                                            |               | 2,211,223    |               |  |   | 6,162,525     |              
|(Accumulated deficit)                                                                                                                                            |                                            |               | (216,283,753 | )             |  |   | (95,125,888   | )            
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              
|                                                                                                                                                                 | Total Stockholders Equity                 |               | $            | 146,399,823   |  |   | $             | 268,336,711   | 
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              
|                                                                                                                                                                 | Total Liabilities and Stockholders Equity |               | $            | 1,081,419,285 |  |   | $             | 2,044,698,187 | 
|                                                                                                                                                                 |                                            |               |              |               |  |   |               |              

See accompanying Notes to Unaudited Consolidated
Financial Statements

1



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited and in U.S. dollars)


|                                                          |         |                            |            |                           |  |      |             |       |   |   |              |       |   |   |             |       |  
|--------------------------------------------------------- | ------- | -------------------------- | ---------- | ------------------------- |  | ---- | ----------- | ----- | - | - | ------------ | ----- | - | - | ----------- | ----- | -
|                                                          |         |                            |            |                          
|                                                          |         | For the Three Months Ended |            | For the Nine Months Ended
|                                                          |         | September 30,              |            | September 30,            
|                                                          |         |                            |            |                          
|                                                          |         | 2003                       |            | 2002                      |  | 2003 |             | 2002 
|                                                          |         |                            |            |                           |  |      |             |      
|Revenues                                                  |         |                            |            |                           |  |      |             |      
|Net premiums                                              |         | $                          | 28,657,263 |                           |  | $    | 84,934,401  |       |   | $ | 148,586,899  |       |   | $ | 255,007,035 |      
|Investment income, net of related expenses                |         |                            | 16,250,225 |                           |  |      | 31,127,396  |       |   |   | 30,143,651   |       |   |   | 82,083,855  |      
|Net realized investment (losses) gains                    |         |                            | (52,025    | )                         |  |      | 9,297,351   |       |   |   | 6,508,019    |       |   |   | 10,813,315  |      
|Net change in fair value of embedded derivatives          |         |                            | 2,808,427  |                           |  |      | (13,277,823 | )     |   |   | 14,845,749   |       |   |   | (18,254,530 | )    
|Surrender fees and other revenues                         |         |                            | 1,667,997  |                           |  |      | 3,549,362   |       |   |   | 6,061,022    |       |   |   | 13,606,694  |      
|                                                          |         |                            |            |                           |  |      |             |       |   |   |              |       |   |   |             |      
|Total Revenues                                            |         | $                          | 49,331,887 |                           |  | $    | 115,630,687 |       |   | $ | 206,145,340  |       |   | $ | 343,256,369 |      
|                                                          |         |                            |            |                           |  |      |             |       |   |   |              |       |   |   |             |      
|Benefits and Expenses                                     |         |                            |            |                           |  |      |             |      
|Claim and policy benefits                                 |         | $                          | 19,075,004 |                           |  | $    | 91,381,831  |       |   | $ | 178,589,650  |       |   | $ | 224,640,576 |      
|Interest credited to interest sensitive products          |         |                            | 3,821,854  |                           |  |      | 18,345,349  |       |   |   | 12,911,155   |       |   |   | 57,215,862  |      
|Policy acquisition costs and other insurance
    expenses |         |                            | 22,796,448 |                           |  |      | 17,492,342  |       |   |   | 119,928,722  |       |   |   | 73,700,329  |      
|Collateral costs                                          |         |                            |           |                           |  |      | 3,731,580   |       |   |   |             |       |   |   | 6,080,321   |      
|Operating expenses                                        |         |                            | 3,605,189  |                           |  |      | 3,826,602   |       |   |   | 15,873,678   |       |   |   | 10,626,666  |      
|                                                          |         |                            |            |                           |  |      |             |       |   |   |              |       |   |   |             |      
|Total Benefits and Expenses                               |         | $                          | 49,298,495 |                           |  | $    | 134,777,704 |       |   | $ | 327,303,205  |       |   | $ | 372,263,754 |      
|                                                          |         |                            |            |                           |  |      |             |       |   |   |              |       |   |   |             |      
|Net Income (Loss)                                         |         | $                          | 33,392     |                           |  | $    | (19,147,017 | )     |   | $ | (121,157,865 | )     |   | $ | (29,007,385 | )    
|                                                          |         |                            |            |                           |  |      |             |       |   |   |              |       |   |   |             |      
|Net income (loss) per common
    share                    |         |                            |            |                           |  |      |             |      
|                                                          | Basic   |                            | $          | 0.00                      |  |      | $           | (0.74 | ) |   | $            | (4.69 | ) |   | $           | (1.13 | )
|                                                          | Diluted |                            | $          | 0.00                      |  |      | $           | (0.74 | ) |   | $            | (4.69 | ) |   | $           | (1.13 | )

See accompanying Notes to Unaudited Consolidated
Financial Statements

2



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS)


(Unaudited and in U.S. dollars)


|                                                                                        |  |                            |          |                           |  |      |             |      |  |   |              |   |  |   |             |  
|--------------------------------------------------------------------------------------- |  | -------------------------- | -------- | ------------------------- |  | ---- | ----------- | ---- |  | - | ------------ | - |  | - | ----------- | -
|                                                                                        |  |                            |          |                          
|                                                                                        |  | For the Three Months Ended |          | For the Nine Months Ended
|                                                                                        |  | September 30,              |          | September 30,            
|                                                                                        |  |                            |          |                          
|                                                                                        |  | 2003                       |          | 2002                      |  | 2003 |             | 2002
|                                                                                        |  |                            |          |                           |  |      |             |     
|Net income (loss) for the period                                                        |  | $                          | 33,392   |                           |  | $    | (19,147,017 | )    |  | $ | (121,157,865 | ) |  | $ | (29,007,385 | )
|Other comprehensive
    (loss) income:                                                  |  |                            |          |                           |  |      |             |      |  |   |              |   |  |   |             |  
|Unrealized holding (losses) gains on securities
    arising during the period           |  |                            | (482,029 | )                         |  |      | 17,633,359  |      |  |   | 2,556,717    |   |  |   | 20,486,539  |  
|Less reclassification adjustment for realized
    losses and gains in net income (loss) |  |                            | (52,025  | )                         |  |      | 9,297,351   |      |  |   | 6,508,019    |   |  |   | 10,813,315  |  
|                                                                                        |  |                            |          |                           |  |      |             |      |  |   |              |   |  |   |             |  
|Other comprehensive (loss) income                                                       |  | $                          | (430,004 | )                         |  | $    | 8,336,008   |      |  | $ | (3,951,302   | ) |  | $ | 9,673,224   |  
|                                                                                        |  |                            |          |                           |  |      |             |      |  |   |              |   |  |   |             |  
|Total Comprehensive (Loss)                                                              |  | $                          | (396,612 | )                         |  | $    | (10,811,009 | )    |  | $ | (125,109,167 | ) |  | $ | (19,334,161 | )
|                                                                                        |  |                            |          |                           |  |      |             |      |  |   |              |   |  |   |             |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

3



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited and in U.S. dollars)


|                                                                                         |                                                      |                           |              |             |   |   |              |             |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------- | ------------ | ----------- | - | - | ------------ | ----------- | -
|                                                                                         |                                                      |                          
|                                                                                         |                                                      | For the Nine Months Ended
|                                                                                         |                                                      | September 30,            
|                                                                                         |                                                      |                          
|                                                                                         |                                                      | 2003                      |              | 2002       
|                                                                                         |                                                      |                           |              |            
|Cash flows from operating activities                                                     |                                                      |                           |              |             |   |   |              |            
|Net (loss)                                                                               |                                                      | $                         | (121,157,865 | )           |   | $ | (29,007,385  | )          
|Adjustments to reconcile net (loss) to cash
    (used) provided by operating activities: |                                                      |                           |              |             |   |   |              |            
|Net realized investment (gains)                                                          |                                                      |                           | (6,508,019   | )           |   |   | (10,813,315  | )          
|Net change in fair value of embedded derivatives                                         |                                                      |                           | (14,845,749  | )           |   |   | 18,254,530   |            
|Amortization of stock grant compensation                                                 |                                                      |                           | 295,786      |             |   |   | 541,344      |            
|Unrealized loss on interest rate swap                                                    |                                                      |                           |             |             |   |   | 2,005,000    |            
|Stock warrants expense                                                                   |                                                      |                           | 1,250,000    |             |   |   |             |            
|Changes in:                                                                              |                                                      |                           |              |             |   |   |              |            
|Accrued investment income                                                                |                                                      |                           | 1,057,414    |             |   |   | 833,266      |            
|Deferred policy acquisition costs                                                        |                                                      |                           | 113,069,242  |             |   |   | (19,015,030  | )          
|Other reinsurance receivables                                                            |                                                      |                           | 22,412,502   |             |   |   | (2,215,364   | )          
|Other assets                                                                             |                                                      |                           | 1,543,664    |             |   |   | 1,834,484    |            
|Reserves for future policy benefits                                                      |                                                      |                           | (82,228,475  | )           |   |   | 59,050,154   |            
|Interest sensitive contracts, net of funds
    withheld                                  |                                                      |                           | 4,200,378    |             |   |   | 1,386,015    |            
|Other reinsurance liabilities                                                            |                                                      |                           | (13,126,127  | )           |   |   | 5,560,803    |            
|Accounts payable and accrued expenses                                                    |                                                      |                           | (3,822,299   | )           |   |   | 2,980,910    |            
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|                                                                                         | Net cash (used) provided by operating
    activities |                           | $            | (97,859,548 | ) |   | $            | 27,726,444  |  
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|Cash flows from investing activities                                                     |                                                      |                           |              |             |   |   |              |            
|Proceeds from sales of fixed maturity investments                                        |                                                      | $                         | 329,135,148  |             |   | $ | 467,314,155  |            
|Purchase of fixed maturity investments                                                   |                                                      |                           | (271,973,762 | )           |   |   | (485,627,324 | )          
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|                                                                                         | Net cash provided (used) by investing
    activities |                           | $            | 57,161,386  |   |   | $            | (18,313,169 | )
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|Cash flows from financing activities                                                     |                                                      |                           |              |             |   |   |              |            
|Interest accrued on notes receivable                                                     |                                                      | $                         | (43,998      | )           |   | $ | (74,437      | )          
|Interest collected on notes receivable                                                   |                                                      |                           | 420,491      |             |   |   | 38,620       |            
|Repayments (issuances) of notes receivable                                               |                                                      |                           | 1,250,000    |             |   |   | (250,000     | )          
|Dividends paid to stockholders                                                           |                                                      |                           |             |             |   |   | (3,867,909   | )          
|Increase in deposit liability                                                            |                                                      |                           |             |             |   |   | 10,000,000   |            
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|                                                                                         | Net cash provided by financing activities            |                           | $            | 1,626,493   |   |   | $            | 5,846,274   |  
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|(Decrease) increase in cash and cash equivalents                                         |                                                      | $                         | (39,071,669  | )           |   | $ | 15,259,549   |            
|Cash and cash equivalents, beginning of period                                           |                                                      |                           | 152,930,908  |             |   |   | 104,793,019  |            
|                                                                                         |                                                      |                           |              |             |   |   |              |            
|Cash and cash equivalents, end of period                                                 |                                                      | $                         | 113,859,239  |             |   | $ | 120,052,568  |            
|                                                                                         |                                                      |                           |              |             |   |   |              |            

See accompanying Notes to Unaudited Consolidated
Financial Statements

4



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY


(Unaudited and in U.S. dollars)


|                                            |  |                           |              |      |  |   |             |  
|------------------------------------------- |  | ------------------------- | ------------ | ---- |  | - | ----------- | -
|                                            |  |                          
|                                            |  | For the Nine Months Ended
|                                            |  | September 30,            
|                                            |  |                          
|                                            |  | 2003                      |              | 2002
|                                            |  |                           |              |     
|Preferred shares par value $1.00            |  |                           |              |      |  |   |             |  
|Balance at beginning and end of period      |  | $                         |             |      |  | $ |            |  
|                                            |  |                           |              |      |  |   |             |  
|Common shares par value $1.00               |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         | 26,106,328   |      |  | $ | 25,705,328  |  
|Issuance of shares                          |  |                           | 575,000      |      |  |   | 401,000     |  
|(Cancellation) of shares                    |  |                           | 207,600      |      |  |   |            |  
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         | 26,473,728   |      |  | $ | 26,106,328  |  
|                                            |  |                           |              |      |  |   |             |  
|Additional paid-in capital                  |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         | 335,334,932  |      |  | $ | 332,447,062 |  
|Issuance of shares                          |  |                           | 353,250      |      |  |   | 2,887,870   |  
|(Cancellation) of shares                    |  |                           | (1,206,572   | )    |  |   |            |  
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         | 334,481,610  |      |  | $ | 335,334,932 |  
|                                            |  |                           |              |      |  |   |             |  
|Notes receivable from stock sales           |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         | (1,626,493   | )    |  | $ | (1,317,259  | )
|Repayments (issuances)                      |  |                           | 1,250,000    |      |  |   | (250,000    | )
|Interest collected on notes receivable      |  |                           | 420,491      |      |  |   | 38,620      |  
|Accrued interest during period              |  |                           | (43,998      | )    |  |   | (74,437     | )
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         |             |      |  | $ | (1,603,076  | )
|                                            |  |                           |              |      |  |   |             |  
|Unamortized stock grant compensation        |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         | (2,514,693   | )    |  | $ |            |  
|(Issuance) of stock grants                  |  |                           | (928,250     | )    |  |   | (3,288,870  | )
|Cancellation of stock grants                |  |                           | 1,414,172    |      |  |   |            |  
|Amortization of stock grants                |  |                           | 295,786      |      |  |   | 541,344     |  
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         | (1,732,985   | )    |  | $ | (2,747,526  | )
|                                            |  |                           |              |      |  |   |             |  
|Stock warrants outstanding                  |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         |             |      |  | $ |            |  
|Issuance of warrants                        |  |                           | 1,250,000    |      |  |   |            |  
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         | 1,250,000    |      |  | $ |            |  
|                                            |  |                           |              |      |  |   |             |  
|Accumulated other comprehensive
    income  |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         | 6,162,525    |      |  | $ | 6,418,469   |  
|Net unrealized (losses) gains on securities |  |                           | (3,951,302   | )    |  |   | 9,673,224   |  
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         | 2,211,223    |      |  | $ | 16,091,693  |  
|                                            |  |                           |              |      |  |   |             |  
|(Accumulated deficit) retained
    earnings |  |                           |              |      |  |   |             |  
|Balance at beginning of period              |  | $                         | (95,125,888  | )    |  | $ | 38,935,242  |  
|Net (loss)                                  |  |                           | (121,157,865 | )    |  |   | (29,007,385 | )
|Stockholder dividends                       |  |                           |             |      |  |   | (3,867,909  | )
|                                            |  |                           |              |      |  |   |             |  
|Balance at end of period                    |  | $                         | (216,283,753 | )    |  | $ | 6,059,948   |  
|                                            |  |                           |              |      |  |   |             |  
|Total Stockholders Equity                  |  | $                         | 146,399,823  |      |  | $ | 379,242,299 |  
|                                            |  |                           |              |      |  |   |             |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

5



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.



NOTES TO UNAUDITED 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. The Company completed an initial public
offering of its equity securities and commenced operations on
April 17, 1998.

2.     Going Concern
Basis of Presentation

The accompanying unaudited 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 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, 2002,
as amended. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included
in these financial statements.

The accompanying unaudited consolidated financial
statements of the Company 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 incurred significant operating losses in
2002 and the first six months of 2003. Further, the financial
strength ratings of the Companys operating subsidiaries
were downgraded in 2002 and 2003 by A.M. Best,
Standard & Poors, and Fitch Ratings to C+, BB-,
and C, respectively. At the Companys request, all three
financial ratings have been withdrawn.

In addition, 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, 2003, the
Company did not have sufficient available cash and investments
to satisfy the collateral requirements asserted by CIGNA, the
cedent under the Companys only guaranteed minimum death
benefit and guaranteed minimum income benefit agreement. The
collateral requirement for this agreement is determined at the
end of each calendar year and does not change in interim
periods. As of December 31, 2002, CIGNA asserted that the
Company was required to satisfy additional collateral
requirements of approximately $59.0 million in excess of
the $11.0 million of collateral posted. The Company has not
agreed with CIGNAs computation of the $70.0 million
collateral requirement and has not posted any additional
collateral under the agreement. As a result, CIGNA has alleged
that the Company is in breach of its agreement, and may
institute arbitration or litigation proceedings to seek remedies
for the alleged breach. If the Company does not prevail in any
such arbitration or litigation proceedings, it would have a
material adverse effect on the Companys financial
condition and the Company may be required to liquidate its
operations. As of September 30, 2003, the Company had met
the collateral requirements of its other cedents, and the
Company expects to be able to meet any collateral requirements
asserted at December 31, 2003, other than CIGNA.

As of September 30, 2003, the Company had
$26.7 million of outstanding unsecured letters of credit
issued on its behalf by Citibank that expire on
December 31, 2003. In November 2003, Citibank agreed to
renew the Companys unsecured letter of credit facility
until December 31, 2004 if the Company reduces the
unsecured balance of the letter of credit facility to
$17.0 million by November 30, 2003. If the Company
does not reduce the unsecured balance of the letter of credit
facility to $17.0 million by November 30, 2003 and
Citibank does not renew the letters of credit, the letters of
credit will expire on December 31, 2003 and the

6



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys cedents will be entitled to draw
on the letters of credit. The Company would then be obligated to
repay Citibank for any amounts drawn.

Under Bermuda law, a single creditor could make a
statutory demand upon the Company for satisfaction of
obligations owed to that creditor. If the statutory demand is
held to be valid, and the Company is unable to satisfy its
obligations to that creditor, the creditor may institute
proceedings seeking the liquidation of the Company. As of the
date of this report, the Company has been served with three
statutory demands under Bermuda law. The Company satisfied or
otherwise eliminated its obligations to two of the parties
making those demands. The third demand relates to an allegation
that the Company owes $640,000 to Imagine Re, a Bermuda
based reinsurance company, as reimbursement for expenses
incurred by Imagine Re in connection with a proposed
December 2002 capital raising transaction with the Company that
was not consummated. The Company believes that Imagine Re
is not entitled to reimbursement of these expenses under the
applicable agreement and intends to defend against Imagine
Res claims. If an undisputed creditor of the Company
successfully pursues this statutory process and the Company is
unable to discharge its obligations, liquidation proceedings
could be commenced against the Company.

Transamerica Occidental Life Insurance Company
(Transamerica) has alleged that the Company owes
$14.9 million under its annuity reinsurance agreement with
it. The Company has not agreed that such amount currently is
owed to Transamerica and the parties are attempting to resolve
their issues. Transamerica has indicated that if the parties
cannot resolve their issues, it will attempt to put the
Companys Bermuda operating subsidiary into liquidation.

In addition to the discussions with Transamerica
related to the alleged amounts owed to it, the Company has been
attempting to engage Transamerica, and ultimately
IL Annuity and Insurance Company, the primary insurance
company under the Transamerica agreement, in discussions aimed
at improving investment returns from the convertible bond
portfolio and potentially redesigning the Vision Mark product to
reduce the minimum guarantee exposures from the Transamerica
agreement. If the Company is not successful in convincing
Transamerica and IL Annuity to restructure the portfolio
and/or to redesign the product, the Company may incur additional
write downs of deferred acquisition costs in the future.

On November 20, 2002, the State of
Connecticut Insurance Department and the Companys United
States domiciled operating subsidiary entered into a letter
agreement acknowledging that the Connecticut Insurance
Department is monitoring the financial condition of the
Companys United States domiciled operating subsidiary. The
letter agreement requires that certain financial transactions
entered into by the subsidiary, including the disposal of
assets, payment of dividends and settlement of inter-company
balances with the Companys Bermuda operating subsidiary,
be pre-approved by the insurance department. In addition, the
Connecticut Insurance Department has requested weekly updates
from senior management of the U.S. operating subsidiary on
the status of the Company and any changes in the status of the
U.S. operating subsidiary. The letter agreement continues
to be effective until March 1, 2004.

In January 2003, the Company instituted
substantial premium rate increases on all of its non-guaranteed
premium yearly renewable term agreements. All of the
Companys cedents subject to the rate increase, except The
Metropolitan Life Insurance Companies (MetLife) and
one other cedent who has accepted the rate increase, have
recaptured their reinsurance agreements. MetLife has made the
rate increase a subject of arbitration with the Company, and has
indicated that its election to recapture is dependent upon the
arbitration panels conclusion about the validity of the
rate increase. On October 3, 2003, MetLife drew
approximately $7.4 million of assets held in trust for its
benefit. The Company believes the draw was inappropriate due to
the pending arbitration, but has chosen at this time not to
attempt to challenge the draw, as the Company will likely
request that the arbitration panel make it a subject of the
arbitration. The arbitration proceeding is scheduled to commence
on December 15, 2003.

7



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The MetLife reinsurance agreement is the
Companys largest life reinsurance agreement. During the
first nine months of 2003, it produced $29.9 million of
premium revenue and $6.3 million of loss for the Company.
If the Company is not successful in obtaining the rate increase
through the arbitration and MetLife does not recapture the
agreement, the Company is likely to continue to incur losses
from this agreement for the foreseeable future. If the Company
is successful in the arbitration and MetLife recaptures the
agreement, the Companys annual premium revenues will
decline, but the Company would no longer incur losses under the
agreement.

The Company continues to consider its strategic
alternatives, including the possibility of raising new capital,
but has not been able to successfully raise new capital to date.
The Company has ceased to write new reinsurance agreements and
is not accepting any new business under existing treaties on
their current terms. The Company does not anticipate writing new
reinsurance agreements in the foreseeable future. In addition,
the Company is a defendant in a shareholder class action suit.
The plaintiffs have not disclosed the damages sought. These
aforementioned factors raise substantial doubt about the
Companys ability to continue as a going concern.

To date, the Companys plans have involved
reducing its collateral requirements by negotiating the
recapture, retrocession, novation or sale of certain of its
reinsurance agreements. During the first nine months of 2003,
these types of transactions resulted in significant losses for
the Company. While the Company may enter into similar
transactions in the future, it is not actively seeking to do so.

There can be no assurance that the Company will
be able to improve its operations and liquidity. If the Company
is unable to reposition its general account investment portfolio
to achieve a substantially higher yield within its investment
guidelines, successfully defend against the pending shareholder
class action suit, attain a favorable outcome from the MetLife
arbitration, and settle its issues with Transamerica regarding
their annuity reinsurance agreement, the Company may not be able
to meet its obligations. The Companys failure to achieve
any one of the foregoing items could have a material adverse
effect on its financial condition and results of operations. The
accompanying unaudited consolidated financial statements do not
include any adjustments that might be necessary should the
Company be unable to continue as a going concern.

3.     Income (Loss)
Per Share

The following table sets forth the computation of
basic and diluted income (loss) per share for the three
month and nine month periods ended September 30:

|                                                         |  |                    |            |                   |  |      |             |      |  |   |              |   |  |   |             |  
|-------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ----------- | ---- |  | - | ------------ | - |  | - | ----------- | -
|                                                         |  |                    |            |                  
|                                                         |  | Three Months Ended |            | Nine Months Ended
|                                                         |  | September 30,      |            | September 30,    
|                                                         |  |                    |            |                  
|                                                         |  | 2003               |            | 2002              |  | 2003 |             | 2002
|                                                         |  |                    |            |                   |  |      |             |     
|Net income (loss) available to common shareholders       |  | $                  | 33,392     |                   |  | $    | (19,147,017 | )    |  | $ | (121,157,865 | ) |  | $ | (29,007,385 | )
|                                                         |  |                    |            |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Basic:                                                   |  |                    |            |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Weighted average number of common shares
    outstanding |  |                    | 25,893,861 |                   |  |      | 25,733,141  |      |  |   | 25,848,999   |   |  |   | 25,722,016  |  
|Net income (loss) per share                              |  | $                  | 0.00       |                   |  | $    | (0.74       | )    |  | $ | (4.69        | ) |  | $ | (1.13       | )
|                                                         |  |                    |            |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Diluted:                                                 |  |                    |            |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Weighted average number of common shares
    outstanding |  |                    | 26,350,616 |                   |  |      | 25,733,141  |      |  |   | 25,848,999   |   |  |   | 25,722,016  |  
|Net income (loss) per share                              |  | $                  | 0.00       |                   |  | $    | (0.74       | )    |  | $ | (4.69        | ) |  | $ | (1.13       | )
|                                                         |  |                    |            |                   |  |      |             |      |  |   |              |   |  |   |             |  

8



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, certain of the
Companys modified coinsurance annuity reinsurance
agreements have features that constitute embedded derivatives
that require bifurcation and separate accounting under
FAS 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, except for
capital raising costs, which are charged directly to the
corporate segment. Capital raising costs incurred in 2002 have
been reallocated to the corporate segment to maintain
comparability with the presentation for 2003. The Company
believes that investors will better understand the
Companys profitability, risk profile, and capital
deployment through this segment reporting method. There are no
intersegment transactions. The following table displays several
key measurements for each of the Companys business
segments:

|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |               | 
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- | - |  | - | ------------- | 
|Three Months Ended    |  | Life        |             | Annuity     |  |           |             |             
|September 30, 2003    |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                      |  |             |             |             |  |           |             |             
|Revenues              |  | $           | 30,013,563  |             |  | $         | 19,097,603  |              |  | $ | 220,721    |   |  | $ | 49,331,887    | 
|Benefits and Expenses |  |             | 29,412,349  |             |  |           | 18,718,677  |              |  |   | 1,167,469  |   |  |   | 49,298,495    | 
|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |               | 
|Segment Income (Loss) |  | $           | 601,214     |             |  | $         | 378,926     |              |  | $ | (946,748   | ) |  | $ | 33,392        | 
|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |               | 
|Total Assets          |  | $           | 273,604,371 |             |  | $         | 726,777,967 |              |  | $ | 81,036,947 |   |  | $ | 1,081,419,285 | 
|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |               | 

|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | -
|Three Months Ended    |  | Life        |             | Annuity     |  |           |               |             
|September 30, 2002    |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                      |  |             |             |             |  |           |               |             
|Revenues              |  | $           | 86,708,167  |             |  | $         | 18,535,565    |              |  | $ | 10,386,955  |  |  | $ | 115,630,687   |  
|Benefits and Expenses |  |             | 96,647,003  |             |  |           | 36,789,209    |              |  |   | 1,341,492   |  |  |   | 134,777,704   |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Segment (Loss) Income |  | $           | (9,938,836  | )           |  | $         | (18,253,644   | )            |  | $ | 9,045,463   |  |  | $ | (19,147,017   | )
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Total Assets          |  | $           | 657,422,016 |             |  | $         | 1,549,867,709 |              |  | $ | 113,368,735 |  |  | $ | 2,320,658,460 |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  

|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- |  |  | - | ------------- | -
|Nine Months Ended     |  | Life        |             | Annuity     |  |           |             |             
|September 30, 2003    |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                      |  |             |             |             |  |           |             |             
|Revenues              |  | $           | 147,690,979 |             |  | $         | 50,967,532  |              |  | $ | 7,486,829  |  |  | $ | 206,145,340   |  
|Benefits and Expenses |  |             | 231,574,262 |             |  |           | 91,523,023  |              |  |   | 4,205,920  |  |  |   | 327,303,205   |  
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Segment (Loss) Income |  | $           | (83,883,283 | )           |  | $         | (40,555,491 | )            |  | $ | 3,280,909  |  |  | $ | (121,157,865  | )
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Total Assets          |  | $           | 273,604,371 |             |  | $         | 726,777,967 |              |  | $ | 81,036,947 |  |  | $ | 1,081,419,285 |  
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  

9



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | -
|Nine Months Ended     |  | Life        |             | Annuity     |  |           |               |             
|September 30, 2002    |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                      |  |             |             |             |  |           |               |             
|Revenues              |  | $           | 260,319,388 |             |  | $         | 66,846,670    |              |  | $ | 16,090,311  |  |  | $ | 343,256,369   |  
|Benefits and Expenses |  |             | 256,465,768 |             |  |           | 111,901,285   |              |  |   | 3,896,701   |  |  |   | 372,263,754   |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Segment Income (Loss) |  | $           | 3,853,620   |             |  | $         | (45,054,615   | )            |  | $ | 12,193,610  |  |  | $ | (29,007,385   | )
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Total Assets          |  | $           | 657,422,016 |             |  | $         | 1,549,867,709 |              |  | $ | 113,368,735 |  |  | $ | 2,320,658,460 |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  

10



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Accounting
Standards



| |                          
| | -------------------------
| | FASB Statement Number 148

In December 2002, the FASB issued Statement
Number 148  Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement Number 123. This statement provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. On January 1, 2003, the Company voluntarily
adopted the fair value based method of accounting for
stock-based employee compensation under the prospective method
described in FASB Statement Number 148. Under this method,
the Company applies fair value accounting to all grants of
employee stock options subsequent to December 31, 2002.
Previously, the Company had applied the intrinsic value method
when accounting for its stock-based compensation and continues
to apply the intrinsic value method to stock-based compensation
issued prior to January 1, 2003. FASB Statement
Number 148 also amends the disclosure requirements of FASB
Statement Number 123 to require more prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reported results. The following
table provides the required disclosure for grants made prior to
the Companys adoption of the prospective method described
in FASB Statement Number 148.

|                                                                                                                                |  |                    |          |                   |  |      |             |      |  |   |              |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- |  | ---- | ----------- | ---- |  | - | ------------ | - |  | - | ----------- | -
|                                                                                                                                |  |                    |          |                  
|                                                                                                                                |  | Three Months Ended |          | Nine Months Ended
|                                                                                                                                |  | September 30,      |          | September 30,    
|                                                                                                                                |  |                    |          |                  
|                                                                                                                                |  | 2003               |          | 2002              |  | 2003 |             | 2002
|                                                                                                                                |  |                    |          |                   |  |      |             |     
|Net income (loss)  as reported                                                                                                 |  | $                  | 33,392   |                   |  | $    | (19,147,017 | )    |  | $ | (121,157,865 | ) |  | $ | (29,007,385 | )
|Pro forma effect on net income (loss) of applying
    fair value accounting to pre January 1, 2003 option grants                |  |                    | (345,248 | )                 |  |      | (862,121    | )    |  |   | (1,440,849   | ) |  |   | (2,586,363  | )
|                                                                                                                                |  |                    |          |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Net (loss)  pro forma                                                                                                          |  | $                  | (311,856 | )                 |  | $    | (20,009,138 | )    |  | $ | (122,598,714 | ) |  | $ | (31,593,748 | )
|                                                                                                                                |  |                    |          |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Income (loss) per share as reported:                                                                                            |  |                    |          |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Basic                                                                                                                           |  | $                  | 0.00     |                   |  | $    | (0.74       | )    |  | $ | (4.69        | ) |  | $ | (1.13       | )
|Diluted                                                                                                                         |  | $                  | 0.00     |                   |  | $    | (0.74       | )    |  | $ | (4.69        | ) |  | $ | (1.13       | )
|Pro forma effect on net income (loss) per
    share of applying fair value accounting to pre January 1,
    2003 option grants: |  |                    |          |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Basic                                                                                                                           |  | $                  | (0.01    | )                 |  | $    | (0.04       | )    |  | $ | (0.05        | ) |  | $ | (0.10       | )
|Diluted                                                                                                                         |  | $                  | (0.01    | )                 |  | $    | (0.04       | )    |  | $ | (0.05        | ) |  | $ | (0.10       | )
|Pro forma (loss) per share:                                                                                                     |  |                    |          |                   |  |      |             |      |  |   |              |   |  |   |             |  
|Basic                                                                                                                           |  | $                  | (0.01    | )                 |  | $    | (0.78       | )    |  | $ | (4.74        | ) |  | $ | (1.23       | )
|Diluted                                                                                                                         |  | $                  | (0.01    | )                 |  | $    | (0.78       | )    |  | $ | (4.74        | ) |  | $ | (1.23       | )



| |                                           
| | ------------------------------------------
| | 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. The SOP provides guidance on
accounting and reporting by insurance enterprises for certain
nontraditional long-duration contracts and for separate
accounts. The SOP

11



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

will change the manner in which life insurance
companies account for certain types of insurance and reinsurance
contracts including those that cover risks such as guaranteed
minimum death benefits and guaranteed minimum income benefits.
Additionally, the SOP provides accounting guidance for sales
inducements paid to contract holders and provides guidance for
establishing liabilities for contracts with features that may
result in more than one potential account balance. The SOP is
effective for financial statements for fiscal years beginning
after December 15, 2003, with earlier adoption encouraged.
The SOP may not be applied retroactively to prior years
financial statements, and initial application should be as of
the beginning of an entitys fiscal year. The Company has
an annuity reinsurance agreement with Transamerica and a
combined GMDB/GMIB contract with CIGNA that may be affected by
the adoption of this new SOP. Management is in the process of
reviewing the SOP and assessing its impact on the Companys
financial reporting, but has not yet completed its analysis.
Management believes that the impact on the Companys
accounting for the annuity reinsurance agreement with
Transamerica could be significant as a result of adopting the
SOP. Management also believes that the Companys carried
reserves for its GMDB/GMIB contract will not change
significantly as a result of adopting the SOP.

6.     Related Party
Transactions



| |            
| | -----------
| | XL Life Ltd

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. As a
result of the transaction, the Company incurred a loss of
approximately $26.5 million, primarily as a result of a
write down of deferred acquisition costs of $38.7 million
(which was partially offset by a net ceding commission to the
Company of $18.0 million), a write down of prepaid expenses
of $2.4 million and transaction costs of approximately
$3.2 million. The agreement also provided that XL Life
would receive an additional payment of $5.0 million if,
during the 18 months following the agreement, the Company
received new capital funding of at least $35.0 million and
the Companys stock traded at a price at or above $5.00 per
share for a period of 20 out of any 30 consecutive trading days.

On August 5, 2003, XL Life served the
Company with notice of its intention to recapture the 50% quota
share reinsurance agreement with the Company. As a result, the
Company determined it would not be able to recover the deferred
acquisition costs carried for this agreement from future
expected income, and wrote down approximately $21.0 million
of such deferred acquisition costs in the three months ended
June 30, 2003.

The Company and XL Life have been in discussions
with respect to each partys rights and obligations under
the novation and retrocession agreements entered into at
December 31, 2002, as well as a $10.0 million excess
of loss reinsurance policy and a catastrophe excess of loss
cover that were each purchased by the Company from XL Life in
the first quarter of 2002 and two annuity reinsurance agreements
ceded to the Company by an affiliate of XL Life. The
$10.0 million excess of loss reinsurance policy was
purchased to protect against lifetime minimum interest guarantee
(LMIG) payments under the Companys annuity
reinsurance agreement with Transamerica, and full recovery under
the policy had been anticipated in establishing the
Companys deferred acquisition cost asset. The catastrophe
excess of loss cover expired by its terms on December 31,
2002, but the parties had continued to discuss with XL Life the
remaining obligations asserted under the agreement. The two
annuity reinsurance agreements had been in effect since
December 17, 1999, and represented approximately
$95.9 million (including a cumulative loss from embedded
derivatives of approximately $2.8 million) of the
Companys Funds withheld at interest and approximately
$95.6 million of the Companys Interest sensitive
contract and other liabilities at June 30, 2003.

As a result of the Companys discussions
with XL Life, the Company and XL Life and its affiliate agreed
to mutually discharge their respective rights and obligations
under all of the agreements described in the

12



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

preceding paragraph 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 agreements among the parties.
In addition, as part of the comprehensive settlement, the
Company is obligated to pay $2.0 million to XL Life if
prior to June 30, 2004 the Companys stock trades
above $2.00 per share for a period of 20 out of any
30 consecutive trading days and the Company raises an
aggregate $35.0 million of equity or debt.



| |                             
| | ----------------------------
| | Transactions with management

During 1998, certain of the Companys
officers purchased 163,121 shares in the Company, and the
Company made loans to the officers to partially finance such
purchases. The loans accrued interest at 7% per annum and
certain unpaid loans became due and payable in April 2003. In
connection with the renegotiation or termination of certain
officers employment agreements, the Company has deemed the
outstanding loans of those officers to have been repaid in
exchange for the officers agreeing to forego certain bonus,
severance or other payments that are or may become payable to
them. During the nine months ended September 30, 2003,
loans of $1.0 million with accrued interest of $402,812
were deemed repaid in this manner.

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. The
Compensation Committee of the Board of Directors administers the
Restricted Stock Plan. During 2002, the Company made two awards
to employees. Under the first award to employees, the Company
issued 133,500 shares of restricted stock that vest on the
third anniversary of the grant date. Under the second award,
certain employees of the Company were irrevocably offered shares
of restricted stock, conditioned upon the execution of a
retention agreement with the Company. The Company issued an
aggregate 267,500 shares to those employees who chose to
execute retention agreements and such shares vest in three equal
annual installments commencing on the first anniversary of the
grant date.

During the first quarter of 2003, the Company
issued 200,000 shares of restricted stock to the
Companys President and Chief Executive Officer. These
shares vest in three equal annual installments commencing on the
first anniversary of the grant date. In addition, during the
second quarter of 2003, the Company issued an additional
375,000 shares of restricted stock in connection with
retention grants to employees. These shares also vest in three
equal annual installments commencing on the first anniversary of
the grant date. During the first nine months of 2003, 207,600
shares of restricted stock were cancelled as a result of certain
employees terminating their employment with the Company. The
fair value as determined at the date of grant of the restricted
stock awards that remain outstanding on September 30, 2003
was approximately $2,500,000 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. The unamortized balance of
outstanding restricted stock is reflected in the balance sheet
as a component of unamortized stock grant compensation.

8.     Vulnerability
Due to Concentrations

The Company has entered into a significant
deferred annuity reinsurance agreement with Transamerica and a
significant life reinsurance agreement with MetLife. Due to the
size of these agreements, there is a material concentration of
net premiums, net investment income, interest credited to
interest sensitive products, funds withheld at interest,
deferred policy acquisition costs and interest sensitive
contract liabilities with one or both of the underlying parties
to these agreements.

At September 30, 2003 and December 31,
2002, approximately $625.3 million and $733.7 million,
respectively, of the Companys funds withheld at interest
receivable and approximately $628.1 million and

13



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$755.9 million, respectively of the
Companys interest sensitive contracts liability related to
its reinsurance agreement with Transamerica, which is a
retrocessional reinsurance arrangement covering policies issued
by IL Annuity. In addition, deferred acquisition costs of
approximately $33.6 million and $50.0 million related
to the Transamerica reinsurance agreement at September 30,
2003 and December 31, 2002, respectively.
Transamericas agreement with IL Annuity is structured on a
modified coinsurance basis, so IL Annuity maintains ownership
and control of the assets supporting the Companys
obligations to Transamerica. At September 30, 2003, IL
Annuitys financial strength rating was BB+ from
Standard & Poors. At September 30, 2003,
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.

During 2002, the Company recorded a write down of
deferred acquisition costs in connection with the Transamerica
agreement of approximately $27.5 million. This charge was
the result of a high level of surrenders of the underlying
policies coupled with poor investment performance on the
premiums paid by the holders of policies underlying the
reinsurance agreement. In writing down the deferred acquisition
costs to their estimated recoverable amount, management
estimated the future levels of surrenders of the underlying
policies together with the estimated future level of investment
return on the invested premiums. As a result of the
comprehensive settlement with XL Life, approximately
$6.2 million of minimum interest guarantee payments that
would have been recovered subsequent to June 30, 2003 were
deemed recovered in the third quarter. In connection with this
deemed recovery, deferred acquisition costs of approximately
$6.2 million were amortized in the quarter ended
September 30, 2003. The comprehensive settlement did not
impact the Companys expected income under the Transamerica
agreement. While management has established its deferred
acquisition cost asset at what it believes to be an appropriate
level based upon reasonable assumptions about future investment
performance and surrenders, if actual experience varies
significantly from the assumptions used to establish the
deferred acquisition cost asset, additional write downs may be
needed in the future.

For the three and nine months ended
September 30, 2003, the Company recorded losses of
approximately $2.4 million and $6.3 million,
respectively, related to its life reinsurance agreement with
MetLife. Premiums associated with this agreement for the three
and nine months ended September 30, 2003, were
approximately $10.0 million and $29.9 million,
respectively.

In January 2003, the Company provided written
notice to MetLife of a premium rate increase in connection with
this agreement, effective March 5, 2003, which has become a
subject of the Companys arbitration with MetLife. On
October 3, 2003, MetLife drew approximately
$7.4 million of assets held in trust for its benefit. The
Company believes the draw was inappropriate due to the pending
arbitration, but has chosen at this time not to attempt to
challenge the draw, as the Company will likely request that the
arbitration panel make it a subject of the arbitration. As a
result of novations and recaptures of certain of the
Companys life reinsurance agreements during the year ended
December 31, 2002 and the first nine months of 2003,
MetLife now represents a significant percentage of the
Companys premium, revenue and net loss. If the Company is
not successful in obtaining the rate increase through the
arbitration and MetLife does not recapture the agreement, the
Company is likely to continue to incur losses from this
agreement for the foreseeable future. If the Company is
successful in the arbitration and MetLife recaptures the
agreement, the Companys annual premium revenues will
decline, but the Company would no longer incur losses under the
agreement.

On December 31, 2002, the Company entered
into a transaction with XL Life 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. On
August 5, 2003, XL Life served the Company with notice of
its intention to recapture the 50% quota share reinsurance
agreement with the Company. The Company and XL Life and its
affiliate agreed to mutually

14



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

discharge their respective rights and obligations
under this agreement, along with four other agreements, 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
reinsurance agreements among the parties.

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, 2003, the Company recorded
losses of approximately $2.2 million and $1.8 million,
respectively, related to its life reinsurance agreement with
Phoenix Home Life. Premiums associated with this agreement for
the three and nine months ended September 30, 2003 were
approximately $3.2 million and $11.6 million,
respectively. For the three and nine months ended
September 30, 2003, the Company recorded losses of
approximately $0.4 million and $2.4 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, 2003 were
approximately $3.1 million and $9.1 million,
respectively. For the three and nine months ended
September 30, 2003, the Company recorded income of
approximately $0.2 million and losses of $1.5 million,
respectively, related to its remaining life reinsurance
agreement with Fidelity & Guarantee Life. Premiums
associated with this agreement for the three and nine months
ended September 30, 2003, were approximately
$4.5 million and $11.8 million, respectively.

The Companys United States domiciled
operating subsidiary, Annuity and Life Reassurance America, was
purchased from a subsidiary of SwissRe on May 31, 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 its reinsurance agreement
amounted to approximately $87.9 million and
$92.0 million at September 30, 2003 and
December 31, 2002, respectively. Reassure is rated A++ by
AM Best, its highest rating.

9.     Contingencies

As of September 30, 2003, the Company did
not have sufficient available cash and investments to post
collateral to satisfy the collateral requirements asserted by
CIGNA, the cedent under the Companys only guaranteed
minimum death benefit and guaranteed minimum income benefit
agreement. As of December 31, 2002, CIGNA asserted that the
Company was required to satisfy additional collateral
requirements of approximately $59.0 million in excess of
the $11.0 million of collateral the Company had posted. The
Company has not agreed with CIGNA regarding the computation of
the $70.0 million collateral requirement and has not posted
any additional collateral under the agreement. As a result,
CIGNA has alleged that the Company is in breach of its agreement
and may institute arbitration or litigation proceedings to seek
remedies for the alleged breach. If the Company does not prevail
in any such arbitration or litigation proceedings, it would have
a material adverse effect on the Companys financial
condition and the Company may be required to liquidate its
operations.

While the Company plans to attempt to continue
receiving premiums and paying claims under its remaining
reinsurance treaties, the Company has ceased to write new
reinsurance agreements and is not accepting any new business
under existing treaties on their current terms. The Company does
not anticipate writing new reinsurance agreements in the
foreseeable future. To date, the Companys plans have
involved reducing its collateral requirements by negotiating the
recapture, retrocession, novation or sale of certain of its
reinsurance agreements. During the first nine months of 2003,
these types of transactions resulted in

15



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

significant losses for the Company. While the
Company may enter into similar transactions in the future, it is
not actively seeking to do so.

In April 2002, the Company served written notice
of arbitration on MetLife, the cedent under its largest life
reinsurance agreement, seeking equitable relief and monetary
damages based on MetLifes misrepresentation of and failure
to disclose material facts relating to the agreement. In January
2003, the Company also provided written notice to MetLife of a
premium rate increase, effective March 5, 2003, which also
has become a subject of this arbitration. On October 3,
2003, MetLife drew approximately $7.4 million of assets
held in trust for its benefit. The Company believes the draw was
inappropriate due to the pending arbitration, but has chosen at
this time not to attempt to challenge the draw, as the Company
will likely request that the arbitration panel make it a subject
of the arbitration. If the Company is not successful in
obtaining the rate increase through the arbitration and MetLife
recaptures the agreement, the Company is likely to continue to
incur losses from this agreement for the foreseeable future. If
the Company is successful in the arbitration and MetLife
recaptures the agreement, the Companys annual premium
revenues will decline, but the Company would no longer incur
losses under the agreement. The arbitration is scheduled to
commence on December 15, 2003.

As of September 30, 2003, the Company had
$26.7 million of outstanding unsecured letters of credit
issued on its behalf by Citibank that expire on
December 31, 2003. In November 2003, Citibank agreed to
renew the Companys unsecured letter of credit facility
until December 31, 2004 if the Company reduces the
unsecured balance of the letter of credit facility to
$17.0 million by November 30, 2003. If the Company
does not reduce the unsecured balance of the letter of credit
facility to $17.0 million by November 30, 2003 and
Citibank does not renew the letters of credit, the letters of
credit will expire on December 31, 2003 and the
Companys cedents will be entitled to draw on the letters
of credit. The Company would then be obligated to repay Citibank
for any amounts drawn.

On November 20, 2002, the State of
Connecticut Insurance Department and the Companys United
States domiciled operating subsidiary entered into a letter
agreement acknowledging that the Connecticut Insurance
Department is monitoring the financial condition of the
Companys United States domiciled operating subsidiary. The
letter agreement requires that certain financial transactions
entered into by the subsidiary, including the disposal of
assets, payment of dividends and settlement of inter-company
balances with the Companys Bermuda operating subsidiary,
be pre-approved by the insurance department. In addition, the
Connecticut Insurance Department has requested weekly updates
from senior management of the U.S. operating subsidiary on the
status of the Company and any changes in the status of the
U.S. operating subsidiary. The letter agreement continues
to be effective until March 1, 2004.

On and since December 4, 2002, certain of
the Companys shareholders filed purported shareholder
class action 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. No assurance
can be given that the Company will not be required to pay
monetary damages in connection with these lawsuits.

As discussed in Note 6 above, on
December 31, 2002, the Company entered into a transaction
with XL Life 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. On August 5,
2003, XL Life served the Company with notice of its intention to
recapture the 50% quota share reinsurance agreement with the
Company. As a result, the Company determined it would not be
able to recover the deferred acquisition costs carried for this
agreement from future expected income, and wrote down
approximately $21.0 million of such deferred acquisition
costs in the three months ended June 30, 2003.

16



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company and XL Life have been in discussions
with respect to each partys rights and obligations under
the novation and retrocession agreements entered into at
December 31, 2002, as well as a $10.0 million excess
of loss reinsurance policy and a catastrophe excess of loss
cover that were each purchased by the Company from XL Life in
the first quarter of 2002 and two annuity reinsurance agreements
ceded to the Company by an affiliate of XL Life. The
$10.0 million excess of loss reinsurance policy was
purchased to protect against LMIG payments under the
Companys annuity reinsurance agreement with Transamerica,
and full recovery under the policy had been anticipated in
establishing the Companys deferred acquisition cost asset.
The catastrophe excess of loss cover expired by its terms on
December 31, 2002, but the Company had continued to discuss
with XL Life the remaining obligations asserted under the
agreement. The two annuity reinsurance agreements had been in
effect since December 17, 1999, and represented
approximately $95.9 million (including a cumulative loss
from embedded derivatives of approximately $2.8 million) of
the Companys Funds withheld at interest and approximately
$95.6 million of the Companys Interest sensitive
contract and other liabilities at June 30, 2003.

As a result of the Companys discussions
with XL Life, the Company and XL Life and its affiliate agreed
to mutually discharge their respective rights and obligations
under all of the agreements described in the preceding paragraph
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
agreements among the parties. In addition, as part of the
comprehensive settlement, the Company is obligated to pay
$2.0 million to XL Life if prior to June 30, 2004 the
Companys stock trades above $2.00 per share for a period
of 20 out of 30 consecutive trading days and the Company raises
an aggregate $35.0 million of equity or debt.

On April 8, 2003, the Company received
notice from the New York Stock Exchange that it did not satisfy
the NYSEs continued listing standards as of that date
because the average closing price of the Companys common
shares had been below $1.00 for a 30 consecutive trading day
period. The notice stated that if the Company did not achieve
(i) a $1.00 average share price for the 30 consecutive
trading days prior to October 7, 2003, the expiration of
the six month period following the date of the receipt of the
notification, and (ii) a $1.00 share price on
October 7, 2003, then the NYSE would commence suspension
and delisting procedures with respect to the Companys
common shares. In addition, the NYSE informed the Company that
it was considering whether it continued to meet certain of the
NYSEs qualitative continued listing standards due to
concerns over the Companys financial condition. On
October 14, 2003, the NYSE informed the Company that it had
satisfied the NYSEs continued listing standards, and as a
result would not be delisted from the Exchange.

On October 8, 2003, the Company was served
with a statutory demand for $640,000 from Imagine Re, a Bermuda
based reinsurance company. Imagine Re alleges that the Company
is obligated to reimburse it for expenses incurred by Imagine Re
in connection with a proposed December 2002 capital raising
transaction that was not consummated. The Company believes that
Imagine Re is not entitled to reimbursement of these expenses
under the applicable agreement and intends to defend against
Imagine Res claims.

Transamerica has alleged that the Company owes
$14.9 million under its annuity reinsurance agreement with
it. The Company has not agreed that such amount currently is
owed to Transamerica and the parties are attempting to resolve
their issues. Transamerica has indicated that if the parties
cannot resolve their issues, it will attempt to put the
Companys Bermuda operating subsidiary into liquidation.

In addition to the discussions with Transamerica
related to the alleged amounts owed to it, the Company has been
attempting to engage Transamerica, and ultimately IL Annuity, in
discussions aimed at improving investment returns from the
convertible bond portfolio and potentially redesigning the
VisionMark product to reduce the minimum guarantee exposures
from the Transamerica agreement. If the Company is not
successful in convincing Transamerica and IL Annuity to
restructure the portfolio and/or to redesign the product, the
Company may incur additional write downs of deferred acquisition
costs in the future.

17



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

There can be no assurance that the Company will
be able to improve its operations and liquidity. If the Company
is unable to reposition its general account investment portfolio
to achieve a substantially higher yield within its investment
guidelines, successfully defend against the pending shareholder
class action suit, attain a favorable outcome from the MetLife
arbitration, and settle its issues with Transamerica regarding
their annuity reinsurance agreement, the Company may not be able
to meet its obligations. The Companys failure to achieve
any one of the foregoing items could have a material adverse
effect on its financial condition and results of operations. The
accompanying unaudited consolidated financial statements do not
include any adjustments that might be necessary should the
Company be unable to continue as a going concern.

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 cedent 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. At June 30,
2003, the fair value of warrants, using a Black-Scholes pricing
model, was estimated at $1,250,000, which was included in the
charge associated with the recapture. The expense of issuing
these warrants is reflected as a component of Claim and policy
benefits expense in the Companys Consolidated Statements
of Operations and as Stock warrants in the Companys
Consolidated Balance Sheet.

18



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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, 2002, as amended.

As discussed in greater detail elsewhere in this
report, our company continued to encounter significant
difficulties during the nine month period ended
September 30, 2003. In addition to reporting a significant
operating loss for the first nine months of 2003, we currently
do not have sufficient available cash and investments to satisfy
the collateral requirements asserted by CIGNA, the cedent under
our only guaranteed minimum death benefit (GMDB) and guaranteed
minimum income benefit (GMIB) agreement. CIGNA has asserted that
we must satisfy additional collateral requirements of
approximately $59,000,000 in excess of the $11,000,000 of
collateral we currently have posted under the agreement. We have
not agreed with CIGNAs computation of the $70,000,000
collateral requirement and have not posted any additional
collateral under the agreement. As a result, CIGNA has alleged
that we are in breach of our agreement, and may institute
arbitration or litigation proceeding to seek remedies for the
alleged breach. If we do not prevail in any such arbitration or
litigation proceedings, it would have a material adverse effect
on our financial condition and we may be required to liquidate
our operations. As of September 30, 2003, we had met the
collateral requirements of our other cedents, and we expect to
be able to meet any collateral requirements asserted at
December 31, 2003, other than CIGNA.

As of September 30, 2003, we had $26,700,000
of outstanding unsecured letters of credit issued on our behalf
by Citibank that expire on December 31, 2003. In November
2003, Citibank agreed to renew our unsecured letter of credit
facility until December 31, 2004 if we reduce the unsecured
balance of the letter of credit facility to $17,000,000 by
November 30, 2003. If we do not reduce the unsecured
balance of the letter of credit facility to $17,000,000 by
November 30, 2003 and Citibank does not renew the letters
of credit, the letters of credit will expire on
December 31, 2003 and our cedents will be entitled to draw
on the letters of credit. We would then be obligated to repay
Citibank for any amounts drawn.

As discussed in Note 6 to our unaudited
consolidated financial statements included elsewhere in this
report, on December 31, 2002, we entered into a transaction
with XL Life Ltd pursuant to which we transferred certain
blocks of life reinsurance business to XL Life. Under the
agreement with XL Life, we novated five blocks of life
reinsurance business to XL Life, which in turn entered into
a 50% quota share reinsurance agreement with us with respect to
four of those blocks of business. On August 5, 2003,
XL Life served us with notice of its intention to recapture
the 50% quota share reinsurance agreement with us. As a result,
we determined we would not be able to recover the deferred
acquisition costs carried for this agreement from future
expected income, and we wrote down approximately $21,000,000 of
such deferred acquisition costs during the three months ended
June 30, 2003.

We have been in discussions with XL Life
with respect to each partys rights and obligations under
the novation and retrocession agreements entered into at
December 31, 2002, as well as a $10,000,000 excess of loss
reinsurance policy and a catastrophe excess of loss cover that
were each purchased by us in the first quarter of 2002 from XL
Life and two annuity reinsurance agreements ceded to us by an
affiliate of XL Life. The $10,000,000 excess of loss reinsurance
policy was purchased to protect against lifetime minimum
interest guarantee (LMIG) payments under our annuity reinsurance
agreement with Transamerica Occidental Life Insurance Company
(Transamerica), and full recovery under the policy had been
anticipated in establishing our deferred acquisition cost asset.
The catastrophe excess of loss cover expired by its terms on
December 31, 2002, but we had continued to discuss with
XL Life the remaining obligations asserted under the
agreement.

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The two annuity reinsurance agreements had been
in effect since December 17, 1999, and represented
approximately $95,900,000 (including a cumulative loss from
embedded derivatives of approximately $2,800,000) of our Funds
withheld at interest and approximately $95,600,000 of our
Interest sensitive contract and other liabilities at
June 30, 2003.


As a result of our discussions with XL Life,
we and XL Life and its affiliate agreed to mutually
discharge our respective rights and obligations under all of the
agreements described in the preceding paragraph in a
comprehensive settlement effective as of July 1, 2003.
Under the terms of the comprehensive settlement, we paid
$6,000,000 to XL Life and were released from any and all
obligations to XL Life and its affiliate under all of the
agreements among the parties. In addition, as part of the
comprehensive settlement, we are obligated to pay $2,000,000 to
XL Life if prior to June 30, 2004 our stock trades
above $2.00 per share for a period of 20 out of 30 consecutive
trading days and we raise an aggregate $35,000,000 of equity or
debt.

In January 2003, we instituted substantial
premium rate increases on all of our non-guaranteed premium
yearly renewable term agreements. All of our cedents subject to
the rate increase, except The Metropolitan Life Insurance
Companies (MetLife) and one other cedent who has accepted the
rate increase, have recaptured their reinsurance agreements.
MetLife has made the rate increase a subject of arbitration with
us, and has indicated that its election to recapture is
dependent upon the arbitration panels conclusion about the
validity of the rate increase. On October 3, 2003, MetLife
drew approximately $7,400,000 of assets held in trust for its
benefit. We believe the draw was inappropriate due to the
pending arbitration, but have chosen at this time not to attempt
to challenge the draw, as we will likely request that the
arbitration panel make it a subject of the arbitration. If we
are not successful in obtaining the rate increase through
arbitration and MetLife does not recapture the agreement, we are
likely to continue to incur losses from this agreement for the
foreseeable future. If we are successful in the arbitration and
MetLife recaptures the agreement, our future annual premium
revenues will decline, but we would no longer incur losses under
the agreement. The arbitration is scheduled to commence on
December 15, 2003.

Transamerica has alleged that we owe $14,900,000
under our annuity reinsurance agreement with it. We have not
agreed that such amount currently is owed to Transamerica and we
are attempting to resolve our issues with Transamerica.
Transamerica has indicated that if we cannot resolve our issues,
it will attempt to put our Bermuda operating subsidiary into
liquidation.

In addition to the discussions with Transamerica
related to the alleged amounts owed to it, we have been
attempting to engage Transamerica, and ultimately
IL Annuity and Reinsurance Company (IL Annuity), the
primary insurance company under the Transamerica agreement, in
discussions aimed at improving investment returns from the
convertible bond portfolio and potentially redesigning the
VisionMark product to reduce the minimum guarantee exposures
from the Transamerica agreement. If we are not successful in
convincing Transamerica and IL Annuity to restructure the
portfolio and/or to redesign the product, we may incur
additional write downs of deferred acquisition costs in the
future.

To date, our plans have involved reducing our
collateral requirements by negotiating the recapture,
retrocession, novation or sale of certain of our reinsurance
agreements. During the first nine months of 2003, these types of
transactions resulted in significant losses for us. While we may
enter into similar transactions in the future, we are not
actively seeking to do so.

There can be no assurance that we will be able to
improve our operations and liquidity. If we are unable to
reposition our general account investment portfolio to achieve a
substantially higher yield within our investment guidelines,
successfully defend against the pending shareholder class action
suit, attain a favorable outcome from the MetLife arbitration,
and settle our issues with Transamerica regarding our annuity
reinsurance agreement, we may not be able to meet our
obligations. Our failure to achieve any one of the foregoing
items could have a material adverse effect on our financial
condition and results of operations. The accompanying unaudited
consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a
going concern.

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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, 2002, 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 agreements. Deviations from estimated
experience are reflected in earnings in the period such
deviations occur. For these agreements, the amortization periods
are generally the estimated life of the policies. As discussed
elsewhere in this report, we have novated and recaptured a
majority of our reinsurance agreements during the first nine
months of 2003. We may novate or recapture other reinsurance
agreements in the future. If these novations and recaptures are
done on unfavorable terms, we will incur additional deferred
acquisition cost write-downs.

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 agreements when estimating gross profits
arising from such agreements. These assumptions have a direct
impact on the amount of expected future LMIG payments and our
estimated expected gross profits on these annuity reinsurance
agreements and, therefore, on the recoverability of the deferred
acquisition costs carried on our balance sheet for these
agreements. 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.

Embedded Derivatives.We have concluded that there are
embedded derivatives within the Funds withheld at interest
receivable related to one of our annuity reinsurance agreements
written on a modified coinsurance basis that require bifurcation
and separate accounting under Statement of Financial Accounting
Standards No. 133  Accounting for Derivative
Instruments and Hedging Activities. These embedded derivatives
are similar to a total return swap arrangement on the underlying
assets held by our ceding company under the reinsurance
agreement. The net fair value of these embedded derivatives 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 agreement and interest
rates. The change in fair value of these embedded derivatives 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 these embedded derivatives also impacts
the emergence of expected gross profits for purposes of
amortizing deferred acquisition costs associated with this
agreement. 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 these embedded derivatives
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 derivatives
and our reported earnings. We do not bifurcate and

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separately account for the embedded derivatives
contained in our Transamerica annuity reinsurance agreement or
our GMDB/GMIB reinsurance agreement with CIGNA, because we
acquired those agreements prior to the transition date elected
by us under FAS 133, as amended by FAS 137 and
FAS 149. Because of the nature of the assets underlying our
Transamerica agreement, which were roughly 65% convertible bonds
at September 30, 2003, the bifurcation and separate
accounting for the embedded derivatives contained in that
agreement would add significant volatility to our reported
results. If we bifurcated and separately accounted for the
embedded derivative contained in our GMBD/GMIB reinsurance
agreement, it also would add 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 investment-type
agreements are recorded on our balance sheet as interest
sensitive contracts liability. Revenues from these
investment-type agreements 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.
Such LMIG payments are recognized when paid upon the surrender
of the underlying policy and are not charged to the
policyholders account balances. We make estimates at the
end of each reporting period regarding premiums and benefits for
cedents 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 agreements 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
materially from those estimates. We monitor actual experience,
and where circumstances warrant, will revise our assumptions and
the related reserve estimates.

We reinsure certain minimum guarantees associated
with variable annuity agreements. These have historically
included GMDB, GMIB, and enhanced earnings benefits (EEB),
although, as of September 30, 2003, our combined GMDB/GMIB
agreement with CIGNA was the only reinsurance agreement we had
covering minimum guarantees associated with variable annuity
agreements. Our accounting policy is designed to establish
reserves for expected claim payments based upon the view of
expected losses over the life of the underlying policies, based
upon original pricing assumptions. Our reserving policy allows
us to increase reserves if reported claim amounts or claims
volume exceed what was anticipated in pricing.

Policy benefit liabilities for annuity agreements
are reflected on our balance sheet as Interest sensitive
contracts liability and are reported at the accumulated
policyholder balance of these accounts.

If actual events differ significantly from the
underlying estimates and assumptions used by us in the
application of these accounting policies, there could be a
material adverse effect on our results of operations and
financial condition.

AICPA Statement of Position (SOP 03-1).In July 2003, the Accounting Standards
Executive Committee of the AICPA issued Statement of Policy
(SOP) 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Non-Traditional Long-Duration Contracts
and for Separate Accounts. The SOP provides guidance on
accounting and reporting by insurance enterprises for certain
nontraditional long-duration contracts and for separate
accounts. The SOP will change the manner in which life insurance
companies account for certain types of insurance and reinsurance
contracts including those that cover risks such as guaranteed
minimum death benefits and guaranteed minimum income benefits.
Additionally, the SOP provides accounting guidance for sales
inducements paid to contract holders and provides guidance for
establishing liabilities for contracts with features that may
result in more than one potential account balance. The SOP is
effective for financial statements for fiscal years beginning
after December 15, 2003, with earlier adoption encouraged.
The SOP may not be applied retroactively to prior years
financial statements, and initial application should be as of
the beginning of an entitys fiscal year. We have an
annuity reinsurance agreement

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with Transamerica and a combined GMDB/GMIB
contract with CIGNA that may be affected by the adoption of this
new SOP. We are in the process of reviewing the SOP and
assessing its impact on our financial reporting, but have not
yet completed our analysis. We believe that the impact on our
accounting for the annuity reinsurance agreement with
Transamerica could be significant as a result of adopting the
SOP. We also believe that our carried reserves for our GMDB/GMIB
contract will not change significantly as a result of adopting
the SOP.


Operating Results

Net Income (Loss).For the three months ended
September 30, 2003, we had net income of $33,392, or $0.00
per basic and fully diluted common share, as compared with a net
loss of $(19,147,017), or $(0.74) per basic and fully diluted
common share, for the three months ended September 30,
2002. For the nine months ended September 30, 2003, we had
a net loss of $(121,157,865), or $(4.69) per basic and fully
diluted common share, as compared to a net loss of
$(29,007,385), or $(1.13) per basic and fully diluted common
share, for the nine months ended September 30, 2002. Net
income in the third quarter of 2003 was primarily the result of
a $9,000,000 benefit resulting from the comprehensive settlement
between XL Life and us, partially offset by a $2,397,000
loss on our MetLife agreement, a $2,174,000 loss on our now
second largest life reinsurance agreement due to seasonal
fluctuations in premiums and a large claim under that agreement
during the quarter, a loss of $1,180,000 on recaptured life
reinsurance agreements other than the comprehensive settlement
with XL Life, litigation costs of approximately $1,000,000
and employee compensation expenses of approximately $1,000,000.
Other losses include an approximate $800,000 reserve increase
for our combined GMDB/GMIB agreement with CIGNA and a loss of
approximately $630,000 on the Transamerica annuity agreement.
The loss for the first nine months of 2003 was primarily the
result of losses associated with recaptures and terminations of
life and annuity reinsurance agreements, as well as adverse
claims experience under our life reinsurance agreements.

During the nine months ended September 30,
2003, we negotiated the recapture and termination of certain of
our life and annuity reinsurance agreements. During the three
months ended September 30, 2003, we experienced a gain of
approximately $7,820,000, reflecting the effect of a $9,000,000
benefit from our comprehensive settlement with XL Life,
partially offset by net charges resulting from other recaptures
and terminations of approximately $1,180,000. These charges
resulted from the write down of deferred acquisition costs and
cash payments made to cedents net of reserve releases associated
with the recaptures. We incurred charges related to recaptures
and terminations of approximately $86,200,000 for the nine
months ended September 30, 2003, including charges incurred
in the second quarter with respect to Hartford Lifes
recapture of our then largest GMDB agreement of approximately
$20,400,000 and the write down in the second quarter of deferred
acquisition costs of approximately $21,000,000 associated with
the expected recapture of our 50% quota share reinsurance
agreement with XL Life. We also recorded income of
approximately $620,000 and a loss of approximately $20,000,000,
respectively, for the three and nine month periods ended
September 30, 2003 on the life, annuity and GMDB agreements
that were recaptured or terminated during the respective
periods. Reduced investment gains and increased operating
expenses due to litigation costs and employee compensation also
contributed to our net loss for the nine month period ended
September 30, 2003.

Net Premiums.Net
premium revenue for the three and nine month periods ended
September 30, 2003 was $28,657,264 and $148,586,899,
respectively, a decrease of 66% and 42%, respectively, from net
premium revenue of $84,934,401 and $255,007,035, respectively,
for the three and nine month periods ended September 30,
2002. Substantially all premium revenue was derived from
traditional ordinary life reinsurance. The decline in premium
revenue reflects the significant reduction of business in force
resulting from the novation and recapture of life reinsurance
agreements in the fourth quarter of 2002 and the first nine
months of 2003. At September 30, 2003, the total face
amount of life reinsurance in force had decreased to
approximately $30 billion, as compared with approximately
$151 billion at September 30, 2002. Approximately
$17 billion of business covered by our 50% quota share
reinsurance agreement with XL Life was recaptured during
the third quarter of 2003. Of the $30 billion still in
force at September 30, 2003, approximately
$10.4 billion related to our MetLife agreement, which is
currently the subject of arbitration, as described elsewhere in
this report. Our next largest life reinsurance agreement
represented approximately

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$7.2 billion of the business in force at
September 30, 2003. We have stopped writing new reinsurance
agreements and are not accepting any new business under existing
treaties on their current terms. The novation, termination and
recaptures of reinsurance agreements during the first nine
months of 2003 will reduce net premiums in future periods.


Net Investment
Income.Total net investment income
for the three and nine month periods ended September 30,
2003 was $16,250,225 and $30,143,651, respectively, as compared
with $31,127,396 and $82,083,855, respectively, for the three
and nine month periods ended September 30, 2002. 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 agreements,
which we refer to as Funds withheld. Both sources of investment
income declined from the comparable prior periods.

Net investment income earned on general account
assets for the three and nine month periods ended
September 30, 2003 was approximately $1,100,000 and
$4,408,000, respectively, as compared to approximately
$5,845,000 and $19,080,000, respectively, for the three and nine
month periods ended September 30, 2002. The decrease in net
investment income for the three and nine months periods ended
September 30, 2003 was primarily the result of our return
of approximately $147,000,000 of invested assets on
December 31, 2002 related to the termination of a
reinsurance agreement that provided cash deposits to us that
were used to secure collateral obligations of our U.S. based
cedents, as well as lower investment returns resulting from the
shift in our general account assets towards a greater cash
position. Because the amount of our cash and invested assets has
decreased significantly due to our operating losses, as well as
the recapture and termination of certain of our reinsurance
agreements, we expect our net investment income for the balance
of 2003 to be substantially less than the comparable period of
2002.

The average annualized yield rate earned on our
general account assets for the three and nine months ended
September 30, 2003 was approximately 2.01% and 2.45%,
respectively, as compared with approximately 5.14% and 5.28%,
respectively, for the three and nine months ended
September 30, 2002. The decline in yield rates primarily
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,
2003 was approximately $15,151,000 and $24,623,000,
respectively, as compared to approximately $25,282,000 and
$63,004,000, respectively, for the three and nine month periods
ended September 30, 2002. The decrease in investment income on
our Funds withheld for the three and nine month periods ended
September 30, 2003 is primarily due to a significant
reduction in Funds withheld as a result of terminations of
several large annuity reinsurance agreements and continued
lapses under remaining reinsurance agreements, which reduce the
invested asset base that generates investment returns.

The average annualized yield rates earned on
Funds withheld were approximately 5.16% and 3.03%, respectively,
for the three and nine months ended September 30, 2003, as
compared with 6.97% and 5.90%, respectively, for the three and
nine months ended September 30, 2002. This reduction in
yield rates is primarily the result of the termination of our
annuity reinsurance agreement with Ohio National in the first
quarter of 2003 and lower investment returns on the assets
underlying our Transamerica annuity reinsurance agreement in
2003.

Net Realized Investment (Losses) Gains.Net realized investment (losses) gains
for the three and nine month periods ended September 30,
2003 were $(52,025) and $6,508,019, respectively, as compared
with net realized investment gains of $9,297,351 and
$10,813,315, respectively, for the three and nine month periods
ended September 30, 2002. The decrease in net realized
investment gains for the three and nine months ended
September 30, 2003 was the result of a smaller invested
asset base and our decision to maintain a significant portion of
our investment portfolio in cash and cash equivalents. We plan
to shift a significant portion of our cash position into other
investments during the fourth quarter if market opportunities
present themselves. Realized gains and losses will fluctuate
from period to period, and we make decisions concerning the
sales of our invested assets based on a variety of market,
business and other factors.

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Net Change in Fair Value of Embedded
Derivatives.For the three and nine
month periods ended September 30, 2003, the net change in
fair value of our embedded derivatives was a gain of $2,808,427
and $14,845,749, respectively. For the three and nine month
periods ended September 30, 2002, the net change in fair
value of our embedded derivatives was a loss of $(13,277,823)
and $(18,254,530), respectively. 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 these agreements
had caused unrealized losses in our embedded derivatives in
prior periods.

Surrender Fees and Other Revenue.Surrender fees and other revenue for
the three and nine month periods ended September 30, 2003
were $1,667,997 and $6,061,022, respectively, as compared with
$3,549,362 and $13,606,694, respectively, for the three and nine
month periods ended September 30, 2002. This income is
primarily derived from surrender fees related to our annuity
reinsurance agreement with Transamerica. The decrease in revenue
for the three and nine month periods ended September 30,
2003 is mainly due to a smaller policyholder base resulting in a
lower absolute level of withdrawals, as well as reduced lapse
rates during those periods as compared with the three and nine
month periods ended September 30, 2002.

Claims and Policy Benefits.Claims and policy benefits for the
three month period ended September 30, 2003 and 2002 were
$19,075,004 and $91,381,831, or 67% and 108% of net premiums,
respectively. The large decline was the result of a reduction of
life insurance in force from $151 billion at
September 30, 2002 to approximately $30 billion at
September 30, 2003 and reserve releases associated with our
comprehensive settlement with XL Life. Approximately $7,300,000
of the reduction in claims and policy benefits for the three
months ended September 30, 2003 was attributable to the
recapture or termination in 2003 of life and annuity reinsurance
agreements that were in effect during the comparable prior
period. For the nine months ended September 30, 2003 and
2002, claims and policy benefits were $178,589,650 and
$224,640,576, or 120% and 88% of net premiums, respectively. The
decrease for the nine months ended September 30, 2003 was
primarily due to the reduced amount of life insurance in force
as a result of recaptures of life reinsurance agreements and the
Hartford Life and XL Life reserve releases, offset by
approximately $24,000,000 of costs resulting from the
termination of life and annuity reinsurance agreements. Claims
and policy benefits as a percentage of net premiums have been
adversely affected by the recaptures and terminations during the
first nine months of 2003. Claims and policy benefits for the
three and nine months ended September 30, 2003 includes
$800,000 and $3,750,000, respectively of reserve increases
related to our remaining GMDB/ GMIB agreement with CIGNA.

We continue to monitor and analyze our experience
under our remaining agreements. If claim experience continues at
the levels observed during the fourth quarter of 2002 and the
first nine months of 2003, or increases from those levels, our
operating results would be materially and adversely affected.
The novation, termination and recaptures of reinsurance
agreements during the nine months of 2003 will reduce claims and
policy benefits in future periods and may affect the level of
claims and policy benefits as a percentage of premiums.

During October 2003, we updated our analysis of
carried reserves for incurred but not reported
(IBNR) claims. In determining the amount of IBNR required
at September 30, 2003, we considered the full trending of
claims reported through September 30, 2003. As a result of
our review, our reserve for IBNR at September 30, 2003 was
$6,500,000. We will continue to examine these IBNR levels in
relation to past experience each quarter.

We are currently seeking relief from MetLife, our
largest cedent of life insurance, with respect to a reinsurance
agreement that has generated mortality experience beyond our
initial pricing parameters and is currently producing losses. If
we are unable to rescind or recapture this agreement, we may
incur additional losses in future periods. This life reinsurance
agreement is currently in arbitration with respect to
representations made to us at the time we underwrote the
agreement and with respect to a rate increase we instituted in

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the first quarter of 2003. In April 2003, MetLife
informed us that if the arbitration panel scheduled to hear
these claims in December 2003 finds the rate increase is valid,
MetLife would recapture the reinsurance agreement effective as
of March 5, 2003, the effective date of the increase. On
October 3, 2003, MetLife drew approximately $7,400,000 of
assets held in trust for its benefit. We believe the draw is
inappropriate due to the pending arbitration, but have chosen
not to attempt to block the draw and will likely request that
the arbitration panel make it a subject of the arbitration. If
we are not successful in obtaining the rate increase through the
arbitration and MetLife does not recapture the agreement, we are
likely to continue to incur losses from this agreement for the
foreseeable future. If we are successful in the arbitration and
MetLife recaptures the agreement, annual premium revenues will
decline, but we would no longer incur losses under the
agreement. The arbitration is scheduled to commence on
December 15, 2003.


Interest Credited to Interest Sensitive
Contracts Liabilities.Interest
credited to Interest sensitive contract liabilities, which are
liabilities we assume under certain annuity reinsurance
agreements, was $3,821,854 and $12,911,155, respectively, for
the three and nine month periods ended September 30, 2003,
as compared with $18,345,349 and $57,215,862, respectively, for
the three and nine month periods ended September 30, 2002.
Included in Interest credited to interest sensitive contracts
liabilities for the three and nine month periods ended
September 30, 2003 are LMIG payments under our Transamerica
annuity reinsurance agreement of approximately $3,196,000 and
$13,022,000, respectively, as compared to LMIG payments of
approximately $8,977,000 and $21,750,000, respectively, for the
comparable prior periods in 2002. The decline in Interest
credited to interest sensitive contracts liabilities for the
three and nine month periods ended September 30, 2003 was
primarily the result of our comprehensive settlement with XL
Life, the terminations of annuity reinsurance agreements,
particularly our agreement with Ohio National, which was our
second largest annuity agreement at the time of its termination,
and a smaller base of policyholders account values as well as
reduced lapse rates on our annuity reinsurance agreement with
Transamerica. We terminated our annuity reinsurance agreement
with Ohio National on February 14, 2003, another large
annuity reinsurance agreement on April 1, 2003 and two
annuity reinsurance agreements with an affiliate of XL Life as
of July 1, 2003.

Policy Acquisition and Other Insurance
Expenses.Policy acquisition 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, 2003 were $22,796,448 and $119,928,722,
respectively, as compared with $17,492,342 and $73,700,329,
respectively, for the comparable prior periods in 2002. The
increase for the three and nine months ended September 30,
2003 is primarily due to the net write down of deferred
acquisition costs associated with the recapture and termination
of agreements of approximately $4,660,000 and $78,870,000,
respectively, for the three and nine month periods ended
September 30, 2003. During the nine months ending
September 30, 2002, we wrote down $24,796,000 of deferred
acquisition costs associated with our Transamerica annuity
reinsurance agreement.

Operating Expenses.Operating expenses for the three month period ended
September 30, 2003 were $3,605,189 or 7.7% of total revenue
(excluding the net change in fair value of embedded
derivatives), as compared with $3,826,602 or 3% of total revenue
(excluding the net change in fair value of embedded derivatives)
for three month period ended September 30, 2002. Operating
expenses for the nine month period ended September 30, 2003
were $15,873,678 or 8.3% of total revenue (excluding the net
change in fair value of embedded derivatives), as compared to
$10,626,666 or 3% of total revenue (excluding the net change in
fair value of embedded derivatives) for the comparable prior
period in 2002. The increase in operating expenses for the nine
month period of 2003 reflects the write off of approximately
$2,100,000 of goodwill associated with our United States
operating subsidiary in the second quarter of 2003, costs
associated with renegotiating employment arrangements and other
employee compensation, increased costs of directors and officers
liability insurance coverage and increased legal and audit fees.

Segment Results

We separately track financial results of our life
and annuity operations in segments. Each segment is defined by a
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

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where the dominant risk characteristic is
investment risk. In addition, certain of our remaining modified
coinsurance annuity reinsurance agreements have features that
constitute embedded derivatives that require bifurcation and
separate accounting under FAS 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 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, except for
capital raising costs, which are charged directly to the
corporate segment. Segment results are reported in Note 4 to our
unaudited consolidated financial statements included elsewhere
in this report.


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.

Life segment income for the three month period
ended September 30, 2003 was $601,214, as compared with
segment loss of $(9,938,836) for the comparable prior period of
2002. Life segment income in the third quarter of 2003 was
primarily the result of a $6,800,000 benefit resulting from our
comprehensive settlement with XL Life, partially offset by a
loss of approximately $2,397,000 on our MetLife agreement, a
loss of approximately $2,174,000 on our now second largest life
reinsurance agreement due to seasonal fluctuations in premiums
and a large claim under that agreement during the quarter and a
loss of $1,180,000 on recaptured life reinsurance agreements
other than the comprehensive settlement with XL Life, as well as
increased litigation costs and employee compensation expenses.
Segment loss for the nine months ended September 30, 2003
was $(83,883,283) compared to segment income of $3,853,620 for
the nine months ended September 30, 2002. Segment loss for
the nine months ended September 30, 2003 reflects charges
for recaptures of life reinsurance agreements of approximately
$54,600,000, including the second quarter write down of deferred
acquisition costs of approximately $21,000,000 associated with
the expected recapture of our 50% quota share reinsurance
agreement with XL Life. These charges reflect the write down of
deferred acquisition costs and cash payments made to cedents net
of reserve releases associated with the recaptures. The net cost
of recaptures in the third quarter of 2003 was not significant.
Our results for the nine month period ending September 30,
2003 were also adversely affected by reported claims from deaths
prior to 2003 exceeding our estimated reserves for such claims
at December 31, 2002 by approximately $5,000,000.

Segment revenues for the three month period ended
September 30, 2003 declined 65% to $30,013,563 from
$86,708,167 in the third quarter of 2002. Segment revenues for
the nine month period ended September 30, 2003 declined 43%
to $147,690,979 from $260,319,388 for the first nine months of
2002. These declines reflect our reduced levels of life
reinsurance in force as a result of novations and recaptures of
life reinsurance agreements during the fourth quarter of 2002
and the first nine months of 2003. We anticipate similar
declines in segment revenue in the fourth quarter of 2003,
relative to prior years, as the result of these novations and
recaptures. In addition, net investment income attributable to
the life segment for the first nine months of 2003 decreased
approximately $8,400,000, as compared with the first nine months
of 2002, reflecting a reduction in invested assets in the
segment and lower asset yields.

Segment policy benefits and expenses decreased
69% to $29,412,349 for the three month period ended
September 30, 2003, as compared with $96,647,003 for the
three month period ended September 30, 2002. Segment policy
benefits and expenses for the nine month period ended
September 30, 2003 were $231,574,262 compared to
$256,465,768 for the comparable prior period. The impact of
recaptures and the comprehensive settlement with XL Life was a
net reduction of policy benefits and expenses of approximately
$5,600,000 for the three month period ended September 30,
2003 and a net increase in policy benefits and expenses of
approximately $54,600,000 for the nine month period ended
September 30, 2003. For the third quarter of 2003,
recapture costs were comprised of write downs of deferred
acquisition costs of approximately

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$20,110,000, and the return of unearned premium
reserves to our cedents of $1,900,000, both offset by policy
benefit reserve reductions of $20,830,000. Policy benefits and
expenses for the nine month period ended September 30, 2003
included the second quarter write down of deferred acquisition
costs of approximately $21,000,000 associated with the expected
recapture of our 50% quota share reinsurance agreement with XL
Life and reported claims for deaths prior to 2003 that exceeded
our estimated reserves for such claims at December 31, 2002
by approximately $5,000,000. This includes $7,800,000 of reduced
benefits and claims resulting from the comprehensive settlement
with XL Life. If claim experience continues at the levels
observed during the fourth quarter of 2002 and the first nine
months of 2003, or increases from those levels, our operating
results would be materially and adversely affected. The
novation, termination and recapture of additional reinsurance
agreements will reduce claims and policy benefits at an
aggregate level in future periods, and may affect the level of
claims and policy benefits as a percentage of premiums.


During October 2003, we updated our analysis of
carried reserves for incurred but not reported
(IBNR) claims. In determining the amount of IBNR required
at September 30, 2003, we considered the full trending of
claims reported through September 30, 2003. As a result of
our review, our reserve for IBNR at September 30, 2003 was
$6,500,000. We will continue to examine these IBNR levels in
relation to past experience each quarter.

Annuity Segment.Our
annuity reinsurance segment is the reinsurance of general
account fixed deferred annuities and certain risks 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. We have also historically reinsured certain
guarantees associated with variable annuity agreements,
including GMDB, EEB and GMIB. As of September 30, 2003, we
reinsured only GMDB and GMIB through a single reinsurance
agreement with CIGNA.

Our annuity segment contains the majority of our
assets. While we would expect it be a small contributor to our
net income, it contains significant volatility from two sources.
First, under FAS 133  Accounting for Derivative
Instruments and Hedging Activities we must value embedded
derivatives in certain 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, our Transamerica annuity reinsurance agreement has
exhibited volatility due to write downs of our deferred
acquisition cost balance which are based upon managements
estimates of future investment performance and lapse experience.
Our annuity reinsurance agreement with Transamerica, which
represented 90% of our annuity segment assets at
September 30, 2003, is not expected to generate significant
income going forward.

Segment income was $378,926 for the three month
period ended September 30, 2003, as compared with a loss of
$(18,253,644) for the three month period ended
September 30, 2002. Annuity segment income for the three
months ended September 30, 2003 includes a $(568,000) loss
from the termination of two annuity reinsurance agreements
associated with our comprehensive settlement with XL Life, a
$(630,000) loss on the Transamerica agreement and $800,000 of
additional reserves for our GMDB/GMIB agreement with CIGNA,
offset by a net gain from embedded derivatives of approximately
$2,808,000. For the first nine months of 2003, segment loss was
$(40,555,491), as compared with $(45,054,615) for the first nine
months of 2002. The 2003 loss includes the items noted above
plus a $(38,200,000) charge related to costs of recaptures and
associated experience during the first six months of 2003
(including the recapture of our then largest GMDB agreement and
our then second largest deferred annuity reinsurance agreement).
The nine months ended September 30, 2002 includes the
$24,796,000 write down of deferred acquisition costs associated
with our annuity reinsurance agreement with Transamerica.

Under FAS 133, we are required to bifurcate
and separately account for embedded derivatives contained in
certain of our annuity reinsurance agreements. The change in the
fair value of the embedded derivatives is influenced by changes
in credit risk, changes in expected future cash flows under the
annuity reinsurance agreements and interest rate changes. For
the three and nine month periods ended September 30, 2003,
the

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net change in fair value of our embedded
derivatives was a gain of $2,808,427 and $14,845,749,
respectively. For the three and nine month periods ended
September 30, 2002, the net change in fair value of our
embedded derivatives was a loss of $(13,277,823) and
$(18,254,530) respectively. 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 these agreements
had caused unrealized losses in our embedded derivatives in
prior periods.


As a result of the recapture of our GMDB
agreement with Hartford Life, we decreased our reserves for
expected claim payments associated with GMDB and EEB agreements
by approximately $10,850,000 in the second quarter of 2003.
During the third quarter, we increased our reserve for our
GMDB/GMIB reinsurance agreement with CIGNA by $800,000, bringing
our total carried reserves for all minimum guarantees associated
with variable annuity agreements to $10,200,000 at
September 30, 2003. Our reinsurance agreement with CIGNA is
our only remaining GMDB and GMIB reinsurance agreement.

Total revenue for our annuity segment increased
3% to $19,097,603 for the three month period ended
September 30, 2003, as compared with $18,535,565 for the
three month period ended September 30, 2002. This is due to
the increase in net change in the fair value of embedded
derivatives of $16,086,000 for the three month period ended
September 30, 2003 as compared with the comparable prior
period of 2002, offset by lower policy premiums of approximately
$2,000,000, lower surrender fees of approximately $1,900,000 and
reduced investment income of approximately $11,600,000.

Total revenue for our annuity segment declined
24% to $50,967,532 for the nine month period ended
September 30, 2003, as compared with $66,846,670 for the
nine month period ended September 30, 2002. This decrease
is primarily related to lower GMDB/GMIB premiums and surrender
fees of approximately $9,700,000 for the nine months ending
September 30, 2003, as well as reduced investment income
attributable to Funds Withheld of $38,900,000. This reduction is
a result of annuity agreement terminations during the first nine
months of 2003, most notably our annuity reinsurance agreements
with Ohio National. Surrender fees from our Transamerica annuity
reinsurance agreement also decreased by approximately $7,500,000
for the nine months ended September 30, 2003 as compared
with the first nine months of 2002, which is reflected in lower
revenues as mentioned above. The decline in segment revenue was
offset by an increase in the net change in the fair value of
embedded derivatives of $33,100,000 for the nine month period
ended September 30, 2003 as compared with the first nine
months of 2002.

Policy benefits and expenses for the annuity
segment, which include interest credited to policyholders,
segment specific expenses, and allocated expenses, declined 49%
to $18,718,677 for the three month period ended
September 30, 2003, as compared with $36,789,209 for the
three month period ended September 30, 2002. As a result of
the recapture of our GMDB agreement with Hartford Life in the
second quarter of 2003, our policy benefit and expenses in the
third quarter of 2003 declined by approximately $12,100,000, as
compared to the same quarter last year. Also, as a result of a
smaller base of policyholders and slightly lower lapse rates on
the Transamerica annuity reinsurance agreement, LMIG payments in
the third quarter of 2003 declined by approximately $5,800,000,
as compared to the same quarter last year.

Policy benefits and expenses declined 18% to
$91,523,023 for the nine months ended September 30, 2003,
as compared with $111,901,285 for the nine months ended
September 30, 2002. The nine months ended
September 30, 2003 includes a charge of $20,400,000 for the
recapture of our GMDB agreement with Hartford Life and LMIG
payments of approximately $13,022,000. The nine months ended
September 30, 2002 includes a write off of $24,796,000 of
deferred acquisition costs associated with our annuity
reinsurance agreement with Transamerica and LMIG payments of
$21,750,000.

Corporate Segment.The corporate segment includes all of our capital gains and
losses, investment income on undeployed invested assets, capital
raising costs and a proportionate share of operating expenses
based upon the relative distribution of stockholders
equity to all three segments. As a result, the corporate

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segment, while small relative to our total
company, will likely have volatile results. For the three and
nine month periods ended September 30, 2003, segment (loss)
income was $(946,748) and $3,280,909, respectively, as compared
with segment income of $9,045,463 and $12,193,610, respectively,
for the three and nine month periods ended September 30,
2002. Revenues diminished 98% to $220,721 for the three month
period ended September 30, 2003, as compared with
$10,386,955 for the three month period ended September 30,
2002, and declined by 54% to $7,486,829 for the nine month
period ended September 30, 2003, as compared with
$16,090,312 for the nine month period ended September 30,
2002. Net realized investment (losses) gains of $(52,025)
and $6,508,019 in the three and nine month periods ended
September 30, 2003, respectively, as compared to $9,297,351
and $10,813,315, respectively, for the three and nine month
periods ended September 30, 2002 were the principal reason
for the declines.


Segment benefits and expenses increased slightly
to $1,167,469 and $4,205,920 for the three and nine month
periods ended September 30, 2003, respectively, as compared
with $1,341,492 and $3,896,702, respectively, for the comparable
prior periods in 2002.

Financial Condition

Investments

At September 30, 2003 and December 31,
2002, virtually all of our invested assets 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, 2003, our
invested assets, including cash and cash equivalents, had an
aggregate fair value of $212,669,998, including unrealized gains
of $2,211,223, as compared with an aggregate fair value of
$306,346,337, including unrealized gains of $6,162,525, at
December 31, 2002. The decline in our invested assets was
primarily the result of claim payments on recaptured or
terminated reinsurance agreements and unearned premium payments
made to effect the recaptures. At September 30, 2003 and
December 31, 2002, the weighted average duration of the
fixed income securities included in our invested assets was 3.7
and 3.8 years respectively and the weighted average
investment quality rating was AA- and AA
respectively.

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. 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 issuer; however, the issuers capacity to meet
its financial commitment on the security is still considered to
be strong. As of July 31, 2002, our investment guidelines
were amended to prohibit us from investing in fixed income
securities that are rated below investment grade at the time of
purchase. We do not invest in any fixed income securities in
emerging markets or securities that are not rated by a major
rating agency.

At both September 30, 2003 and
December 31, 2002, less than 1% of our fixed income
securities consisted of below investment grade securities. The
fair value of such 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 prohibit the purchase of below investment grade
securities, as these investments are subject to a higher degree
of credit risk than investment grade securities. 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, 2003, mortgage-backed
securities represented approximately 12% of our invested assets,
including cash and cash equivalents, as compared with
approximately 10% at December 31, 2002. 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

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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, 2003 and December 31, 2002.


At September 30, 2003, none of our
mortgage-backed investment portfolio consisted of securities
with planned repayment schedules, as compared with 7% at
December 31, 2002. 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.

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      |         | Twelve Months Ended
|                                                                  |  | September 30,          |         | December 31,       
|                                                                  |  |                        |         |                    
|                                                                  |  | 2003                   |         | 2002                |  | 2002 |         | 2001 |  | 2000
|                                                                  |  |                        |         |                     |  |      |         |      |  |     
|                                                                  |  |                       
|                                                                  |  | (Dollars in thousands)
|Total invested assets, including cash and cash
    equivalents(1) |  | $                      | 212,670 |                     |  | $    | 475,213 |      |  | $    | 306,346 |   |  | $ | 423,780 |   |  | $ | 321,819 |  
|Investment income, net of related expenses                        |  | $                      | 4,508   |                     |  | $    | 19,080  |      |  | $    | 25,931  |   |  | $ | 20,165  |   |  | $ | 20,126  |  
|Effective annualized yield rate(2)                                |  |                        | 2.45    | %                   |  |      | 5.28    | %    |  |      | 5.28    | % |  |   | 5.74    | % |  |   | 6.85    | %
|Realized investment gains (losses)                                |  | $                      | 6,508   |                     |  | $    | 10,813  |      |  | $    | 19,749  |   |  | $ | 1,230   |   |  | $ | (4,817  | )



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|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 at the end of each calendar quarter
    included in the indicated period.

The effective annualized yield rate on our
invested assets has declined significantly during the first nine
months of 2003. This decline is the result of the shift in our
general account assets towards a greater cash position. We had
increased our cash position to maximize the amount of collateral
we can provide to our cedents and letter of credit providers and
to minimize market risk related to our collateral requirements.
Our investment portfolio is approximately 54% invested in cash
and cash equivalents at September 30, 2003. However, we
plan to invest a significant percentage of this money during the
fourth quarter if market opportunities present themselves.

Funds Withheld at Interest

At September 30, 2003, our Funds withheld
receivable was approximately $696,000,000, as compared with
approximately $1.4 billion at December 31, 2002.
Historically, when a ceding company enters into a reinsurance
agreement structured as a modified coinsurance or coinsurance
funds withheld 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. For annuity reinsurance agreements, the Funds
withheld at interest receivable is equal to our fixed portion of
the statutory reserves carried by the ceding company. For life
reinsurance agreements, the Funds withheld at interest
receivable is equal to the value of the ceding companys
GAAP reserves related to the policies underlying our life
reinsurance agreements, which includes reserves for pending
claims and reserves for incurred but not reported

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claims. 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 Funds withheld at interest under each type of agreement.


At September 30, 2003, our Funds withheld at
interest receivable related to our annuity reinsurance
agreements had a carrying value of approximately $688,000,000.
Our agreement with Transamerica accounted for approximately 90%
of annuity related Funds withheld at interest receivable as
September 30, 2003, as compared to 51% at December 31,
2002. The increase in the proportion of our Funds withheld at
interest asset related to the Transamerica agreement generally
reflects the termination of our annuity reinsurance agreement
with Ohio National, as well as other annuity agreements, during
2003. At September 30, 2003, the assets held and managed by
our ceding companies under our annuity reinsurance agreements
were invested in convertible bonds and fixed income securities
having a weighted average credit quality of A and a
weighted average duration of 5.9 years. In addition, at
September 30, 2003, approximately 5.5% of such assets were
invested in below investment grade securities, as compared with
4.2% of such assets at December 31, 2002. At
December 31, 2002, these assets had a weighted average
credit quality of A and a weighted average duration
of 5.3 years.

The average annualized yield rate earned on the
assets held and managed by our ceding companies under our
annuity reinsurance agreements was approximately 5.16% and 3.03%
for the three and nine month periods ended September 30,
2003, as compared to 6.97% and 5.90% for the three and nine
month periods ended September 30, 2002. The average
annualized yield rate earned on the assets funding our annuity
obligations to Transamerica was approximately 5.11% and 2.59%
for the three and nine month periods ended September 30,
2003, as compared with 7.18% and 5.30% for the three and nine
month periods ended September 30, 2002. For purposes of
calculating the average yield rate earned on assets held and
managed by our ceding companies, including Transamerica, we
include net realized capital gains and losses as reported to us
by our ceding companies.

Transamerica

Our annuity reinsurance agreement with
Transamerica is our largest annuity reinsurance agreement. As of
September 30, 2003, approximately $625,000,000, or 90% of
our Funds withheld at interest receivable, approximately
$628,000,000, or 90% of our Interest sensitive contracts
liability and approximately $34,000,000 of our Deferred policy
acquisition costs asset related to this agreement. As a result
of the changes to our company resulting from the recapture,
termination, and novations of numerous blocks of business, we
expect that the assets and liabilities associated with the
Transamerica agreement will also represent a significant portion
of our total assets and liabilities in future periods. We do not
expect the Transamerica agreement to generate significant income
in future periods.

At September 30, 2003, the assets funding
the policyholder obligations under the Transamerica agreement
had an average credit quality of A and an average
duration of 6.2 years, as compared with an average credit
quality of A- and an average duration of
4.2 years at December 31, 2002. The agreement is a
retrocessional arrangement covering VisionMark fixed annuity
products issued by IL Annuity and Insurance Company, the primary
insurance company. AmerUS Capital Management, the investment
manager appointed by IL Annuity, manages the assets underlying
the Transamerica agreement. At September 30, 2003 and
December 31, 2002, AmerUS Capital Management had invested
approximately 65% 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,
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 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.

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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, 2003 and the year ended
December 31, 2002, we paid approximately $13,022,000 and
$26,763,000, respectively, under our annuity reinsurance
agreement 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 LMIG for surrendered policies.

According to data provided to us by Transamerica,
at September 30, 2003, the assets held by IL Annuity and
managed by AmerUS Capital were comprised of the following:

|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |       |  
|------------------------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---- | ----- | -
|                                            |                                                             |               |             |              |  | % of Total  
|Type of Security                            |                                                             | Book Value(1) |             | Market Value |  | Market Value
|                                            |                                                             |               |             |              |  |             
|Investment grade convertible bonds          |                                                             | $             | 410,652,803 |              |  | $            | 402,837,815 |             |  |  | 65.2 | %    
|Investment grade U.S. corporate bonds       |                                                             |               | 113,512,308 |              |  |              | 117,430,283 |             |  |  | 19.0 | %    
|Below investment grade U.S. corporate bonds |                                                             |               | 33,224,270  |              |  |              | 34,141,139  |             |  |  | 5.5  | %    
|Mortgage-backed securities                  |                                                             |               | 30,993,440  |              |  |              | 31,009,308  |             |  |  | 5.0  | %    
|Short term securities                       |                                                             |               | 32,285,333  |              |  |              | 32,324,401  |             |  |  | 5.2  | %    
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                                            | Total invested assets                                       |               | $           | 620,668,154  |  |              | $           | 617,742,947 |  |  |      | 100.0 | %
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      
|Accrued investment income                   |                                                             |               |             |              |  |              | 3,875,935   |             |  |  |      |      
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                                            | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 621,618,882 |  |  |      |       |  
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

According to data provided to us by Transamerica,
at September 30, 2003, the credit ratings of the assets
(excluding accrued investment income) held by IL Annuity and
managed by AmerUS Capital were approximately as follows:

|                          |                                                             |               |             |              |  |              |             |             |  |  |      |       |  
|------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---- | ----- | -
|                          |                                                             |               |             |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |             | Market Value |  | Market Value
|                          |                                                             |               |             |              |  |             
|AAA                       |                                                             | $             | 128,497,001 |              |  | $            | 127,977,688 |             |  |  | 20.7 | %    
|AA                        |                                                             |               | 47,648,955  |              |  |              | 45,680,422  |             |  |  | 7.4  | %    
|A                         |                                                             |               | 157,940,656 |              |  |              | 158,941,039 |             |  |  | 25.7 | %    
|BBB                       |                                                             |               | 252,040,161 |              |  |              | 249,762,779 |             |  |  | 40.4 | %    
|BB and below              |                                                             |               | 34,541,381  |              |  |              | 35,381,019  |             |  |  | 5.7  | %    
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                          | Total invested assets                                       |               | $           | 620,668,154  |  |              | $           | 617,742,947 |  |  |      | 100.0 | %
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|Accrued investment income |                                                             |               |             |              |  |              | 3,875,935   |             |  |  |      |      
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                          | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 621,618,882 |  |  |      |       |  
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      



---



|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.           

33



---



##### 



According to data provided to us by Transamerica,
at September 30, 2003, the maturity distribution of the
assets held by IL Annuity and managed by AmerUS Capital was
approximately as follows:

|                       |                 |               |             |              |  |            |             |             |  |  |      |       |  
|---------------------- | --------------- | ------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ---- | ----- | -
|                       |                 |               |             |              |  | % of Total
|Maturity               |                 | Book Value(1) |             | Market Value |  | Book Value
|                       |                 |               |             |              |  |           
|Within one year        |                 | $             | 49,113,545  |              |  | $          | 49,150,872  |             |  |  | 8.0  | %    
|From one to five years |                 |               | 129,715,360 |              |  |            | 130,174,555 |             |  |  | 21.0 | %    
|From six to ten years  |                 |               | 134,401,515 |              |  |            | 135,734,041 |             |  |  | 22.0 | %    
|More than ten years    |                 |               | 307,437,734 |              |  |            | 302,683,479 |             |  |  | 49.0 | %    
|                       |                 |               |             |              |  |            |             |             |  |  |      |      
|                       | Total all years |               | $           | 620,668,154  |  |            | $           | 617,742,947 |  |  |      | 100.0 | %
|                       |                 |               |             |              |  |            |             |             |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

Other Annuity Reinsurance Agreement

At September 30, 2003, we had one other
annuity reinsurance agreement that guaranteed crediting rates
that vary in amount and duration. At September 30, 2003,
the assets funding the policyholder obligations under this
agreement had an average credit quality of A- and an
average duration of approximately 3.77 years, as compared with
an average credit quality of A and an average
duration of approximately 7.04 years for the other annuity
agreements in force at December 31, 2002.

According to information provided by the ceding
company under this annuity reinsurance agreement, at
September 30, 2003, the assets held and managed by this
ceding company were comprised of as follows:

|                                    |                                                             |               |            |              |  |              |            |            |  |  |      |       |  
|----------------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ---------- | ---------- |  |  | ---- | ----- | -
|                                    |                                                             |               |            |              |  | % of Total  
|Type of Security                    |                                                             | Book Value(1) |            | Market Value |  | Market Value
|                                    |                                                             |               |            |              |  |             
|Investment grade US corporate bonds |                                                             | $             | 58,788,630 |              |  | $            | 62,651,550 |            |  |  | 82.9 | %    
|Short term securities               |                                                             |               | 5,389,555  |              |  |              | 5,389,555  |            |  |  | 7.1  | %    
|Mortgage securities                 |                                                             |               | 4,441,242  |              |  |              | 5,083,146  |            |  |  | 6.7  | %    
|Below investment grade bonds        |                                                             |               | 3,540,278  |              |  |              | 2,454,656  |            |  |  | 3.3  | %    
|                                    |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                                    | Total invested assets                                       |               | $          | 72,159,705   |  |              | $          | 75,578,907 |  |  |      | 100.0 | %
|                                    |                                                             |               |            |              |  |              |            |            |  |  |      |      
|Accrued investment income           |                                                             |               |            |              |  |              | 1,105,237  |            |  |  |      |      
|                                    |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                                    | Total market value, including accrued investment
    income |               |            |              |  |              | $          | 76,684,144 |  |  |      |       |  
|                                    |                                                             |               |            |              |  |              |            |            |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

34



---



##### 



According to information provided by the ceding
company under this annuity reinsurance agreement, at
September 30, 2003, the credit ratings of the assets
(excluding accrued investment income) held and managed by this
ceding company were approximately as follows:

|                          |                                                             |               |            |              |  |              |            |            |  |  |      |       |  
|------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ---------- | ---------- |  |  | ---- | ----- | -
|                          |                                                             |               |            |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |            | Market Value |  | Market Value
|                          |                                                             |               |            |              |  |             
|AAA                       |                                                             | $             | 5,990,875  |              |  | $            | 5,978,700  |            |  |  | 7.9  | %    
|AA                        |                                                             |               | 3,585,596  |              |  |              | 3,818,954  |            |  |  | 5.1  | %    
|A                         |                                                             |               | 24,109,602 |              |  |              | 25,769,487 |            |  |  | 34.1 | %    
|BBB                       |                                                             |               | 34,933,354 |              |  |              | 37,557,110 |            |  |  | 49.7 | %    
|BB and below              |                                                             |               | 3,540,278  |              |  |              | 2,454,656  |            |  |  | 3.2  | %    
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                          | Total invested assets                                       |               | $          | 72,159,705   |  |              | $          | 75,578,907 |  |  |      | 100.0 | %
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      
|Accrued investment income |                                                             |               |            |              |  |              | 1,105,237  |            |  |  |      |      
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                          | Total market value, including accrued investment
    income |               |            |              |  |              | $          | 76,684,144 |  |  |      |       |  
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      



---



|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.           

According to information provided by the ceding
companies under this annuity reinsurance agreement, at
September 30, 2003, the maturity distribution of the assets
held and managed by this ceding company was approximately as
follows:

|                       |                 |               |            |              |  |            |            |            |  |  |      |       |  
|---------------------- | --------------- | ------------- | ---------- | ------------ |  | ---------- | ---------- | ---------- |  |  | ---- | ----- | -
|                       |                 |               |            |              |  | % of Total
|Maturity               |                 | Book Value(1) |            | Market Value |  | Book Value
|                       |                 |               |            |              |  |           
|Within one year        |                 | $             | 13,319,669 |              |  | $          | 13,410,982 |            |  |  | 17.7 | %    
|From one to five years |                 |               | 24,212,414 |              |  |            | 26,132,038 |            |  |  | 34.6 | %    
|From six to ten years  |                 |               | 27,231,188 |              |  |            | 28,252,552 |            |  |  | 37.4 | %    
|More than ten years    |                 |               | 7,396,434  |              |  |            | 7,783,335  |            |  |  | 10.3 | %    
|                       |                 |               |            |              |  |            |            |            |  |  |      |      
|                       | Total all years |               | $          | 72,159,705   |  |            | $          | 75,578,907 |  |  |      | 100.0 | %
|                       |                 |               |            |              |  |            |            |            |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

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. The principal
obligations and uses of the funds are to post collateral for the
statutory reserves ceded to us by U.S. based insured and
reinsurers, the payment of policy benefits, 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 cedents. At September 30,
2003 and December 31, 2002, letters of credit totaling
$75,000,000 and $174,000,000, 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, 2003 and
December 31, 2002, cash and investments of approximately
$64,000,000 and $115,000,000, respectively, were pledged as
collateral for letters of credit. At September 30, 2003 and
December 31, 2002, cash and investments of $98,675,000 and
$125,085,000

35



---



##### 



respectively were held in trust for the benefit
of certain 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 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, 2003,
approximately $49,000,000 of our cash and cash equivalents and
fixed income securities were held by the U.S. operating
subsidiary and were not available to our Bermuda operating
subsidiary to fund our liquidity or collateral needs. In
addition, our U.S. operating company has entered into a
letter agreement with the Connecticut Insurance Department that,
among other things, restricts the U.S. operating company
from paying dividends or settling inter-company balances with us
or our Bermuda operating company.

As discussed in Note 6 to our unaudited
consolidated financial statements included elsewhere in this
report, on December 31, 2002, we entered into a transaction
with XL Life pursuant to which we novated five blocks of life
reinsurance business to XL Life, which in turn entered into a
50% quota share reinsurance agreement with us with respect to
four of those blocks of business. On August 5, 2003, XL
Life served us with notice of its intention to recapture the 50%
quota share reinsurance agreement with us. As a result, we
determined we would not be able to recover our deferred
acquisition costs carried for this agreement from future
expected income, and wrote down approximately $21,000,000 of
such deferred acquisition costs in the three months ended
June 30, 2003.

We have been in discussions with XL Life with
respect to each partys rights and obligations under the
novation and retrocession agreements entered into at
December 31, 2002, as well as a $10,000,000 excess of loss
reinsurance policy and a catastrophe excess of loss cover that
were each purchased by us from XL Life in the first quarter of
2002 and two annuity reinsurance agreements between our company
and XL Life or its affiliates. The excess of loss reinsurance
policy was purchased to protect against LMIG payments under our
annuity reinsurance agreement with Transamerica, and full
recovery under the policy has been anticipated in establishing
our deferred acquisition cost asset. The catastrophe excess of
loss cover expired by its terms on December 31, 2002, but
we continued to discuss with XL Life remaining obligations
asserted under the agreement. The two annuity reinsurance
agreements represent approximately $95,900,000 (including a
cumulative loss from embedded derivatives of approximately
$2,800,000) of our Funds withheld at interest and approximately
$95,600,000 of our Interest sensitive contract and other
liabilities.

As a result of our discussions with XL Life, we
and XL Life and its affiliate agreed to mutually discharge our
respective rights and obligations under all of the agreements
described in the preceding paragraph in a comprehensive
settlement effective as of July 1, 2003. Under the terms of
the comprehensive settlement, we paid $6,000,000 to XL Life and
were released from any and all obligations to XL Life and its
affiliate under all of the agreements among the parties. In
addition, as part of the comprehensive settlement, we are
obligated to pay $2,000,000 to XL Life if prior to June 30,
2004 our stock trades above $2.00 per share for a period of 20
out of 30 consecutive trading days and we raise an aggregate
$35,000,000 of equity or debt.

We did not have sufficient available cash and
investments at September 30, 2003 to satisfy the collateral
requirements asserted by CIGNA, the cedent under our only GMDB/
GMIB agreement. As of December 31, 2002, CIGNA asserted
that we must satisfy additional collateral requirements of
approximately $59,000,000 in excess of the $11,000,000 of
collateral we currently have posted. We have not agreed with
CIGNAs computation of the $70,000,000 collateral
requirement and have not posted any additional collateral under
the agreement. As a result, CIGNA has alleged that we have
breached our agreement and may institute arbitration or
litigation proceedings to seek remedies for the alleged breach.
If we do not prevail in any such arbitration or litigation
proceedings, it would have a material adverse effect on our
financial condition and we may be required to liquidate our
operations. As of September 30, 2003, we had met the
collateral requirements

36



---



##### 



of our other cedents, and we expect to be able to
meet any collateral requirements asserted at December 31,
2003, other than CIGNA.


As of September 30, 2003, we had $26,700,000
of outstanding unsecured letters of credit issued on its behalf
by Citibank that expire on December 31, 2003. In November
2003, Citibank agreed to renew our unsecured letter of credit
facility until December 31, 2004 if we reduce the unsecured
balance of the letter of credit facility to $17,000,000 by
November 30, 2003. If we do not reduce the unsecured
balance of the letter of credit facility to $17,000,000 by
November 30, 2003 and Citibank does not renew the letters
of credit, the letters of credit will expire on
December 31, 2003 and our cedents will be entitled to draw
on the letters of credit. We would then be obligated to repay
Citibank for any amounts drawn.

At September 30, 2003, our total
capitalization, which consisted entirely of equity, was
$146,399,823. For the nine months ended September 30, 2003,
we utilized $97,859,548 of our cash and cash equivalents to fund
our operating activities, as compared with generating cash and
cash equivalents of $27,726,444 from our operating activities
for the nine months ended September 30, 2002. The
utilization of our cash and cash equivalents during the first
nine months was primarily the result of claim payments on
recaptured or terminated reinsurance agreements and unearned
premium payments made to effect the recaptures.

In January 2003, we instituted substantial
premium rate increases on all of our non-guaranteed premium
yearly renewable term agreements. All of our cedents subject to
the rate increase, except MetLife and one other cedent who has
accepted the rate increase, have recaptured their reinsurance
agreements. MetLife has made the rate increase a subject of
arbitration with us, and has indicated that its election to
recapture is dependent upon the arbitration panels
conclusion about the validity of the rate increase. If we are
not successful in obtaining the rate increase through
arbitration and MetLife does not recapture the agreement, we are
likely to continue to incur losses from this agreement for the
foreseeable future. If we are successful in the arbitration and
MetLife recaptures the agreement, our annual premium revenues
will decline, but we would no longer incur losses under the
agreement. The arbitration is scheduled to commence on
December 15, 2003.

Transamerica has alleged that we owe $14,900,000
under our annuity reinsurance agreement with it. We have not
agreed that such amount currently is owed to Transamerica, and
we are attempting to resolve our issues with Transamerica.
Transamerica has indicated that if we cannot resolve our issues,
it will attempt to put our Bermuda operating subsidiary into
liquidation.

In addition to the discussions with Transamerica
related to the alleged amounts owed to it, we have been
attempting to engage Transamerica, and ultimately IL Annuity, in
discussions aimed at improving investment returns from the
convertible bond portfolio and potentially redesigning the
VisionMark product to reduce the minimum guarantee exposures
from the Transamerica agreement. If we are not successful in
convincing Transamerica and IL Annuity to restructure the
portfolio and/or to redesign the product, we may incur
additional write downs of deferred acquisition costs in the
future.

While we plan to continue receiving premiums and
paying claims under our remaining reinsurance treaties, we have
ceased to write new reinsurance agreements and are not accepting
any new business under existing treaties on their current terms.
We do not anticipate writing new reinsurance agreements in the
foreseeable future. To date, our plans have involved reducing
our collateral requirements by negotiating the recapture,
retrocession, novation or sale of certain of our reinsurance
agreements. During the first nine months of 2003, these types of
transactions resulted in significant losses for us. While we may
enter into similar transactions in the future, we are not
actively seeking to do so.

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. 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 December 31, 2002, we could not
reasonably determine that we met these grounds. Accordingly, on
February 19, 2003, we announced that we

37



---



##### 



would not declare or pay a dividend on our common
shares during the first quarter of 2003. No dividends have been
paid since. 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. We do not expect to declare or pay
dividends in the near future.


During 2001, our Board of Directors approved a
share repurchase program of up to $25,000,000 of our common
stock. While our Board has given us the flexibility to
repurchase our common stock in the future if market conditions
so dictate, at the present time we do not anticipate
repurchasing any common shares.

We had no material commitments for capital
expenditures as of September 30, 2003, but as noted above,
we have significant obligations that we may not be able to
satisfy. There can be no assurance that the actions taken by us
have been sufficient to improve our operations and liquidity. In
addition, we cannot predict the outcome of several pending
issues and the impact those outcomes may have on us. If we are
unable to reposition our general account investment portfolio to
achieve a substantially higher yield within our investment
guidelines, successfully defend ourselves against the pending
shareholder class action suit, attain a favorable outcome from
the MetLife arbitration and settle our issues with Transamerica
regarding our annuity reinsurance agreement, we may not be able
to meet our obligations. Any failure to achieve one of the
foregoing items could have a material adverse effect on our
financial condition and results of operations. The accompanying
unaudited consolidated financial statements do not include any
adjustments that might be necessary should we be unable to meet
such obligations.

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 through novations, recaptures
or otherwise; 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 maintain the listing of our common shares on the New
York Stock Exchange; 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, 2002, 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.

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|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    about Market Risk

Market risk is the risk of loss arising from
adverse changes in market rates and prices, such as interest
rates, foreign currency exchange rates, and other relevant
market rate or price changes. The following is a discussion of
our primary market risk exposures and how those exposures are
currently managed as of September 30, 2003.

Our major market risk exposure is changing
interest rates, primarily in the United States. We have a
portfolio of fixed income investments and a change in interest
rates will affect the fair value of our investments and may
affect our operating results and financial condition. Interest
rate risk is managed with effective maturity structures and with
the application of duration management practices.

We have no equity securities in our general
account. We have significant market risk, including equity risk,
from our largest annuity reinsurance agreement and our GMDB/
GMIB agreement. We do not currently use derivative financial
instruments such as futures and options to manage risk in our
general account or assumed through our reinsurance agreements,
although we may do so in the future. We manage other risks,
including credit and liquidity, in the normal course of
business. In managing credit risk, we establish overall quality
and rating guidelines and place limits on credit exposure by
issuer and industry to achieve appropriate diversification in
the portfolio. We do not have a trading portfolio and are not
exposed to market risk from trading activities.

Our primary market risk exposures as of
September 30, 2003 have changed since the year ended
December 31, 2002 as a result of a decrease in the amount
of our invested assets and funds withheld. In addition, the
recapture of our GMDB reinsurance agreement with Hartford Life
has significantly decreased our market risk exposures. Our GMDB
exposure at December 31, 2002 was approximately
$1.23 billon, but has diminished to approximately
$139,000,000 at September 30, 2003.

The table below presents as of September 30,
2003 the amortized cost amounts and related weighted average
interest rates by years of maturity for our investment
portfolio. Mortgage-backed securities are included in the table
by anticipated year of maturity.

|                           |  |                        |         |                  |  |                |      |                  |  |   |        |  |  |  |      |  
|-------------------------- |  | ---------------------- | ------- | ---------------- |  | -------------- | ---- | ---------------- |  | - | ------ |  |  |  | ---- | -
|Weighted Average           |  | Cash and Cash          |         | Weighted Average |  | Fixed Maturity |      | Weighted Average
|Interest Rates By Maturity |  | Equivalents            |         | Interest Rate    |  | Investments    |      | Interest Rate   
|                           |  |                        |         |                  |  |                |      |                 
|                           |  |                       
|                           |  | (Dollars in thousands)
|2003                       |  | $                      | 113,859 |                  |  |                | 0.85 | %                |  |   |        |  |  |  |      |  
|2004                       |  |                        |         |                  |  |                |      |                  |  | $ | 4,850  |  |  |  | 4.53 | %
|2005                       |  |                        |         |                  |  |                |      |                  |  |   | 7,101  |  |  |  | 5.37 | %
|2006                       |  |                        |         |                  |  |                |      |                  |  |   | 9,404  |  |  |  | 5.59 | %
|2007                       |  |                        |         |                  |  |                |      |                  |  |   | 8,977  |  |  |  | 5.70 | %
|Thereafter                 |  |                        |         |                  |  |                |      |                  |  |   | 65,726 |  |  |  | 5.33 | %
|                           |  |                        |         |                  |  |                |      |                  |  |   |        |  |  |  |      |  
|Total                      |  | $                      | 113,859 |                  |  |                | 0.85 | %                |  | $ | 96,058 |  |  |  |      |  
|                           |  |                        |         |                  |  |                |      |                  |  |   |        |  |  |  |      |  
|Fair Value                 |  | $                      | 113,859 |                  |  |                |      |                  |  | $ | 98,810 |  |  |  |      |  
|                           |  |                        |         |                  |  |                |      |                  |  |   |        |  |  |  |      |  

Sensitivity analysis and duration modeling are
used to estimate changes in fair values of fixed income
investments and the potential effects on operating earnings and
cash flows resulting from possible near term changes in interest
rates. The term near term means a period of time
going forward up to one year from the date of our consolidated
financial statements. Durations of fixed income investments are
adjusted for call, put and reset features. Portfolio durations
are calculated on a market value weighted basis, including
accrued investment income. Our duration model uses a 100 basis
point change in interest rates to measure the hypothetical
change in fair value of financial instruments included in the
model. The duration model produces a loss in fair value of the
fixed income investments of approximately $3,600,000 based on a
100 basis point increase in interest rates as of
September 30, 2003. Conversely, the model produces gains of
similar amounts with a 100 basis point decrease in interest
rates. Actual results may differ from the hypothetical change in
fair

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values assumed in this disclosure, especially
since the analysis does not and cannot reflect the results of
any actions that would be taken by us to mitigate losses or to
optimize gains in fair values.


One of our modified coinsurance annuity
reinsurance agreements have features that constitute embedded
derivatives that require bifurcation and separate accounting
under FAS 133  Accounting for Derivative
Instruments and Hedging Activities. We have identified an
embedded derivative, similar to a total return swap arrangement,
within our funds withheld at interest receivable asset that we
record in connection with this agreement. The valuation of this
embedded derivative requires complex cash flow modeling and
assumptions, most notably with respect to expected future cash
flows. The net fair value of this derivative is classified on
our balance sheet as a component of our Funds withheld asset.
Changes in the fair value of the derivative are reported in net
income as Net change in fair value of embedded derivatives.
While we believe these estimates of future cash flows and other
assumptions in our models are reasonable when made, 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, we may modify
our methodology.

The methodology we use to determine the fair
value of the embedded derivatives in our annuity reinsurance
agreements that require bifurcation and separate accounting
under FAS 133 is to determine the fair value of the host
contract (notional asset) based upon expected future cash flows
under the annuity agreements. The fair value of the embedded
derivative is calculated as being the market value of the actual
assets less the fair value of the notional asset. The change in
fair value of the embedded derivative is influenced by changes
in credit risk, changes in expected future cash flows under the
annuity agreements and interest rate changes. This methodology,
which applies to all of our fixed annuity reinsurance agreements
other than Transamerica, results in a valuation of the embedded
derivative reflecting the market risk inherent in the underlying
agreements.

As of September 30, 2003, the net impact on
our embedded derivatives of a 20 basis point increase or
decrease in credit spreads is a loss or gain on the embedded
derivative of approximately $218,000, respectively. Also, as of
September 30, 2003 and after giving effect to the
termination or recapture of certain annuity reinsurance
agreements, the net impact on our embedded derivatives of a
50 basis point increase or decrease in interest rates as a
result of duration mismatching is a gain or loss on the embedded
derivative of approximately $293,000, respectively. The duration
of the actual assets is approximately 3.77 years and the
duration of the notional asset is approximately 4.04 years.
As a result, we believe the impact of interest rate movements on
the embedded derivative will be small.

The table below shows the change in our embedded
derivatives by quarter for 2002 and 2003:

|                    |  |                    |             |                     |  |   |             |  
|------------------- |  | ------------------ | ----------- | ------------------- |  | - | ----------- | -
|                    |  | Change in Embedded |             | Embedded Derivative
|                    |  | Derivative Value   |             | at Fair Value      
|                    |  |                    |             |                    
|First Quarter 2002  |  | $                  | 1,590,098   |                     |  | $ | 2,953,390   |  
|Second Quarter 2002 |  | $                  | (6,566,805  | )                   |  | $ | (3,613,415  | )
|Third Quarter 2002  |  | $                  | (13,277,823 | )                   |  | $ | (16,891,238 | )
|Fourth Quarter 2002 |  | $                  | (7,591,581  | )                   |  | $ | (24,482,819 | )
|First Quarter 2003  |  | $                  | 13,754,859  |                     |  | $ | (10,727,960 | )
|Second Quarter 2003 |  | $                  | (1,717,537  | )                   |  | $ | (12,445,497 | )
|Third Quarter 2003  |  | $                  | 2,808,427   |                     |  | $ | (9,637,070  | )

Our accounting policy for guaranteed minimum
death benefit, minimum guaranteed income benefit and enhanced
earnings benefit agreements is discussed in Note 3 to our
consolidated financial statements for the fiscal year ended
December 31, 2002. As of December 31, 2002, we had
established reserves of approximately $18,500,000 related to
these types of minimum guarantees associated with variable
annuity products. Our exposure for GMIB benefits has not
materially changed since December 31, 2002. Our reserve for
GMDB and GMIB as of September 30, 2003 was $10,200,000.
These reserves are calculated on the basis of actuarial
assumptions related to projected benefits and related contract
charges over the lives of the agreements. Our reserve
methodology for these variable annuity minimum guarantee
products is not directly market sensitive, although we do make
assumptions about the state of the financial markets when we
establish our reserves for

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these exposures. After giving effect to the
recapture of our largest guaranteed minimum death benefit
agreement, we estimate little impact on our reserve for
guaranteed minimum death benefits and guaranteed minimum income
benefits based on our preliminary review of the Statement of
Position 03-1 Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts.


We refer you to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market
Risk of our Annual Report on Form 10-K for the year
ended December 31, 2002 for additional information
regarding our exposure to market risk.

The statements above are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act. See Forward-Looking and Cautionary
Statements.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of the end of the period covered by this
Form 10-Q, the Companys management, including its
Chief Executive Officer/ Chief Financial Officer, conducted an
evaluation of the effectiveness of the Companys disclosure
controls and procedures. Based on that evaluation, the Chief
Executive Officer/ Chief Financial Officer concluded that the
Companys disclosure controls and procedures were
effective. There have been no changes in the Companys
internal controls over financial reporting during the period
ended September 30, 2003 that have materially affected, or
are reasonably likely to materially affect, the Companys
internal controls over financial reporting.

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PART II

OTHER INFORMATION



|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

On April 23, 2002, we served written notice
of arbitration on The Metropolitan Life Insurance Companies
(MetLife), the cedent under our largest life reinsurance
agreement, seeking equitable relief and monetary damages based
on MetLifes misrepresentation of and failure to disclose
material facts known to it relating to the agreement. On
January 30, 2003, we also provided written notice to
MetLife of a premium rate increase, effective March 5,
2003, which also has become a subject of this arbitration. In
April 2003, MetLife informed us that, if the arbitration panel
finds the premium rate increase valid, MetLife would recapture
the reinsurance agreement as of March 5, 2003. On
October 3, 2003, MetLife drew approximately $7,400,000 of
assets held in trust for its benefit. We believe the draw was
inappropriate due to the pending arbitration, but have chosen at
this time not to attempt to challenge the draw, as we will
likely request that the arbitration panel make it a subject of
the arbitration. The arbitration is scheduled to commence on
December 15, 2003.

On and since December 4, 2002, certain of
our shareholders have filed purported shareholder class action
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.

On March 18, 2003, Hartford Life Insurance
Company, the cedent under our largest guaranteed minimum death
benefit reinsurance agreement, served notice seeking to
institute arbitration proceedings against us alleging that we
had failed to satisfy additional collateral requirements under
the agreement of approximately $59,000,000. On July 17,
2003, Hartford Life agreed to recapture its guaranteed minimum
death benefits reinsurance agreement with us. As consideration
for the recapture, Hartford Life retained approximately
$31,000,000 of the funds it had drawn from a trust account and
letters of credit that had been posted as collateral under the
agreement, and we issued warrants to purchase an aggregate one
million of our common shares to Hartford Life. Under the terms
of the recapture, we have no further obligations to Hartford
Life.

On October 8, 2003, we were served with a
statutory demand for $640,000 from Imagine Re, a Bermuda
based reinsurance company. Imagine Re alleges that we are
obligated to reimburse it for expenses incurred by
Imagine Re in connection with a December 2002 capital
raising transaction that was not consummated. We believe that
Imagine Re is not entitled to reimbursement of these
expenses under the applicable agreement and intend to defend
against Imagine Res claims.

There are no other arbitration or legal
proceedings currently in process.



|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

On July 17, 2003, we issued warrants to
purchase an aggregate one million of our common shares at an
exercise price of $1.25 per share to Hartford Life, the ceding
company under our largest guaranteed minimum death benefit
reinsurance agreement. The warrants were issued in connection
with the recapture of the agreement and expire on June 30,
2013. The issuance of the warrants was exempt from the
registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.

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|        |                  
|------- | -----------------
|Item 5. | Other Information

On April 8, 2003, we received notice from
the New York Stock Exchange that we did not satisfy the
NYSEs continued listing standards as of that date because
the average closing price of our common shares had been below
$1.00 for a 30 consecutive trading day period. The notice
indicated that if we could not achieve (i) a $1.00 average
share price for the 30 consecutive trading days prior to
October 7, 2003, the expiration of the six month period
following the date of the receipt of the notification, and
(ii) a $1.00 share price on October 7, 2003, then the
NYSE would commence suspension and delisting procedures with
respect to our common shares. In addition, the NYSE informed us
that it was considering whether we continued to meet certain of
the NYSEs qualitative continued listing standards due to
concerns over our financial condition. On October 14, 2003,
the NYSE informed us that we had satisfied the NYSEs
continued listing standards, and as a result would not be
delisted from the Exchange.

On October 8, 2003, we were served with a
statutory demand for $640,000 from Imagine Re, a Bermuda
based reinsurance company. Imagine Re alleges that we are
obligated to reimburse it for expenses incurred by
Imagine Re in connection with a December 2002 capital
raising transaction that was not consummated. We believe that
Imagine Re is not entitled to reimbursement of these
expenses under the applicable agreement and intend to defend
against Imagine Res claims.

On August 13, 2003, Martin A. Berkowitz
joined our Board of Directors. Mr. Berkowitz replaced Mark
Grier, who resigned from the Board of Directors effective
May 14, 2003.

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Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits 

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4    |  | Form of Warrant issued to Hartford Life and
    Annuity Insurance Company and Hartford Life Insurance Company
    (incorporated by reference to Exhibit 4 to the
    registrants Form 10-Q for the quarterly period ended
    June 30, 2003).                                                                                                                                                          
|10.1 |  | Amended and Restated Employment Agreement, dated
    as of July 28, 2003, by and between Annuity and Life Re
    (Holdings), Ltd., Annuity and Life Reassurance, Ltd. and John F.
    Burke (incorporated by reference to Exhibit 10.1 to the
    registrants Form 10-Q for the quarterly period ended
    June 30, 2003).                                                                             
|10.2 |  | Recapture Agreement and General Release of
    Guaranteed Minimum Death Benefit Reinsurance Agreements, dated
    as of June 30, 2003, among Hartford Life and Annuity
    Insurance Company, Hartford Life Insurance Company and Annuity
    and Life Reassurance, Ltd. (incorporated by reference to
    Exhibit 10.3 to the registrants Form 10-Q for
    the quarterly period ended June 30, 2003).
|10.3 |  | Settlement and Commutation Agreement, dated as of
    November 4, 2003, by and among XL Life Ltd, XL Re Ltd
    (formerly known as XL MidOcean Reinsurance Ltd), Annuity and
    Life Reassurance Ltd., and Annuity and Life Re (Holdings), Ltd.                                                                                                                                                        
|31   |  | Rule 13a-14(a)/15d-14(a) Certification of
    the Companys Chief Executive Officer and Chief Financial
    Officer.                                                                                                                                                                                                                                                                                    
|32   |  | Section 1350 Certification of the
    Companys Chief Executive Officer and Chief Financial
    Officer.                                                                                                                                                                                                                                                                                                

(b) Reports on Form 8-K 

Current Report on Form 8-K (Items 7 and
12) dated and filed on August 7, 2003, reporting several
recent developments that had occurred with respect to the
Company, including the recapture of the Companys largest
guaranteed minimum death benefits reinsurance agreement and the
announcement that XL Life Ltd had served notice that it intended
to recapture four life reinsurance agreements ceded to the
Company on a 50% quota share basis.

Current Report on Form 8-K (Items 7 and
12) dated August 14, 2003 and filed on August 15,
2003, regarding the Companys release of its financial
results for the three month period ended June 30, 2003.

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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. BURKE                   
| |                                     
| | Name: John F. Burke                 

| |        |                            
| | ------ | ---------------------------
| | Title: | Chief Executive Officer and

| |                        
| | -----------------------
| | Chief Financial Officer

Date: November 14, 2003

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EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4    |  | Form of Warrant issued to Hartford Life and
    Annuity Insurance Company and Hartford Life Insurance Company
    (incorporated by reference to Exhibit 4 to the
    registrants Form 10-Q for the quarterly period ended
    June 30, 2003).                                                                                                                                                          
|10.1 |  | Amended and Restated Employment Agreement, dated
    as of July 28, 2003, by and between Annuity and Life Re
    (Holdings), Ltd., Annuity and Life Reassurance, Ltd. and John F.
    Burke (incorporated by reference to Exhibit 10.1 to the
    registrants Form 10-Q for the quarterly period ended
    June 30, 2003).                                                                             
|10.2 |  | Recapture Agreement and General Release of
    Guaranteed Minimum Death Benefit Reinsurance Agreements, dated
    as of June 30, 2003, among Hartford Life and Annuity
    Insurance Company, Hartford Life Insurance Company and Annuity
    and Life Reassurance, Ltd. (incorporated by reference to
    Exhibit 10.3 to the registrants Form 10-Q for
    the quarterly period ended June 30, 2003).
|10.3 |  | Settlement and Commutation Agreement, dated as of
    November 4, 2003, by and among XL Life Ltd, XL Re Ltd
    (formerly known as XL MidOcean Reinsurance Ltd), Annuity and
    Life Reassurance Ltd., and Annuity and Life Re (Holdings), Ltd.                                                                                                                                                        
|31   |  | Rule 13a-14(a)/15d-14(a) Certification of
    the Companys Chief Executive Officer and Chief Financial
    Officer.                                                                                                                                                                                                                                                                                    
|32   |  | Section 1350 Certification of the
    Companys Chief Executive Officer and Chief Financial
    Officer.