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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
    FORM 10-Q    (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004
 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(State or Other Jurisdiction of
Incorporation or Organization)
    
    66-0619270(IRS Employer
Identification No.)
 Cumberland House, 1 Victoria Street, Hamilton, Bermuda(Address of Principal Executive Offices)
    
    HM11(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 May 5, 2004 was 26,454,195.




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INDEX TO FORM 10-Q  
 PAGEPART IFINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsCondensed
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
    
    
    1Condensed
Consolidated Statements of Operations
Three Months ended March 31, 2004 and March 31, 2003
    
    
    2Condensed
Consolidated Statements of Comprehensive Income (Loss)
Three Months ended March 31, 2004 and March 31, 2003
    
    
    3Condensed
Consolidated Statements of Cash Flows
Three Months ended March 31, 2004 and March 31, 2003
    
    
    4Condensed
Consolidated Statements of Changes in Stockholders Equity
Three Months ended March 31, 2004 and March 31, 2003
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    34Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    35Item 5.
    
    Other Information
    
    
    35Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    36Signatures
    
    
    
    
    37EMPLOYMENT AGREEMENT - JOHN LOCKWOODRULE 13A-14(A)/15D-14(A) CERTIFICATION OF CEORULE 13A-14(A)/15D-14(A) CERTIFICATION OF CFOSECTION 1350 CERTIFICATION OF CEOSECTION 1350 CERTIFICATION OF CFO




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PART I
FINANCIAL INFORMATION 
 Item 1.Unaudited Condensed Consolidated Financial Statements ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (U.S. dollars)
 March 31, 2004
    
    December 31, 2003(unaudited)AssetsCash and cash equivalents
    
    $
    76,488,023
    
    
    $
    80,068,310Fixed income investments at fair value (amortized cost of
$82,515,313 and $115,594,199 at March 31, 2004 and December 31,
2003)
    
    
    85,665,560
    
    
    
    117,812,445Funds withheld at interest
    
    
    644,666,193
    
    
    
    667,824,819Accrued investment income
    
    
    943,738
    
    
    
    1,491,170Receivable for reinsurance ceded
    
    
    85,760,853
    
    
    
    88,480,172Deposits and other reinsurance receivables
    
    
    7,423,375
    
    
    
    4,580,745Deferred policy acquisition costs
    
    
    100,982,665
    
    
    
    68,942,628Other assets
    
    
    1,641,911
    
    
    
    682,050Total Assets
    
    $
    1,003,572,318
    
    
    $
    1,029,882,339LiabilitiesReserves for future policy benefits
    
    $
    161,055,848
    
    
    $
    161,105,541Interest sensitive contracts liability
    
    
    677,459,200
    
    
    
    670,717,546Other reinsurance liabilities
    
    
    23,170,908
    
    
    
    55,826,940Accounts payable and accrued expenses
    
    
    4,951,505
    
    
    
    7,059,733Total Liabilities
    
    
    866,637,461
    
    
    
    894,709,760Stockholders EquityPreferred shares (par value $1.00; 50,000,000 shares authorized;
no shares outstanding)
    
    
    
    
    
    
    Common shares (par value $1.00; 100,000,000 shares
authorized; 26,454,195 shares outstanding at March 31,
2004 and December
31, 2003)
    
    
    26,454,195
    
    
    
    26,454,195Additional paid-in capital
    
    
    334,418,029
    
    
    
    334,418,029Stock warrants
    
    
    1,250,000
    
    
    
    1,250,000Unamortized stock based compensation
    
    
    (1,290,844
    )
    
    
    (1,509,022
    )Accumulated other comprehensive income
    
    
    2,550,555
    
    
    
    1,840,849Accumulated Deficit
    
    
    (226,447,078
    )
    
    
    (227,281,472
    )Total Stockholders Equity
    
    
    136,934,857
    
    
    
    135,172,579Total Liabilities and Stockholders Equity
    
    $
    1,003,572,318
    
    
    $
    1,029,882,339
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -1-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited and in U.S. dollars)
 For the Three Months Ended March 31,2004
    
    2003RevenuesNet premiums
    
    $
    14,310,641
    
    
    $
    61,365,914Investment income, net of related expenses
    
    
    9,250,735
    
    
    
    8,158,689Net realized investment gains
    
    
    678,925
    
    
    
    1,663,868Net change in fair value of embedded derivatives
    
    
    607,388
    
    
    
    13,754,859Surrender fees and other revenues
    
    
    1,074,932
    
    
    
    1,390,247Total Revenues
    
    
    25,922,621
    
    
    
    86,333,577Benefits and ExpensesClaim and policy benefits
    
    
    10,244,658
    
    
    
    75,089,440Interest credited to interest sensitive products
    
    
    3,529,250
    
    
    
    4,871,759Policy acquisition costs and other insurance expenses
    
    
    8,180,997
    
    
    
    52,501,064Operating expenses
    
    
    2,767,362
    
    
    
    6,346,130Total Benefits and Expenses
    
    
    24,722,267
    
    
    
    138,808,393Income (loss) before cumulative effect of a
change inaccounting principle (Note 5)
    
    
    1,200,354
    
    
    
    (52,474,816
    )Cumulative effect of a change in accounting principle
    
    
    (365,960
    )
    
    
    Net Income (Loss)
    
    $
    834,394
    
    
    $
    (52,474,816
    )Income (loss) per common share before cumulative
effect of a change in
accounting principleBasic
    
    $
    0.04
    
    
    $
    (2.03
    )Diluted
    
    $
    0.04
    
    
    $
    (2.03
    )Cumulative effect of a change in accounting
principle per common shareBasic
    
    $
    (0.01
    )
    
    $
    Diluted
    
    $
    (0.01
    )
    
    $
    Net income (loss) per common shareBasic
    
    $
    0.03
    
    
    $
    (2.03
    )Diluted
    
    $
    0.03
    
    
    $
    (2.03
    )
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -2-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited and in U.S. dollars)
 For the Three Months Ended March 31,2004
    
    2003Net income (loss) for the period
    
    $
    834,394
    
    
    $
    (52,474,816
    )Other comprehensive income (loss):Unrealized holding gains on securities arising during the period
    
    
    1,388,631
    
    
    
    907,870Less reclassification adjustment for realized gains
in net income (loss)
    
    
    678,925
    
    
    
    1,663,868Other comprehensive income (loss)
    
    
    709,706
    
    
    
    (755,998
    )Total Comprehensive Income (Loss)
    
    $
    1,544,100
    
    
    $
    (53,230,814
    )
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -3-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited and in U.S. dollars)
 For the Three Months Ended March 31,2004
    
    2003Cash flows from operating activitiesNet income (loss)
    
    $
    834,394
    
    
    $
    (52,474,816
    )Adjustments to reconcile net income (loss) to cash
used by operating activities:Net realized investment (gains)
    
    
    (678,925
    )
    
    
    (1,663,868
    )Net change in fair value of embedded derivatives
    
    
    (607,388
    )
    
    
    (13,754,859
    )Amortization of stock based compensation
    
    
    218,178
    
    
    
    184,272Cumulative effect of a change in accounting principle
    
    
    365,960
    
    
    
    Changes in:
    
    
    
    
    
    
    Accrued investment income
    
    
    547,432
    
    
    
    429,507Deferred policy acquisition costs
    
    
    4,113,973
    
    
    
    44,222,380Deposits and other reinsurance receivables
    
    
    (123,311
    )
    
    
    13,616,282Other assets
    
    
    (959,861
    )
    
    
    (1,243,416
    )Reserves for future policy benefits
    
    
    1,829,067
    
    
    
    (12,711,101
    )Interest sensitive contracts, net of funds withheld
    
    
    (7,891,062
    )
    
    
    (22,214,985
    )Other reinsurance liabilities
    
    
    (32,656,031
    )
    
    
    38,165,273Accounts payable and accrued expenses
    
    
    (2,108,228
    )
    
    
    (989,729
    )Net cash used by operating activities
    
    
    (37,115,802
    )
    
    
    (8,435,060
    )Cash flows from investing activitiesProceeds from sales of fixed maturity investments
    
    $
    33,985,515
    
    
    $
    176,481,085Purchase of fixed maturity investments
    
    
    (450,000
    )
    
    
    (175,400,345
    )Net cash provided by investing activities
    
    
    33,535,515
    
    
    
    1,080,740Cash flows from financing activitiesInterest accrued on notes receivable
    
    $
    
    
    
    $
    (32,099
    )Interest collected on notes receivable
    
    
    
    
    
    
    209,134Repayments of notes receivable
    
    
    
    
    
    
    750,000Net cash provided by financing activities
    
    
    
    
    
    
    927,035Decrease in cash and cash equivalents
    
    
    (3,580,287
    )
    
    
    (6,427,285
    )Cash and cash equivalents, beginning of period
    
    
    80,068,310
    
    
    
    152,930,908Cash and cash equivalents, end of period
    
    $
    76,488,023
    
    
    $
    146,503,623Non-Cash disclosures: amounts recorded in connection
with the cumulative effect of a change in accounting
principleDeferred policy acquisition costs
    
    $
    (36,154,010
    )
    
    $
    Reserves for future policy benefits
    
    
    (1,878,760
    )
    
    
    Interest sensitive contracts, net of funds withheld
    
    
    38,398,730
    
    
    
    Cumulative effect of a change in accounting principle
    
    $
    365,960
    
    
    $
    
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -4-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF
 CHANGES IN STOCKHOLDERS EQUITY
 (Unaudited and in U.S. dollars)
 For the Three Months Ended March 31,2004
    
    2003Preferred shares par value $1.00Balance at beginning and end of period
    
    $
    
    
    
    $
    Common shares par value $1.00Balance at beginning of period
    
    $
    26,454,195
    
    
    $
    26,106,328Issuance of shares
    
    
    
    
    
    
    200,000(Cancellation) of shares
    
    
    
    
    
    
    (23,200
    )Balance at end of period
    
    
    26,454,195
    
    
    
    26,283,128Additional paid-in capitalBalance at beginning of period
    
    $
    334,418,029
    
    
    $
    335,334,932(Cancellation) of shares
    
    
    
    
    
    
    (148,764
    )Balance at end of period
    
    
    334,418,029
    
    
    
    335,186,168Notes receivable from stock salesBalance at beginning of period
    
    $
    
    
    
    $
    (1,626,493
    )Repayments
    
    
    
    
    
    
    750,000Interest collected on notes receivable
    
    
    
    
    
    
    209,134Accrued interest during period
    
    
    
    
    
    
    (32,099
    )Balance at end of period
    
    
    
    
    
    
    (699,458
    )Unamortized stock based compensationBalance at beginning of period
    
    $
    (1,509,022
    )
    
    $
    (2,514,693
    )(Issuance) of stock based compensation
    
    
    
    
    
    
    (200,000
    )Cancellation of stock based compensation
    
    
    
    
    
    
    171,964Amortization of stock based compensation
    
    
    218,178
    
    
    
    184,272Balance at end of period
    
    
    (1,290,844
    )
    
    
    (2,358,457
    )Stock WarrantsBalance at beginning of period
    
    $
    1,250,000
    
    
    $
    Issuance of warrants
    
    
    
    
    
    
    Balance at end of period
    
    
    1,250,000
    
    
    
    Accumulated other comprehensive incomeBalance at beginning of period
    
    $
    1,840,849
    
    
    $
    6,162,525Net unrealized gains (losses) on securities
    
    
    709,706
    
    
    
    (755,998
    )Balance at end of period
    
    
    2,550,555
    
    
    
    5,406,527Accumulated DeficitBalance at beginning of period
    
    $
    (227,281,472
    )
    
    $
    (95,125,888
    )Net income (loss)
    
    
    834,394
    
    
    
    (52,474,816
    )Balance at end of period
    
    
    (226,447,078
    )
    
    
    (147,600,704
    )Total Stockholders Equity
    
    $
    136,934,857
    
    
    $
    216,217,204
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements -5-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Annuity and Life Re (Holdings), Ltd. (Holdings) was incorporated on
December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned subsidiaries:
Annuity and Life Reassurance, Ltd., which is licensed under the laws of Bermuda
as a long term insurer; and Annuity and Life Re America, Inc., an insurance
holding company based in the United States, and Annuity and Life Reassurance
America, Inc., a life insurance company domiciled in the United States.
Holdings, Annuity and Life Reassurance, Annuity and Life Re America and Annuity
and Life Reassurance America are collectively referred to herein as the
Company. 2. Going Concern Basis of Presentation The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) for interim
financial information and in accordance with Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto contained in the Companys Form 10-K for
the fiscal year ended December 31, 2003, as amended. The accounting policies
used in preparing these unaudited condensed consolidated financial statements
are consistent with those described in Note 3 to the Companys audited
consolidated financial statements for the fiscal year ended December 31, 2003.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included in these financial statements. The results of
operations for the quarterly period ended March 31, 2004 are not necessarily
indicative of results that may be expected for any other interim period or for
the full year. The
accompanying unaudited condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. However, the
Company has incurred significant operating losses during the last three fiscal
years and is currently subject to the contingencies described below and in Note
9, which raise substantial doubt about the Companys ability to continue as a
going concern. The accompanying unaudited condensed consolidated financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. The Company is required to post collateral for the statutory reserves
ceded to it by U.S. based insurers and reinsurers. A summary of the assets
pledged as collateral and security as of March 31, 2004 and December 31, 2003,
respectively, is as follows: March 31, 2004
    
    December 31, 2003Cash and investments pledged as
security for the letters of credit
    
    $
    68,000,000
    
    
    $
    56,000,000Cash and investments held in trust
for the benefit of ceding companies
    
    $
    31,000,000
    
    
    $
    96,000,000Cash and investments of US
subsidiary unavailable for liquidity
or collateral needs
    
    $
    54,000,000
    
    
    $
    49,000,000
 -6-




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As of March 31, 2004, the Company had satisfied the collateral
requirements of all its ceding companies with the exception of those asserted
by Connecticut General Life Insurance Company (CIGNA), the ceding company
under the Companys only remaining guaranteed minimum death benefit (GMDB)
and guaranteed minimum income benefit (GMIB) reinsurance agreement. As of
March 31, 2004, CIGNA was seeking $49 million of collateral in addition to the
$11 million of collateral the Company had previously provided. The Company does
not agree that the aggregate $60 million collateral requirement currently
asserted by CIGNA is required to be posted and has not posted any additional
collateral for this agreement. If CIGNAs asserted collateral requirement is
valid, the Company does not have sufficient available cash and investments to
satisfy CIGNAs request. The Company is attempting to restructure the
reinsurance agreement or otherwise meet or reduce CIGNAs request for
collateral. If these negotiations are unsuccessful, CIGNA could initiate
arbitration or litigation proceedings against the Company. The specific relief
sought and the outcome of any proceedings that CIGNA could initiate cannot be
determined at this time. 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 it may be required to liquidate its
operations. The Company is also a defendant in a purported shareholder class
action lawsuit. The plaintiffs have not yet disclosed the damages sought. The Company plans to continue to receive premiums and pay claims under its
remaining reinsurance treaties; however, it is not currently underwriting any
new treaties or accepting any new business from its existing treaties. The
Company is currently exploring whether it can, should or will begin selling new
insurance and reinsurance products in the future, but there is no assurance
that it will be able to successfully develop, underwrite or market any products
currently being considered. While the Company reported net income for the first quarter of 2004, there
can be no assurance that the Company will be able to continue to improve its
operations and liquidity. If the Company is unable to reposition its investment
portfolio to achieve a substantially higher yield within its investment
guidelines, successfully defend against the pending purported shareholder class
action suit, experience continued improvement in the performance of its
reinsurance agreement with Transamerica and restructure its reinsurance
agreement with CIGNA, the Company may not be able to meet its future
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 and may raise doubt as to its ability to continue as a going
concern. -7-




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##### Table of Contents



3. Income (Loss) Per Common Share The following table sets forth the computation of basic and diluted income
(loss) per common share for the three months ended March 31, 2004 and 2003: Three Months Ended March 31,2004
    
    2003Income (loss) before cumulative effect of a
change in accounting principle
    
    $
    1,200,354
    
    
    $
    (52,474,816
    )Cumulative effect of a change in accounting
principle (Note 5)
    
    $
    (365,960
    )
    
    $
    Net income (loss)
    
    $
    834,394
    
    
    $
    (52,474,816
    )Basic:Weighted average number of common shares outstanding
    
    
    25,786,161
    
    
    
    25,796,195Income (loss) per common share before
cumulative effect of a change in accounting
principle
    
    $
    0.04
    
    
    $
    (2.03
    )Cumulative effect of a change in accounting
principle per common share
    
    $
    (0.01
    )
    
    $
    Net income (loss) per common share
    
    $
    0.03
    
    
    $
    (2.03
    )Diluted:Weighted average number of common shares outstanding
    
    
    25,786,161
    
    
    
    25,796,195Plus: incremental shares from assumed exercise of
options and warrants and vesting of restricted
stock outstanding
    
    
    340,290
    
    
    
    Diluted weighted average number of common shares
outstanding
    
    
    26,126,451
    
    
    
    25,796,195Income (loss) per common share before
cumulative effect of a change in accounting
principle
    
    $
    0.04
    
    
    $
    (2.03
    )Cumulative effect of a change in accounting
principle per common share
    
    $
    (0.01
    )
    
    $
    Net income (loss) per common share
    
    $
    0.03
    
    
    $
    (2.03
    )
 The incremental number of shares of 340,290 from the assumed exercise of
options and warrants, and vesting of restricted stock grants outstanding does
not include 4,516,248 warrants, 883,800 options, and 415,781 shares of
restricted stock outstanding at March 31, 2004. The inclusion of these
potential common shares would be considered antidilutive due to the increase in
earnings per share resulting from the conversion, exercise, or contingent
issuance of these securities. -8-




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The following tables set forth the pro forma computation of basic and
diluted income (loss) per common share after accounting for stock option grants made
prior to the Companys January 1, 2003 adoption of the prospective method
described in Statement of Financial Accounting Standards (SFAS) No. 148 for
the three months ended March 31, 2004 and 2003: Three Months Ended March 31,2004
    
    2003Income (loss)  before
cumulative effect of a change in
accounting principle (Note 5)
    
    $
    1,200,354
    
    
    $
    (52,474,816
    )Pro forma effect on income
(loss) of applying fair value
accounting to pre January 1, 2003
option grants
    
    
    (211,854
    )
    
    
    (547,800
    )Pro forma income (loss) 
before cumulative effect of a
change in accounting principle
    
    $
    988,500
    
    
    $
    (53,022,616
    )Income (loss) per share as reported
before cumulative effect of a
change in accounting principle:Basic
    
    $
    0.04
    
    
    $
    (2.03
    )Diluted
    
    $
    0.04
    
    
    $
    (2.03
    )Pro forma effect on income
(loss) per share of applying fair
value accounting to pre January 1,
2003 option grants:Basic
    
    $
    (0.01
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )Pro forma income (loss) per share
before cumulative effect of a
change in accounting principle:Basic
    
    $
    0.03
    
    
    $
    (2.06
    )Diluted
    
    $
    0.03
    
    
    $
    (2.06
    )
 Three Months Ended March 31,2004
    
    2003Net income (loss)  as reported
    
    $
    834,394
    
    
    $
    (52,474,816
    )Pro forma effect on net income
(loss) of applying fair value
accounting to pre January 1, 2003
option grants
    
    
    (211,854
    )
    
    
    (547,800
    )Pro forma net income (loss)
    
    $
    622,540
    
    
    $
    (53,022,616
    )Income (loss) per share as reported:Basic
    
    $
    0.03
    
    
    $
    (2.03
    )Diluted
    
    $
    0.03
    
    
    $
    (2.03
    )Pro forma effect on net income
(loss) per share of applying fair
value accounting to pre January 1,
2003 option grants:Basic
    
    $
    (0.01
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )Pro forma income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    (2.06
    )Diluted
    
    $
    0.02
    
    
    $
    (2.06
    )
 4. Business Segments The Company separately tracks financial results of the Companys life and
annuity operations in segments. Each segment is defined by a dominant risk
characteristic inherent in all products in that segment. The life segment
consists of all products where the dominant risk characteristic is mortality
risk. The annuity segment comprises all products where the dominant risk
characteristic is investment risk, including those products that provide
minimum guarantees on variable annuity products. In addition, since January 1,
2001, certain of the Companys modified coinsurance and coinsurance funds
withheld annuity reinsurance agreements have features that constitute embedded
derivatives that require bifurcation and separate accounting under SFAS No. 133
 Accounting for Derivative Instruments and Hedging Activities. The change in
the fair value of these embedded derivatives is included in the annuity
segment. -9-




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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
that have been completely allocated to the corporate segment. The following
table displays several key measurements for each of the Companys business
segments: Three Months Ended
    
    Life
    
    AnnuityMarch 31, 2004
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedRevenues
    
    $
    14,615,501
    
    
    $
    9,920,074
    
    
    $
    1,387,046
    
    
    $
    25,922,621Benefits and Expenses
    
    
    14,440,921
    
    
    
    8,586,461
    
    
    
    1,694,885
    
    
    
    24,722,267Segment Income
(Loss) before
cumulative effect of
a change in
accounting principle
    
    $
    174,580
    
    
    $
    1,333,613
    
    
    $
    (307,839
    )
    
    $
    1,200,354Cumulative effect of
a change in
accounting principle
    
    $
    
    
    
    $
    (365,960
    )
    
    $
    
    
    
    $
    (365,960
    )Segment Income (Loss)
    
    $
    174,580
    
    
    $
    967,653
    
    
    $
    (307,839
    )
    
    $
    834,394Total Assets
    
    $
    216,526,757
    
    
    $
    702,159,200
    
    
    $
    84,886,361
    
    
    $
    1,003,572,318
 Three Months Ended
    
    Life
    
    AnnuityMarch 31, 2003
    
    Reinsurance
    
    Reinsurance
    
    Corporate
    
    ConsolidatedRevenues
    
    $
    60,169,987
    
    
    $
    24,103,131
    
    
    $
    2,060,459
    
    
    $
    86,333,577Benefits and Expenses
    
    
    105,316,155
    
    
    
    31,973,607
    
    
    
    1,518,631
    
    
    
    138,808,393Segment (Loss) Income
    
    $
    (45,146,168
    )
    
    $
    (7,870,476
    )
    
    $
    541,828
    
    
    $
    (52,474,816
    )Total Assets
    
    $
    446,513,145
    
    
    $
    1,043,908,700
    
    
    $
    82,205,050
    
    
    $
    1,572,626,895
 5. Accounting Standards Variable Interest Entities In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (as amended
in December 2003, FIN 46), an interpretation of Accounting Research Bulletin
No. 51. FIN 46 expands upon and strengthens existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity is any
legal structure used for business purposes that either does not have equity
investors with voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys residual
returns or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to entities created before January 31, 2003 in the first
fiscal year or interim period beginning after March 15, 2004. The effect of the
adoption of this new -10-




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accounting pronouncement did not have a significant impact on the
Companys consolidated financial statements. AICPA Statement of Position (SOP) 03-1 In July 2003, the Accounting Standards Executive Committee of the American
Institute of CPAs (AICPA) issued Statement of Position (SOP) 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional
Long-Duration Contracts and for Separate Accounts.The SOP is effective for
financial statements for fiscal years beginning after December 15, 2003 and
provides guidance on accounting and reporting by insurance enterprises for
certain nontraditional long-duration contracts and for separate accounts. The
SOP changed the manner in which life insurance companies account for certain
types of insurance and reinsurance contracts. The Company has a combined GMDB/GMIB contract with CIGNA and an annuity
reinsurance agreement with Transamerica, both of which are affected by the
adoption of this new SOP. The SOP provides guidance for reserving for contracts
with guaranteed minimum death and guaranteed minimum income benefits. The SOP
requires projections of a wide number of future economic scenarios that impact
the present value of premiums earned and claims paid. Based on these
projections and historical experience, a Benefit Ratio is determined. The
reserve is then determined by applying the Benefit Ratio to premiums received
and then deducting claims paid, both with interest. The SOP also provides
guidance for reserving for annuity agreements with more than one potential
account balance. These types of exposures are reserved for based upon the
highest contractually determinable balance for each policyholder, without
consideration of surrender fees. While this new SOP does not change
managements view of the profitability of these two agreements over the long
term, the Company does anticipate that this new standard will increase the
volatility of its income for both of these agreements on a quarterly basis. On January 1, 2004, the Company adopted this new accounting standard. The
cumulative effect of the change in accounting principle was a net loss of
$365,960. As a result of adopting the SOP, the amount of reserves carried for
the Companys GMDB/GMIB reinsurance agreement with CIGNA was reduced by
$1,878,760, favorably impacting our reported net income. Also as a result of
the SOP, the Company increased its reserves for interest sensitive contracts
liability for its Transamerica contract by $38,398,730 to $611,486,170, and
increased its deferred policy acquisition costs for that contract by
$36,154,010 to $65,907,500. The impact of the adoption of the SOP on the
Companys accounting for the Transamerica annuity reinsurance agreement was a
net charge to income of $2,244,720. Almost all of the GMDB policies underlying the Companys reinsurance
agreement with CIGNA include a GMIB feature. Although the individual
policyholders will only be entitled to receive either the death benefit or the
income benefit under those policies, the tables below are presented without any
adjustment to reflect that a policyholder will not receive both benefits. All
tables related to GMDB and GMIB are presented as of March 31, 2004, and are
based on data as of December 31, 2003 (except as indicated). -11-




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The key attributes of the Companys exposure to GMDB are summarized in the
following table: Guaranteed Minimum Death Benefit
(dollars in millions) Type of ContractReturn ofPremium
    
    Ratchet
    
    Roll-Up
    
    TotalPolicyholder account
value
    
    $
    1
    
    
    $
    85
    
    
    $
    200
    
    
    $
    286Net amount at risk
    
    $
    0
    
    
    $
    27
    
    
    $
    83
    
    
    $
    110Average age of
policyholder
    
    
    87
    
    
    
    62
    
    
    
    65
    
    
    
    64Range of minimum
guarantee return rates
    
    
    n/a
    
    
    
    n/a
    
    
    
    3-6
    %
    
    
    n/aAverage of range of
minimum return rates
    
    
    n/a
    
    
    
    n/a
    
    
    
    5.83
    %
    
    
    n/a
 The key attributes of the Companys exposure to GMIB are summarized in the
following table. To determine the Companys GMIB net amount at risk in the
table below, the Company assumed the net amount at risk for each policy to be
the present value of the minimum guaranteed annuity payments available to the
policyholder determined in accordance with the terms of the policy in excess of
the policyholders current account balance at the valuation date. The Company
assumes that all policies annuitize at March 31, 2004. Annuity purchase rates
have been determined based on the 7-year treasury rate at March 31, 2004 of
3.31%. Guaranteed Minimum Income Benefit
(dollars in millions) Policyholder account value
    
    $
    821Net amount at risk
    
    $
    260Average age of policyholders
    
    
    62Range of minimum guarantee return rates
    
    
    3-6
    %Average of range of minimum guarantee return rates
    
    
    5.92
    %Average years remaining until annuitization
    
    
    2.69
 Guaranteed minimum income benefits entitle a policyholder to purchase a
lifetime annuity payment stream after the expiration of a stipulated waiting
period of at least 7 years. The following table displays the development of the
net amount at risk, determined at March 31, 2004, assuming all policyholders
annuitize immediately at the end of their stipulated waiting period. For
purposes of this display the aggregate net amount at risk is not projected to
increase or decrease during the remainder of the waiting period. -12-




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Guaranteed Minimum Income Benefit
Development of Net Amount at Risk by Waiting Period
(dollars in millions) Year WaitingPeriod Ends
    
    Net Amount at Risk2004
    
    $
    42005
    
    
    322006
    
    
    702007
    
    
    1262008
    
    
    28Total
    
    $
    260
 The Companys annuity reinsurance agreements contain minimum interest
guarantee provisions that take effect when the policyholder dies, their policy
annuitizes, or the policy is surrendered. During the three months ending March
31, 2004 and 2003, the Company paid approximately $1.8 million and $5.2 million,
respectively, for lifetime minimum interest guarantees. The following table
summarizes key information about the Companys exposure to minimum interest
guarantees. Risk Information
    
    AmountAccount Value
    
    $
    612,242,033Minimum Guarantee
    
    
    54,000,000Net Market
Value Adjustment
    
    
    11,217,167Interest Sensitive Contracts Liability
    
    $
    677,459,200Weighted Average Attained Age of Policyholders
    
    69 years
 The Companys two remaining annuity reinsurance agreements are modified
coinsurance agreements. As a result, the invested assets funding the Companys
annuity obligations are held and managed by the insurer issuing the underlying
policies. The assets funding the Companys annuity obligations under those
agreements are described in the following table: % of TotalType of Security
    
    Market Value
    
    Market ValueInvestment grade convertible bonds
    
    $
    365,508,814
    
    
    
    54.2
    %Investment grade U.S. corporate bonds
    
    
    185,190,899
    
    
    
    27.5
    %U.S. Government bonds
    
    
    51,084,322
    
    
    
    7.6
    %Mortgage-backed securities
    
    
    39,058,994
    
    
    
    5.8
    %Below investment grade U.S. corporate bonds
    
    
    32,804,060
    
    
    
    4.9
    %Total invested assets
    
    $
    673,647,089
    
    
    
    100.0
    %Accrued investment income
    
    
    5,520,077Total market value, including accrued
investment income
    
    $
    679,167,166
 -13-




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6. Related Party Transactions XL Capital Ltd and XL Life Ltd Michael P. Esposito, Jr., a director of the Company, currently serves as
the non-executive Chairman of the Board of XL Capital Ltd (XL Capital).
Henry C.V. Keeling is a director of the Company and currently serves as an
officer of XL Capital and is the Chief Executive Officer of XL Re
Ltd, a subsidiary of XL Capital. Robert M.
Lichten, a director of the Company, serves as a director of a United
States-based subsidiary of XL Capital. XL Capital is a major shareholder of
the Company. On December 31, 2002, the Company entered into a transaction with XL Life
Ltd (XL Life), a subsidiary of XL Capital, pursuant to which the Company
transferred certain blocks of life reinsurance business to XL Life. Under the
agreement with XL Life, the Company novated five blocks of life reinsurance
business to XL Life, which in turn entered into a 50% quota share reinsurance
agreement with the Company with respect to four of those blocks of business.
The Company has also historically been a party to various insurance and
reinsurance relationships with XL Life and its affiliates, including an excess
of loss reinsurance policy related to minimum interest guarantee payments under
the Companys annuity reinsurance agreement with Transamerica. The Company and
XL Life and its affiliate agreed to mutually discharge their respective rights
and obligations under all of the parties insurance and reinsurance
relationships in a comprehensive settlement effective as of July 1, 2003. Under
the terms of the comprehensive settlement, the Company paid $6.0 million to XL
Life and was released from any and all obligations to XL Life and its affiliate
under all of the insurance and reinsurance agreements among the parties. As
part of the comprehensive settlement, the Company is obligated to pay an
additional $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. Indemnification Advances In accordance with the Companys Amended and Restated Bye-laws, the
Company indemnifies its officers and directors to the fullest extent
permissible under Bermuda law. Pursuant to the Bye-laws, the Company will make
advances for payment of the expenses incurred in connection with defending any
action for which indemnification has properly been sought. In connection with a
purported shareholder class action lawsuit filed against the Company and
certain of its current and former officers and directors, the Company had, as
of March 31, 2004, made advances of approximately $103,289 and $50,551 to John
F. Burke, its Chief Executive Officer and a director, and Frederick S. Hammer,
the non-executive Chairman of its Board of Directors, respectively, for payment
of their expenses related to defending this lawsuit. -14-




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7. Restricted Stock In 2002, the Board of Directors adopted a Restricted Stock Plan under
which it may grant common shares to key employees. The aggregate number of
common shares that may be granted under the Restricted Stock Plan is 1,200,000,
and the Compensation Committee of the Board of Directors administers the plan.
Since the inception of the plan, the Company has issued 976,000 shares of
restricted stock under the plan. As a result of certain employees terminating
their employment with the Company, 227,133 shares of restricted stock were
cancelled in 2003. The following table summarizes the vesting schedule for the
shares of restricted stock outstanding as of March 31, 2004: Restricted
    
    Shares Vested
    
    Shares
    
    Shares
    
    SharesShares
    
    at March 31,
    
    Vesting in
    
    Vesting in
    
    Vesting inGrant Date
    
    Outstanding
    
    2004
    
    2004
    
    2005
    
    2006February 13, 2002
    
    
    74,700
    
    
    
    
    
    
    
    
    
    
    
    74,700
    
    
    
    September 30, 2002
    
    
    129,167
    
    
    
    47,500
    
    
    
    40,833
    
    
    
    40,834
    
    
    
    February 28, 2003
    
    
    200,000
    
    
    
    
    
    
    
    66,666
    
    
    
    66,667
    
    
    
    66,667June 25, 2003
    
    
    345,000
    
    
    
    
    
    
    
    115,000
    
    
    
    115,000
    
    
    
    115,000Total
    
    
    748,867
    
    
    
    47,500
    
    
    
    222,499
    
    
    
    297,201
    
    
    
    181,667
 The fair value as determined at the date of grant of the restricted stock
awards that were outstanding on March 31, 2004 was approximately $2,340,000 and
is reflected in the Companys balance sheet as common shares and additional
paid-in-capital. The fair value of the outstanding restricted stock is being
amortized on a straight-line basis over the three-year vesting period. Based on
the vesting of the restricted stock, approximately $197,000 was expensed in the
three months ended March 31, 2004. The unamortized balance of outstanding
restricted stock is reflected in the balance sheet as a component of
unamortized stock-based compensation and was approximately $1,072,000 at March
31, 2004. 8. Vulnerability Due to Concentrations The Company has a significant deferred annuity reinsurance agreement with
Transamerica. Due to the size of this agreement, there is a material
concentration of net investment income, interest credited to interest sensitive
products, funds withheld at interest, deferred policy acquisition costs and
interest sensitive contract liabilities. At March 31, 2004 and December 31, 2003, approximately $582 million and
$604 million, respectively, of the Companys funds withheld at interest
receivable and $611 million and $602 million, respectively, of the Companys
interest sensitive contracts liability related to its reinsurance agreement
with Transamerica. Also, at March 31, 2004 and December 31, 2003, approximately
$66 million and $33 million, respectively, of the deferred policy acquisition
costs asset related to its reinsurance agreement with Transamerica. The
reinsurance agreement is a modified coinsurance retrocessional agreement
covering policies issued by IL Annuity and Insurance Company (IL Annuity).
Transamericas agreement with IL Annuity is also structured on a modified
coinsurance basis, thus IL Annuity maintains ownership and control of the assets
supporting the Companys obligations to Transamerica. At March 31, 2004,
Transamerica had financial strength or claims paying ratings of A+, AA, Aa3 and
AA+ (with a negative outlook) from A.M. Best, Standard & Poors, Moodys
Ratings and Fitch Ratings, respectively. -15-




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IL Annuity is not
individually rated by A.M. Best, but had
a financial strength rating of BB+ from Standard & Poors at January 1, 2004,
which was subsequently withdrawn. During the three months ended March 31, 2004 and 2003, the Company
recorded approximately $1.8 million and $5.1 million, respectively, of minimum
interest guarantee payments in connection with the Transamerica annuity
reinsurance agreement. The amount of deferred acquisition costs recorded as an
asset on the Companys balance sheet related to the Transamerica agreement is
based on a series of assumptions related to the investment performance of the
assets supporting its liabilities under the agreement, as well as future lapse
rates for the underlying policies. These assumed lapse rates include
assumptions regarding future full surrenders, partial withdrawals,
annuitizations and policyholder deaths. These assumptions have a direct impact
on the amount of expected future minimum interest guarantee payments and on the
Companys estimated expected gross profits on the agreement and, therefore, on
the recoverability of the deferred acquisition costs carried on its balance
sheet. The Company believes that the assumptions related to investment
performance and lapse rates are reasonable. However, there may be differences
between the Companys assumptions and the actual events and circumstances that
occur in the future, and those differences could be material. If actual results
are materially different from the Companys assumptions, the Company could be
required to write off additional deferred acquisition costs, which would have a
significant adverse impact on the Companys net income in future periods. As a result of the recapture or termination of many of the Companys
reinsurance agreements, certain of the Companys remaining agreements, which
previously did not represent a significant percentage of the Companys
business, have become more prominent. For the quarter ended March 31, 2004, the
Company recorded income of approximately $0.5 million, related to its life
reinsurance agreement with ERC Life. Premiums associated with this agreement
for the quarter ended March 31, 2004 were approximately $5.0 million. For the
quarter ended March 31, 2004, the Company recorded a loss of $0.7 million
related to its remaining life reinsurance agreement with Fidelity & Guarantee
Life. Premiums associated with this agreement for the quarter ended March 31,
2004, were approximately $3.8 million. For the quarter ended March 31, 2004,
the Company recorded a loss of approximately $0.8 million related to its life
reinsurance agreement with National States Life. Premiums associated with this
agreement for the quarter ended March 31, 2004 were approximately $2.9 million. The Companys United States domiciled operating subsidiary, Annuity and
Life Reassurance America, was purchased from a subsidiary of SwissRe on June 1,
2000. Immediately prior to the acquisition, 100% of Annuity and Life
Reassurance Americas life and annuity policies were reinsured with Reassure
America Life Insurance Company (Reassure), a subsidiary of SwissRe, under an
indemnity co-insurance agreement. Following the acquisition, the policies
continue to be 100% reinsured with Reassure; however, Annuity and Life
Reassurance America remains the primary carrier. Reassure is required to
indemnify Annuity and Life Reassurance America for any losses associated with
these policies. Reserves ceded under the reinsurance agreement with Reassure
amounted to approximately $85.2 million and $88.2 million at March 31, 2004 and
December 31, 2003, respectively. As of March 31, 2004, Reassure was rated A+
(g) (superior) by A.M. Best. 9. Contingencies As of March 31, 2004, the Company had satisfied the collateral
requirements of all its ceding companies with the exception of those asserted
by CIGNA, the ceding company under the Companys only remaining GMDB and GMIB
reinsurance agreement. As of March 31, 2004, CIGNA was seeking $49.0 million of
collateral in addition to the $11.0 million of collateral the Company had
previously provided. The Company does not agree that the aggregate $60.0
million collateral requirement currently asserted by CIGNA is required to be
posted and has not posted any additional collateral for the -16-




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agreement. If CIGNAs asserted collateral requirement is valid, the
Company does not have sufficient available cash and investments to satisfy
CIGNAs request. The Company is attempting to restructure the reinsurance
agreement or otherwise meet or reduce CIGNAs request for collateral. If these
negotiations are unsuccessful, CIGNA could initiate arbitration or litigation
proceedings against the Company. The specific relief sought and the outcome of
any proceedings that CIGNA could initiate cannot be determined at this time. 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 it may be required to liquidate its operations. 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. The plaintiffs filed a single
consolidated amended complaint in July 2003, adding as defendants XL Capital
Ltd and two additional directors. On October 1, 2003, the Company answered the
amended and consolidated complaint and denied liability on the claims the
plaintiffs have asserted. In January 2004, the court ordered that a related
action that the plaintiffs filed against the KPMG LLP (United States) and KPMG
in Bermuda be consolidated with the action against the Company. In February
2004, the court denied certain individual defendants motions to dismiss the
action. In March 2004, the court denied motions to dismiss filed by certain
other individual defendants and XL Capital Ltd. Also in March 2004, KPMG LLP
(United States) and KPMG in Bermuda filed motions to dismiss the action. The
court has not yet ruled on KPMG LLPs (United States), KPMG in Bermudas and
one individual defendants respective motions to dismiss. As of March 31,
2004, the Company did not possess sufficient information to assess the possible
outcome of this lawsuit and accordingly, no amounts have been recorded in the
accompanying unaudited condensed consolidated financial statements related to this matter. On October 8, 2003, the Company was served with a statutory demand for
$640,000 from Imagine Group Holdings Limited (Imagine), a Bermuda based
reinsurance company, which was subsequently withdrawn. Imagine has since
instituted a civil proceeding in the Bermuda Supreme Court against the Company,
alleging that the Company is obligated to reimburse it for $640,000 of expenses
incurred by Imagine in connection with a proposed December 2002 capital raising
transaction that was not consummated. On March 11, 2004, the Company filed an
amended defense with the court to which Imagine responded on April 26, 2004.
The Company does not believe that Imagine is entitled to reimbursement of these
expenses under the applicable agreement and intends to defend itself against
Imagines claims. Transamerica has alleged that the Company, as of October 31, 2003, owed
$17.6 million under its annuity reinsurance agreement with Transamerica. On
February 3, 2004, the Company paid Transamerica $12.6 million representing the
net amount the Company believed was due under the reinsurance agreement as of
October 31, 2003 after deducting $5.0 million for investment related expenses
that the Company believes was owed to it by Transamerica. Transamerica is
currently pursuing arbitration with the Company, asserting that the $5.0
million offset is not justified and that the Company owes Transamerica that
amount and interest on the amounts that Transamerica previously alleged were
due. In addition, through October 31, 2003, the Company had received monthly
settlement reports from Transamerica prepared on a basis that the Company
believes conformed with the reinsurance agreement between the parties. For the
period subsequent to October 31, 2003, the Company has only received settlement
reports from Transamerica on a basis that Transamerica alleges is appropriate
but which the Company believes is not consistent with the reinsurance
agreement. The principal difference -17-




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relates to how realized gains and losses related to the invested assets
supporting the annuity obligations are settled between the parties. The method
used by Transamerica, if appropriate, would require the Company to pay it
approximately $6 million more than the Company believes is required under the agreement for the period from October 31, 2003 through March 31,
2004. Transamerica has not provided the Company with realized gain and loss
information on the basis the Company believes is appropriate. As a result, in
preparing its financial statements the Company has adjusted the amounts
reported to it by Transamerica in the monthly settlement reports for periods
subsequent to October 31, 2003 to reflect what the Company believes is the
appropriate treatment of realized capital gains and losses. This dispute will
be included in the pending arbitration. The United States Internal Revenue Service (IRS) is currently conducting
an audit of the Companys United States based subsidiaries. Those companies
currently have a significant tax based net operating loss carryforward. In
addition, the IRS has requested certain information and documents related to
the Companys Bermuda based operations. While the Companys United States based
subsidiaries have complied with the IRS requests for information, both the
Company and its Bermuda operating subsidiary have declined to supply the IRS
with the information it has requested based on the IRS lack of jurisdiction
over those entities. If the IRS were to determine that the Company or its
Bermuda operating subsidiary were engaged in business in the United States,
those entities could be subject to United States tax at regular corporate rates
on their taxable income that is attributable to a permanent establishment, if
any, in the United States plus an additional 30% branch profits tax on such
income remaining after the regular tax. Such taxes, if levied, could have an
adverse effect on the Companys business. 10. Stock Warrants On June 30, 2003, the Company issued warrants to purchase an aggregate one
million common shares of the Company at an exercise price of $1.25 per share to
Hartford Life, the ceding company under the Companys then largest guaranteed
minimum death benefit reinsurance agreement. The warrants were issued in
connection with the recapture of that agreement and expire on June 30, 2013,
and are currently exercisable. At June 30, 2003, the fair value of these
warrants, using a Black-Scholes pricing model, was estimated at $1,250,000,
which was included in a charge associated with the recapture that the Company
recorded during the second quarter of 2003 as a component of Claim and policy
benefits expense. The expense of issuing these warrants is presented as Stock
warrants in the stockholders equity section of the Companys Condensed
Consolidated Balance Sheet as at March 31, 2004. -18-




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Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations General Annuity and Life Re (Holdings), Ltd. was incorporated on December 2, 1997
under the laws of Bermuda. We provide annuity and life reinsurance to select
insurers and reinsurers through our wholly-owned subsidiaries: Annuity and Life
Reassurance, Ltd., which is licensed under the insurance laws of Bermuda as a
long term insurer; and Annuity and Life Re America, Inc., an insurance holding
company based in the United States, and its subsidiary, Annuity and Life
Reassurance America, Inc., a life insurance company authorized to conduct
business in over 40 states of the United States and the District of Columbia.
We acquired Annuity and Life Reassurance America on June 1, 2000. For more
information regarding the business and operations of our company and its
subsidiaries, please see our Annual Report on Form 10-K for the year ended
December 31, 2003, as amended. Our company encountered significant difficulties during the last three
years. In addition to reporting significant operating losses for those years,
we did not have sufficient available cash and investments to post as collateral
to satisfy all of our obligations under certain of our reinsurance agreements
during 2002 and 2003. During 2003, we negotiated the termination or recapture
of most of our reinsurance agreements. As a result of those terminations and
recaptures and other actions taken by management, as of March 31, 2004 we had
satisfied all the collateral requirements of our remaining ceding companies
with the exception of those asserted by Connecticut General Life Insurance
Company (CIGNA), the ceding company under our only remaining guaranteed
minimum death benefit (GMDB) and guaranteed minimum income benefit (GMIB)
reinsurance agreement. As of March 31, 2004, CIGNA was seeking $49 million of
collateral in addition to the $11 million of collateral we had previously
provided. We do not agree that the aggregate $60 million collateral requirement
currently asserted by CIGNA is required to be posted and we have not posted any
additional collateral for this agreement. If CIGNAs asserted collateral
requirement is valid, we do not have sufficient available cash and investments
to satisfy CIGNAs request. We are attempting to restructure the reinsurance
agreement or otherwise meet or reduce CIGNAs request for collateral. If these
negotiations are unsuccessful, CIGNA could initiate arbitration or litigation
proceedings against us. The specific relief sought and the outcome of any
proceedings that CIGNA could initiate cannot be determined at this time. 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. We are also a defendant in a purported shareholder
class action lawsuit. The plaintiffs have not yet disclosed the damages
sought. Transamerica Occidental Life Insurance Company (Transamerica) has
alleged that we, as of October 31, 2003, owed $17.6 million under our annuity
reinsurance agreement with Transamerica. On February 3, 2004, we paid
Transamerica $12.6 million representing the net amount we believed was due
under the reinsurance agreement as of October 31, 2003 after deducting $5.0
million for investment related expenses that we believed was owed to us by
Transamerica. Transamerica is currently pursuing arbitration with us, asserting
that the $5.0 million offset is not justified and that we owe Transamerica that
amount and interest on the amounts that Transamerica previously alleged were
due. In addition, through October 31, 2003, we had received monthly settlement
reports from Transamerica prepared on a basis that we believe conformed with
the reinsurance agreement between us. For the period subsequent to October 31,
2003, we have only received settlement reports from Transamerica on a basis
that Transamerica alleges is appropriate, but which we believe is not
consistent with the reinsurance agreement. The principal difference relates to
how realized gains and losses related to the invested assets supporting the
annuity obligations are settled between us. The method used by Transamerica,
if appropriate, would require us to pay Transamerica approximately $6 million
more than we believe is required under the agreement for the -19-




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period from October 31, 2003 through March 31, 2004. Transamerica has not
provided us with realized gain and loss information on the basis we believe is
appropriate. As a result, in preparing our financial statements we have
adjusted the amounts reported to us by Transamerica in the monthly settlement
reports for periods subsequent to October 31, 2003 to reflect what we believe
is the appropriate treatment of realized capital gains and losses. This dispute
will be included in the pending arbitration. In addition, we have been attempting to engage Transamerica, and
ultimately IL Annuity and Insurance Company (IL Annuity), the primary
insurance company under the Transamerica agreement, in discussions aimed at
improving investment returns from the convertible bond portfolio supporting the
liabilities under this agreement and potentially redesigning the reinsured
product to reduce the minimum interest guarantee exposure to us.
Although certain changes have been implemented in the composition of
the investment portfolio, if we are not
successful in convincing Transamerica and IL Annuity to restructure the
portfolio further and/or to redesign the product, we may incur additional losses on the
agreement in the future. We plan to continue to receive premiums and pay claims under our remaining
reinsurance treaties; however, we are not currently underwriting any new
treaties or accepting any new business from our existing treaties. We are
currently exploring whether we can, should or will begin selling new insurance
and reinsurance products in the future, but we cannot assure you that we will
be able to successfully develop, underwrite or market any products currently
being considered. We are not seeking to negotiate the termination or recapture
of any of our remaining reinsurance agreements at this time except that, as
noted above, we are seeking to restructure our agreement with CIGNA. Our remaining life reinsurance agreements continue to be reinsurance of
ordinary life insurance, primarily for mortality risk. Profitability of our
life reinsurance line depends in large part on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a long time
horizon, they are less predictable over shorter periods and are subject to
fluctuation from quarter to quarter and year to year. Significant fluctuations
from period to period could adversely affect the results of our operations, as
occurred in 2003 and 2002. At March 31, 2004 and December 31, 2003, the total
face amount of our life insurance in force was approximately $16.7 billion and
$17.5 billion, respectively. Our remaining annuity products are reinsurance of general account fixed
deferred annuities and certain ancillary risks arising from variable annuities.
Profitability of the annuity reinsurance line is primarily dependent on earning
a spread between the interest rate earned on the assets under management and
the interest rate credited to the policyholder. This product line is market and
interest rate sensitive. Fluctuations in the general level of interest rates,
fixed income markets, and equity markets from period to period may cause
fluctuations in the results of our operations. The combined effects of poor
market performance and excessive surrender rates can adversely impact this
product line, such as occurred in 2001 and 2002. At March 31, 2004 and December
31, 2003, our liability for annuity reinsurance agreements amounted to
approximately $677 million and $671 million, respectively. Because our financial results are heavily dependent on three life
reinsurance agreements and two annuity reinsurance agreements, large
fluctuations in any one of these contracts could cause volatility in our
overall financial results. On January 1, 2004, we adopted AICPA Statement of Position (SOP) 03-1.
One requirement of the SOP is for us to record the largest contractually
determinable amount payable to the policyholder of each underlying policy
comprising our Interest sensitive contract liabilities as our reserve for those
policies, rather than simply recording reserves based solely on the
policyholder account values. The computation of amounts due policyholders
under our reinsurance contract with Transamerica includes a market value
adjustment and, to the extent the market value adjustment would require
payments to -20-




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policyholders in excess of the minimum guarantee amount under the
policies, the reserve required under the SOP is directly influenced by changes
in the value of the underlying assets. The SOP modified the accounting for
liabilities recorded in connection with our reinsurance contracts, but did not
modify the accounting for the assets supporting the liabilities. As a result,
changes in our reserve levels resulting from underlying asset value changes
will not be offset with corresponding changes in our Funds withheld asset
values. This mismatch will cause volatility in net income on a quarterly
basis, but we believe that it will have no effect on the underlying
profitability of the Transamerica contract over the long term. To the extent
that the minimum guarantee payable under the policy exceeds the payment that
would be required as a result of the market value adjustment, the reserves
required under the SOP would be based upon the minimum guarantee and the
mismatch between liabilities and assets is less significant. If we computed our
reserves as if the amounts payable to the policyholders under the Transamerica
contract exceeded the minimum guarantee amount, a 1% increase (decrease) in
underlying asset values would cause a $6 million charge (benefit) to net
income. In addition to the increased net income volatility the new SOP will cause,
it also adversely impacts our tangible book value, which is GAAP book value
less deferred acquisition costs. The SOP required an increase in our liabilities of approximately
$36.6 million and an increase in deferred acquisition costs of approximately
$36.2 million. While the net impact on our GAAP book value is minor, our
tangible book value was reduced by $1.38 per share as of January 1, 2004, primarily
because the increase in our deferred acquisition costs is excluded from the
tangible book value computation, while the increase in our liabilities is not.
If the SOP were applied as of December 31, 2003 our tangible book value would
have been $1.12 per share, as opposed to $2.50 per share. At
March 31, 2004, our tangible book value was $1.36 per share,
reflecting the continuing improvement in our
financial condition. Our GAAP book value at March 31, 2004 was
$5.18 per share, as compared to $5.11 per share at December 31,
2003. While we reported net income for the first quarter of 2004, there can be
no assurance that we will be able to continue to improve our operations and
liquidity. If we are unable to reposition our investment portfolio to achieve a
substantially higher yield within our investment guidelines, successfully
defend against the pending purported shareholder class action suit, experience
continued improvement in the performance of our reinsurance agreement with
Transamerica and restructure our reinsurance agreement with CIGNA, we may not
be able to meet our future 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 and may raise significant doubt as to our ability to
continue as a going concern. The accompanying unaudited condensed consolidated
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern. For a more detailed
discussion of certain factors that could materially and adversely affect our
financial condition and results of operations, please see  Forward-Looking and
Cautionary Statements. Critical Accounting Policies Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require our management to make estimates and assumptions that affect the
amounts of our assets, liabilities, stockholders equity and net income. We
believe that the following critical accounting policies, as well as those set
forth in our Form 10-K for the year ended December 31, 2003, as amended, detail
the more significant estimates and assumptions used in the preparation of our
consolidated financial statements. Deferred Policy Acquisition Costs.The costs of acquiring new business,
principally allowances, which vary with and are primarily related to the
production of new business, are deferred. For traditional -21-




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life and annuity policies with life contingencies, deferred policy acquisition
costs are charged to expense using assumptions consistent with those used in
computing policy reserves. Assumptions as to anticipated premiums are estimated
at the date of the policy issuance, or the effective date of the most recent
premium rate increase, and are consistently applied during the life of the
contracts. Deviations from estimated experience are reflected in earnings in
the period such deviations occur. For these contracts, the amortization periods
are generally the estimated life of the policies. We terminated or recaptured
several of our reinsurance agreements during 2003, which caused us to incur
significant deferred acquisition cost write-downs. While we believe that there
will be minimal, if any, termination or recapture activity in the future, we
will consider transactions in connection with the resolution of outstanding
disputes with certain of our ceding companies, or that are otherwise
economically beneficial to us, which may require write downs of deferred
acquisition costs. In preparing our financial statements, we make assumptions about our
proportionate share of future investment income that will be earned from the
investment of premiums received from underlying policyholders by our ceding
companies and about future rates of lapse of policies underlying our annuity
reinsurance contracts when estimating gross profits arising from such
contracts. These assumptions have a direct impact on the amount of expected
future minimum interest guarantee payments and our estimated expected gross
profits on these annuity reinsurance contracts and, therefore, on the
recoverability of the deferred acquisition costs carried on our balance sheet
for these contracts. While these estimates are based upon historical results
and information provided to us by our ceding companies, 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 minimum interest
guarantee payments and record additional charges, which would adversely impact
our earnings. In determining the level of our deferred acquisition costs relating to our
Transamerica contract at March 31, 2004, we assumed future total returns on
convertible bonds of 8.01% for 2004 and each year thereafter. Additionally, we
assumed future average total returns of 6.24% for 2004 and each year thereafter
for the other asset classes in which policyholder premiums have been invested.
We also assumed a future lapse rate for the underlying policies of
approximately 21% in 2004, 18% in 2005 and annual rates of 12% to 17%
thereafter. These assumed lapse rates include assumptions regarding full
surrenders, partial withdrawals, annuitizations and policyholder deaths.
Consistent with our accounting policies, we review the key assumptions used in
determining the carrying value of our deferred acquisition cost each quarter. A
change in these assumptions could result in additional charges that would
adversely impact future earnings. If our assumptions for total returns prove to
be inaccurate, or if lapse rates exceed our assumptions, we may be required to
make additional minimum interest guarantee payments and record additional write
downs of deferred acquisition costs, which would adversely impact future
earnings. Assuming no change in lapse assumptions, the net impact of a 100
basis point decrease in our total return assumptions in all future years would
have required an additional write down of deferred acquisition costs of
approximately $8,800,000 as of March 31, 2004. Assuming no change in our total
return assumptions, a 1% increase in our lapse assumptions on our Transamerica
annuity agreement in all future years would have not required an additional
write down of deferred acquisition costs as of March 31, 2004 because we are
not currently projecting a loss over the life of the agreement. Additional
increases in our lapse assumptions might result in write downs of deferred
acquisition costs. Embedded Derivatives.We have concluded that there is an embedded
derivative within the Funds withheld at interest receivable related to one of
our annuity reinsurance contracts written on a modified -22-




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coinsurance basis that requires bifurcation and separate accounting under
Statement of Financial Accounting Standards No. 133  Accounting for Derivative
Instruments and Hedging Activities. This embedded derivative is similar to a
total return swap arrangement on the underlying assets held by our ceding
company under the agreement. The fair value of the embedded derivative is
classified as part of our Funds withheld asset on our balance sheet. We have
developed a cash flow model with the assistance of outside advisors to arrive
at an estimate of the fair value of this total return swap that uses various
assumptions regarding future cash flows under the affected annuity reinsurance
agreement. The fair value of the embedded derivative is influenced by changes
in credit risk, changes in expected future cash flows under the annuity
reinsurance agreement and interest rates. The change in fair value of the
embedded derivative is recorded in our statement of operations as Net change in
fair value of embedded derivatives, which is a non-cash item. The change in
fair value of the embedded derivative also impacts the emergence of expected
gross profits for purposes of amortizing deferred acquisition costs associated
with the contract. The application of this accounting policy has increased the
volatility of our reported earnings. While we have made an estimate of the fair
value of the embedded derivative using a model that we believe to be
appropriate and based upon reasonable assumptions, the assumptions used are
subjective and may require adjustment in the future. In addition, as industry
standards for estimating the fair value of embedded derivatives develop, it is
possible that we may modify our methodology. Changes in our assumptions and
industry standards could have a significant impact on the fair value of the
embedded derivative and our reported earnings. We do not bifurcate and
separately account for the embedded derivatives contained in our Transamerica
annuity reinsurance agreement or our GMDB/GMIB reinsurance agreement with CIGNA
because we acquired those agreements prior to the transition date elected by us
under SFAS 133, as amended. Because of the nature of the assets underlying our
Transamerica contract, which were roughly 60.5% convertible bonds at March 31,
2004, the bifurcation and separate accounting for the embedded derivatives
contained in that contract could add significant volatility to our reported
results. If we bifurcated and separately accounted for the embedded derivatives
contained in our GMDB/GMIB reinsurance agreement with CIGNA, it also could 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 contracts are
recorded on our balance sheet as interest sensitive contracts liability.
Revenues from these investment-type contracts consist of income earned on the
assets and amounts assessed during the period against policyholders account
balances for mortality charges, policy administration charges and surrender
charges. Items that are charged to expense represent interest credited to
policyholder accounts and other benefits in excess of related policyholders
account balances, including minimum interest guarantee payments (LMIG). Such
LMIG payments are recognized as an expense 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 ceding companies who do not report such information in a timely
manner. These estimates can have a significant effect on the amounts we report
in our financial statements. Reserves for Policy Benefits, Including Claims Incurred but not Reported
(IBNR) and Interest Sensitive Contracts Liabilities.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, and in the past have
differed, materially from those estimates. We monitor actual experience, and
where circumstances warrant, will revise our assumptions and the related
reserve estimates. -23-




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We reinsure certain minimum guarantees associated with variable annuity
agreements through our combined GMDB/GMIB agreement with CIGNA. Our obligations
for the CIGNA annuity contract are reflected on our balance sheet as Reserves
for future policy benefits. Our obligations arising from our fixed annuity
reinsurance agreements come from our reinsurance agreement with Transamerica
and a second smaller annuity reinsurance agreement. Our obligations for these
fixed annuity contracts are reflected on our balance sheet as Interest
sensitive contracts liability. On January 1, 2004, we adopted the AICPA
Statement of Position (SOP) 03-1 to account for our combined GMDB/GMIB
agreement with CIGNA and our annuity reinsurance agreement with Transamerica. AICPA Statement of Position (SOP) 03-1. In July 2003, the Accounting
Standards Executive Committee of the AICPA issued Statement of Position (SOP)
03-1, Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Contracts and for Separate Accounts and provides
guidance on accounting and reporting by insurance enterprises for certain
nontraditional long-duration contracts and for separate accounts. The SOP is
effective for financial statements for fiscal years beginning after December
15, 2003. We adopted the SOP as of January 1, 2004. We have a combined GMDB/GMIB contract with CIGNA and an annuity
reinsurance agreement with Transamerica, both of which are affected by the
adoption of this new SOP. The SOP provides guidance for reserving for contracts
with guaranteed minimum death and guaranteed minimum income benefits. The SOP
requires projections of a wide number of future economic scenarios that impact
the present value of premiums earned and claims paid. Based on these
projections and historical experience, a Benefit Ratio is determined. The
reserve is then determined by applying the Benefit Ratio to premiums received
and then deducting claims paid, both with interest. The SOP also provides
guidance for reserving for annuity agreements with more than one potential
account balance. These types of exposures are reserved for based upon the
highest contractually determinable balance for each policyholder, without
consideration of surrender fees. Upon adoption of the SOP on January 1, 2004,
we recorded a one-time transition adjustment to our carried reserves for
interest sensitive contracts liability and deferred acquisition costs asset
for the Transamerica annuity reinsurance agreement, and future policy
benefits for the CIGNA contract. The impact of our adoption of the SOP is
discussed below in Operating Results. While this new SOP does not change
managements view of the profitability of these two agreements over the long
term, we do anticipate that this new standard will increase the volatility of
our income for both of these agreements on a quarterly basis. If actual events differ significantly from the underlying estimates and
assumptions used by us in the application of any of the aforementioned
accounting policies, there could be a material adverse effect on our results of
operations and financial condition. Operating Results Net Income (Loss).For the three month period ended March 31, 2004, we
had net income, after the cumulative effect of a change in accounting
principle, of $834,394, or $0.03 per basic and fully diluted common share, as
compared to a net loss of $(52,474,816), or $(2.03) per basic and fully diluted
common share, for the three month period ended March 31, 2003. In the three months ended March 31, 2004, our income before cumulative
effect of a change in accounting principle was $1,200,354. We recorded income
of approximately $930,000 from our annuity reinsurance agreement with
Transamerica during the first quarter of 2004. This agreement is our largest
annuity reinsurance agreement, and represented approximately $582 million, or
approximately 90%, of our Funds withheld at interest receivable as of March 31,
2004. Our GMDB/GMIB contract with -24-




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CIGNA produced income of approximately $527,000 in the first quarter of
2004. Our largest life reinsurance agreement produced approximately $513,000
of income during the first quarter of 2004 and $400,000 of income resulted from
lower than expected claims from reinsurance agreements recaptured in 2003.
Income for the three month period ended March 31, 2004 was partially offset by
a $737,000 loss on our second largest life reinsurance agreement as well as
operating expenses that exceeded general account investment income and net
realized investment gains by approximately $533,000. In the three months ended March 31, 2004, the cumulative effect of a
change in accounting principle due to the adoption of Statement of Position
(SOP) 03-1 was a net loss of $365,960. As a result of the adoption of the SOP
on January 1, 2004, the amount of Reserves for future policy benefits relating
to our GMDB/GMIB agreement with CIGNA was reduced by $1,878,760, favorably
impacting our reported net income. The impact of the adoption of the SOP on our
accounting for the Transamerica annuity reinsurance agreement was a net charge
of $2,244,720 as a result of an increase in Interest sensitive contracts
liability of $38,398,730 partially offset by an increase in Deferred policy
acquisition costs of $36,154,010. The loss in the first quarter of 2003 was primarily the result of losses
associated with recaptures and terminations of life and annuity reinsurance
agreements and adverse claims experience under our life reinsurance agreements.
During the first quarter of 2003, we negotiated the recapture and termination
of certain of our reinsurance agreements, including several life reinsurance
agreements and our annuity reinsurance agreement with Ohio National. In
connection with these recaptures and terminations, we incurred losses of
approximately $39,585,000 during the first quarter of 2003. Adding to our net
loss for the three months ended March 31, 2003 were reported claims under our
life reinsurance agreements exceeding our expectations, reduced investment
income and increased operating expenses. Net Premiums. Net premium revenue for the three months ended March 31,
2004 decreased 77% to $14,310,641, as compared with $61,365,914 for the three
months ended March 31, 2003. Substantially all premium revenue was derived
from traditional ordinary life reinsurance agreements. The decline in premium
revenue reflects the significant reduction of business in force resulting from
the recapture and termination of life reinsurance agreements in 2003. At March 31, 2004, the total face
amount of life insurance in force decreased to approximately $16.7 billion, as
compared with approximately $69.0 billion at March 31, 2003. Our now largest
life reinsurance agreement represented approximately $7.8 billion of life
insurance in force at March 31, 2004 and $5 million of premium revenue for the
quarter ended March 31, 2004. Net Investment Income. Total net investment income for the three months
ended March 31, 2004 was $9,250,735, as compared with $8,158,689 for the three
months ended March 31, 2003. Income earned on our general account assets for
the three months ended March 31, 2004 was approximately $1,555,000, as compared
to approximately $1,882,000 for the three month period ended March 31, 2003.
The average annualized yield rate earned on our general account assets for this
quarter was approximately 3.46%, as compared with 2.48% for the three months
ended March 31, 2003. Income earned on Funds withheld for the three months ended March 31, 2004
was approximately $7,696,000, as compared to approximately $6,277,000 for the
three months ended March 31, 2003. The increase in investment income on our
Funds withheld is primarily due to increased yields on the assets underlying
our two annuity reinsurance agreements, especially our largest such agreement
with Transamerica. The average annualized yield rate earned on Funds withheld
was approximately 4.85% for the three months ended March 31, 2004, compared
with 2.51% for the three months ended March 31, 2003. For purposes of
calculating the average yield rates earned on our Funds withheld at interest,
we -25-




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include our share of the investment income and net realized capital gains and
losses as reported to us through our settlements with our ceding companies,
although we are currently involved in a dispute with Transamerica regarding
the method by which realized gains and losses are settled under our reinsurance
agreement. As a result, we have adjusted the amounts reported to us in the
monthly settlement reports for periods subsequent to October 31, 2003 to
reflect what we believe is the appropriate treatment of realized capital gains
and losses. Net Realized Investment Gains.Net realized investment gains for the
three months ended March 31, 2004 were $678,925, as compared with net realized
investment gains of $1,663,868 for the three months ended March 31, 2003. The
relatively high level of net realized investment gains for the three months
ended March 31, 2003 reflected the significant sales from our investment
portfolio in the first quarter of 2003 in connection with the termination and
recapture of a number of our reinsurance agreements and to meet the collateral
requirements of certain of our ceding companies. We plan to continue to hold a
relatively large portion of our assets in short duration investments until
interest rates rise or we conclude they are not going to rise in the
foreseeable future. However, we will adjust our investment strategy based on
developments in the markets and our business and those adjustments may result
in realized gains or losses being recognized. We make decisions concerning the
sales of invested assets based on a variety of market, business and other
factors. Net Change in Fair Value of Embedded Derivatives. Under SFAS 133, we are
required to bifurcate and separately account for the embedded derivatives
contained in one of our annuity reinsurance contracts. As of March 31, 2004,
the embedded derivative related to that agreement had an unrealized loss of
approximately $7,183,000. Unrealized changes in the fair value of the embedded
derivative are reflected in our results of operations. For the three months
ended March 31, 2004, the net change in fair value of embedded derivatives was
an unrealized gain of $607,388, as compared to an unrealized gain of
$13,754,859 for the comparable prior period in 2003. In the first quarter of
2003, we had four annuity reinsurance agreements with embedded derivatives that
we were required to bifurcate and separately account for. The unrealized gain
in embedded derivatives during the three months ended March 31, 2004 reflects
credit spreads tightening. The primary reason for the unrealized gain in
embedded derivatives for the three months ended March 31, 2003 was the
termination of our Ohio National annuity reinsurance agreement in the first
quarter of 2003. Widening credit spreads and bond defaults in the portfolio of
assets supporting this agreement had caused unrealized losses on our Ohio
National annuity reinsurance agreement through December 31, 2002. These
cumulative unrealized losses were reversed upon the termination of the Ohio
National agreement. Surrender Fees and Other Revenue.Surrender fees and other revenue for
the three months ended March 31, 2004 were $1,074,932, as compared with
$1,390,247 for the three months ended March 31, 2003. This income is primarily
derived from surrender fees related to our fixed annuity contract with
Transamerica. The decrease in revenue is mainly due to a smaller policyholder
base resulting in a lower absolute level of withdrawals and lower surrender
rates. Claims and Policy Benefits.Claims and policy benefits include both life
and variable annuity benefits, including GMDB, GMIB and, during the first
quarter of 2003, enhanced earnings benefits (EEB). Claims and policy benefits
for the three months ended March 31, 2004 were $10,244,658, or 72% of net
premium, as compared with $75,089,440, or 122% of net premium, for the three
months ended March 31, 2003. The absolute decline in claims and policy
benefits compared to the same quarter in 2003 was the result of the significant
reduction of life insurance in force from approximately $69.0 billion at March
31, 2003 to approximately $16.7 billion at March 31, 2004, as well as the
termination of our guaranteed minimum death benefit contract with Hartford Life
in 2003. While the recaptures of life -26-




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reinsurance agreements during 2003 have reduced claims and policy benefits in
2004, they may increase volatility in the level of claims and policy benefits
as a percentage of premiums in the future. Interest Credited to Interest Sensitive Products. Interest credited to
Interest sensitive products, which represents liabilities to policyholders we
assume under certain annuity reinsurance agreements, was $3,529,250 for the
three months ended March 31, 2004, as compared with $4,871,759 for the three
months ended March 31, 2003. Included in Interest credited to interest
sensitive products for the three months ended March 31, 2004 are minimum
interest guarantee payments of approximately $1,828,000, as compared to minimum
interest guarantee payments of $5,107,000 for the three months ended March 31,
2003. The reduction in minimum interest guarantee payments in 2004 was
primarily due to improving lapse experience and total returns on our annuity
reinsurance contract with Transamerica during the first quarter of 2004. Policy Acquisition Costs and Other Insurance Expenses. Policy acquisition
costs and other insurance expenses, consisting primarily of allowances and
amortization and write downs of deferred policy acquisition costs, for the
three months ended March 31, 2004 were $8,180,997, as compared with $52,501,064
for the three months ended March 31, 2003. The decrease for the three months
ended March 31, 2004 reflects the reduction in the size of our book of business
during 2003. Policy acquisition and other insurance expenses for the first
quarter of 2003 included the net write down of deferred acquisition costs
associated with the recapture and termination of contracts of approximately
$42,250,000. Operating Expenses. Operating expenses for the three months ended March
31, 2004 were $2,767,362 or 11% of total revenue (excluding the net change in
fair value of embedded derivatives), as compared with $6,346,130 or 9% of total
revenue (excluding the net change in fair value of embedded derivatives) for
three months ended March 31, 2003. The absolute decrease in expenses for the
first quarter of 2004 reflects reductions in employee compensation costs,
premiums for directors and officers liability coverage
and reduced professional and consulting fees. Segment Results We separately track financial results of our life and annuity operations
in segments. Each segment is defined by the dominant risk characteristic
inherent in products in that segment. The life segment consists of all products
where the dominant risk characteristic is mortality risk. The annuity segment
comprises all products where the dominant risk characteristic is investment
risk. In addition, one of our remaining modified coinsurance annuity
reinsurance agreements has features that constitute an embedded derivative that
requires bifurcation and separate accounting under SFAS 133  Accounting for
Derivative Instruments and Hedging Activities. The change in the fair value of
this embedded derivative is included in the annuity segment. Both the life and
annuity segments have specific assets, liabilities, stockholders equity,
revenue, benefits and expenses that apply only to them. The corporate segment
contains all stockholders equity not otherwise deployed to the life or annuity
segment. In addition, the corporate segment includes all capital gains and
losses from sales of securities in our portfolio and investment income on
undeployed invested assets. Operating expenses are generally allocated to the
segments proportionately based upon the amount of stockholders equity deployed
to the segment, except for capital raising costs, which have been completely
allocated to the corporate segment. Segment results are reported in Note 4 to
our unaudited condensed consolidated financial statements. Life Segment.Our life reinsurance segment is the reinsurance of ordinary
life insurance, primarily for mortality risks. Ordinary life reinsurance
generally is the reinsurance of individual term life insurance policies, whole
life insurance policies and joint and survivor insurance policies on yearly -27-




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renewable term bases. In addition, we reinsured the mortality risk inherent in
universal life insurance policies, variable universal life insurance policies
and variable life insurance policies. Our life segment is our largest segment as measured by revenues. Our life
segment income for the three months ended March 31, 2004 was $174,580, as
compared with a segment loss of $(45,146,168) for the three months ended March
31, 2003. In the three months ended March 31, 2004, our largest life
reinsurance agreement produced approximately $513,000 of income and $400,000 of
income resulted from lower than expected claims from reinsurance agreements
recaptured in 2003. These amounts were partially offset by a $737,000 loss on
our second largest life reinsurance agreement. The life segment loss for the
three months ended March 31, 2003 was primarily due to a loss of approximately
$34,090,000 relating to the recaptures of life reinsurance agreements in that
quarter. Segment loss for the three months ended March 31, 2003 was also
affected by reported claims under our life reinsurance agreements that exceeded
our expectations. Segment revenues for the three months ended March 31, 2004 declined 76% to
$14,615,501 from $60,169,987 for the three months ended March 31, 2003. This
decline reflects our reduced levels of life insurance in force as a result of
recaptures of life reinsurance agreements during 2003. In addition, net
investment income attributable to the life segment for the first quarter of
2004 decreased by approximately $644,000, as compared with the first quarter of
2003, reflecting reduced invested assets in the life segment as a result of the
terminations and recaptures in 2003. Segment policy benefits and expenses declined 86% to $14,440,921 for the
three months ended March 31, 2004, as compared with $105,316,155 for the three
months ended March 31, 2003. Segment policy benefits and expenses for the three
months ended March 31, 2003 included the net cost of recaptures during that
quarter of $34,100,000. The balance of the decline is attributable to the
significant reduction in life insurance in force during 2003 and because the
three months ended March 31, 2003 was adversely affected by reported claims
under our life reinsurance agreements that exceeded our expectations. While
the recaptures of life reinsurance agreements during 2003 have reduced claims
and policy benefits in the first quarter of 2004, they may increase volatility
in the level of claims and policy benefits as a percentage of premiums in the
future. Annuity Segment.Our annuity reinsurance segment is the reinsurance of
general account fixed deferred annuities and certain minimum guarantees arising
from variable annuities. With respect to the general account fixed annuities we
reinsure, our agreements generally relate to individual general account single
premium deferred annuity policies, which involve the tax-deferred accumulation
of interest on a single premium paid by the policyholder (accumulation phase
policies). Accumulation phase policies are subject primarily to investment risk
and persistency (lapse) risk. We also reinsure certain guarantees associated
with variable annuity agreements, including GMDB, GMIB, and, during the first
quarter of 2003, EEB. As of March 31, 2004, we reinsured only GMDB and GMIB
through a single reinsurance agreement with CIGNA. Our annuity segment contains the majority of our assets and exposes us to
significant net income volatility from three sources. First, under SFAS 133 
Accounting for Derivative Instruments and Hedging Activities we must value the
embedded derivative associated with one of our annuity reinsurance agreements.
This unrealized change in the value of the derivative is reported in our income
statement each quarter. The change in the value of the derivative can be
large, and is driven by financial market conditions, most notably credit risk
related changes. Second, as a result of our adoption of AICPA Statement of
Position (SOP) 03-1, changes in our reserve levels for our Transamerica annuity
reinsurance agreement resulting from underlying asset value changes will not be
offset with corresponding changes in our Funds withheld asset values, which
will cause volatility in net income. To the extent that the -28-




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minimum guarantee payable under the policies underlying the Transamerica
agreement exceeds the payment that would be required as a result of the market
value adjustment in those policies, the reserves required under the SOP would
be based upon the minimum guarantee and the mismatch between liabilities and
assets is less significant. If we computed our reserves as if the amounts
payable to the policyholders under the Transamerica contract exceeded the
minimum guarantee amount, a 1% increase (decrease) in underlying asset values
would cause a $6 million charge (benefit) to net income. Third, our
Transamerica annuity reinsurance contract has exhibited volatility in the past
due to write downs of our deferred acquisition cost balance which were based
upon managements estimates of future investment performance and lapse
experience. While we believe these estimates are reasonable, they are estimates
of future events and may prove to be inaccurate. If such assumptions turn out
to be inaccurate, we could be required to write off additional deferred
acquisition costs, which would have a significant adverse impact on our net
income in future periods. Annuity segment income was $967,653 for the three months ended March 31,
2004, as compared with a loss of $(7,870,476) for the three month period ended
March 31, 2003. As a result of the adoption of the SOP on January 1, 2004, the
amount of reserves for future policy benefits for our GMDB/GMIB reinsurance
agreement was reduced by $1,878,760, favorably impacting net income. The impact
of the adoption of the SOP on our accounting for the Transamerica annuity
reinsurance agreement was a cumulative charge of $2,244,720. This was the net
result of an increase in Interest sensitive contracts liability of $38,398,730
offset by an increase in Deferred policy acquisition costs of $36,154,010.
The Transamerica annuity agreement also produced income of approximately
$930,000 during the three months ended March 31, 2004 while our GMDB/GMIB
contract with CIGNA resulted in income of approximately $527,000. We also
incurred a loss of approximately $73,000 on our other annuity reinsurance
agreement reflecting a narrowing of our yield spread due to the current
interest rate environment. Total revenue for our annuity segment declined 59% to $9,920,074 for the
three months ended March 31, 2004, as compared with $24,103,131 for the three
month period ended March 31, 2003. This decline is due to a decrease in
embedded derivative gains of $13,147,471, as well as reduced surrender fee
revenue due to improving lapse experience and lower policy premiums due to a
smaller asset and policyholder base. The declines were partially offset by
increased investment income on our Funds withheld assets. Policy benefits and expenses for the annuity segment decreased 73% to
$8,586,461 for the three month period ended March 31, 2004, as compared with
$31,973,607 for the three month period ended March 31, 2003. The primary
components of these expenses are interest credited to policyholders, payments
for minimum interest guarantees, payments and reserve changes for minimum
guarantees associated with variable annuity contracts and write downs and
amortization of deferred acquisition costs. The decline in policy benefits and
expenses is primarily due the termination of several of our annuity reinsurance
agreements during 2003. In addition, as a result of a smaller base of
policyholders, improved -29-




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investment returns and lower lapse rates on the Transamerica annuity
reinsurance agreement, minimum interest guarantee payments under the contract
declined from approximately $5,170,000 for the first quarter of 2003 to
approximately $1,828,000 for the first quarter of 2004, a decrease of
approximately $3,342,000. 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 how
stockholders equity is deployed to the life and annuity segments. As a result,
the corporate segment, while small relative to our total company, will likely
have volatile results. Corporate segment loss was $(307,839) for the three
month period ended March 31, 2004, as compared with segment income of $541,828
for the three month period ended March 31, 2003. Revenues declined 33% to
$1,387,046 for the three month period ended March 31, 2004, as compared with
$2,060,459 for the three month period ended March 31, 2003. The decreases in
segment revenues and income were primarily the result of lower realized capital
gains of approximately $985,000 in the first quarter of 2004 compared to the
first quarter of 2003. Segment benefits and expenses increased 12% to $1,694,885 for the three
month period ended March 31, 2004, as compared with $1,518,631 for the three
month period ended March 31, 2003. The increase reflects a rise in the
percentage of operating expenses allocated to the corporate segment in the
first quarter of 2004 due to a greater proportionate share of stockholders
equity allocated to the corporate segment as a result of the downsizing of our
life and annuity segments during 2003. Financial Condition Investments At March 31, 2004 and December 31, 2003, virtually all of our invested
assets, including cash and cash equivalents, were posted as collateral to
secure our obligations under reinsurance agreements and letter of credit
facilities or were required to maintain the statutory capital and surplus
requirements of our U.S. operating subsidiary. At March 31, 2004, our invested
assets, including cash and cash equivalents, had an aggregate fair value of
$162,153,583, as compared with an aggregate fair value of $197,880,755 at
December 31, 2003. The decline in our invested assets during the first quarter
of 2004 was due to a $22,100,000 million payment we made in connection with the
settlement of the recapture of our life reinsurance agreement with Metropolitan
Life Insurance Companies and a $12,600,000 payment we made to Transamerica in
February 2004. At March 31, 2004, unrealized gains totaled
$2,550,555, as compared to $1,840,849 at December 31, 2003. At March 31, 2004
and December 31, 2003, the weighted average duration of the fixed income
securities included in our invested assets was 3.6 and 3.9 years, respectively,
and the weighted average investment quality rating was AA at the end of each
period. Our investments are governed by investment guidelines established and
approved by our Board of Directors. Our investment objectives are to achieve
above average risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of liquidity in our
portfolio and match the cash flows of our investments to our related insurance
liabilities. Our investment guidelines, as recently amended, require our
overall fixed income portfolio to maintain a minimum weighted average credit
quality of A and limit investment in fixed income securities that are
non-rated or below investment grade at the time of purchase to an aggregate of
$3,000,000. In the first quarter of 2004, we invested approximately $450,000 in
securities that were non-rated at the time of their purchase. While any
investment carries some risk, the risks associated with non-rated or
lower-rated securities generally are greater than the risks associated with
investment grade securities. A fixed income security -30-




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rated A by Standard & Poors is considered to be somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than higher-rated issuers; however, the issuers capacity to meet
its financial commitment on the security is still considered to be strong. We
currently do not invest in any fixed income securities in emerging markets. At both March 31, 2004 and December 31, 2003, none of our fixed income
securities consisted of below investment-grade securities. There was one
non-rated security held at March 31, 2004. The fair value of below
investment-grade and non-rated investments varies depending on economic and
market conditions, the level of interest rates and the perceived
creditworthiness of the issuer. As noted above, our investment guidelines
require our overall fixed income portfolio to maintain a minimum weighted
average credit quality of A and limit the amount of our investments in fixed
income securities that are non-rated or below investment grade at the time of
purchase. We monitor the creditworthiness of the portfolio as a whole, and when
the fair market value of a security declines for reasons other than changes in
interest rates or other perceived temporary conditions, the security is written
down to its fair value. At March 31, 2004, there were no impaired securities in
our portfolio. At March 31, 2004, mortgage-backed securities represented approximately
15% of our invested assets, including cash and cash equivalents, as compared
with approximately 11% at December 31, 2003. Investors in these securities are
compensated primarily for reinvestment risk rather than credit quality risk.
Investments in mortgage-backed securities include collateralized mortgage
obligations (CMOs) and mortgage-backed pass-through securities. Mortgage
backed securities generally are collateralized by mortgages issued by the
Government National Mortgage Association (GNMA), the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
Of these, only GNMA mortgages are backed by the full faith and credit of the
U.S. government. Credit risk generally is not a consideration when investing
in agency mortgage backed securities. Our mortgage backed securities portfolio
had a weighted average investment quality rating of AAA at both March 31,
2004 and December 31, 2003. At March 31, 2004, approximately 21% of our mortgage-backed investment
portfolio consisted of securities with planned repayment schedules, as compared
with 7% at December 31, 2003. These investments are designed to amortize in a
more predictable manner by shifting the primary risk of prepayment of the
underlying collateral to investors in other tranches of the CMO. 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 Three Months Ended March 31,
    
    Twelve Months Ended December 31,2004
    
    2003
    
    2003
    
    2002
    
    2001(Dollars in thousands)Total invested assets,
including cash and
equivalents (1)
    
    $
    162,154
    
    
    $
    299,864
    
    
    $
    197,881
    
    
    $
    306,346
    
    
    $
    423,780Investment income, net
of related expenses
    
    $
    1,555
    
    
    $
    1,882
    
    
    $
    5,924
    
    
    $
    25,931
    
    
    $
    20,165Effective yield rate (2)
    
    
    3.46
    %
    
    
    2.48
    %
    
    
    2.53
    %
    
    
    5.28
    %
    
    
    5.74
    %Realized investment gains
    
    $
    679
    
    
    $
    1,664
    
    
    $
    6,407
    
    
    $
    19,749
    
    
    $
    1,230
   (1)
    
    Fair value at end of the indicated period.(2)
    
    The effective yield rate equals (i) net investment income divided by
(ii) the average of total adjusted invested assets (fixed maturities at
amortized cost, including assets on deposit with reinsurers) at the end
of each calendar quarter included in the indicated period. -31-




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Funds Withheld at Interest Our remaining two annuity reinsurance agreements cover individual single
premium deferred annuity policies and are structured as modified coinsurance
arrangements. In this type of arrangement, the ceding company invests the
premiums received from policyholders or engages an investment manager to do so,
credits interest to policyholders accounts, processes surrenders and engages
in other administrative activities. The ceding company is also required to
carry reserves for these annuity policies based upon certain statutory rules in
the state in which the ceding company is domiciled. The underlying investments
purchased with the premiums received from policyholders support these statutory
reserves. Historically, when a ceding company enters into an annuity reinsurance
contract structured as a modified coinsurance arrangement with us, a portion of
the ceding companys liability to the policyholders or, in the case of a
retrocessional arrangement, the primary insurer, is ceded to us. Our remaining
modified coinsurance arrangements are on a quota share basis, so the portion
that is ceded to us is a fixed percentage of the liabilities arising from the
underlying policies. Our share of the ceding companys liability is included on
our balance sheet as Interest sensitive contracts liabilities. However,
unlike other reinsurance arrangements in which we receive cash or investments
as consideration for assuming a portion of the ceding companys liability,
under these types of arrangements, we have established a receivable called
Funds withheld at interest that is equal to our fixed portion of the
statutory reserves carried by the ceding company. We are allocated our share of
the investment income and realized capital gains and losses that arise from the
securities in the investment portfolio underlying the statutory reserve. At March 31, 2004, our Funds withheld at interest receivable related to
our annuity reinsurance contracts had a carrying value of approximately $640
million. Our agreement with Transamerica accounted for approximately 90% of
our Funds withheld at interest receivable at March 31, 2004, as compared to 91%
at December 31, 2003. At March 31, 2004, the assets held and managed by our
ceding companies under our annuity reinsurance contracts had a combined market
value of $674 million and were invested in convertible bonds and fixed income
securities having a weighted average credit quality of A- and a weighted
average duration of 4.7 years. At December 31, 2003, these assets had a
weighted average credit quality of A- and a weighted average duration of 5.9
years. In addition, at March 31, 2004, approximately 4.9% of such assets were
invested in below investment grade securities, as compared with 5.5% of such
assets at December 31, 2003. The average yield rates earned on the assets held
and managed by our ceding companies was approximately 2.81% for the three
months ended March 31, 2004. The average yield rate earned on the invested premiums funding our annuity
obligations to Transamerica was approximately 4.85% for the three months ended
March 31, 2004. The average yield rate earned on the invested premiums funding
our annuity obligations for the other annuity reinsurance agreement was
approximately 4.86% for the three months ended March 31, 2004. For purposes of
calculating the average yield rate earned on assets held and managed by our
ceding companies, we include our share of the investment income and net realized capital
gains and losses as reported to us through our settlements with our ceding
companies, although we are currently involved in a dispute with Transamerica
regarding the method by which realized gains and losses are settled under our
reinsurance agreement. As a result, we have adjusted the amounts reported to
us in the monthly settlement reports for periods subsequent to October 31, 2003
to reflect what we believe is the appropriate treatment of realized capital
gains and losses. -32-




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Transamerica Our annuity reinsurance contract with Transamerica is our largest annuity
reinsurance contract and, as of March 31, 2004, approximately $582 million, or
90%, of our Funds withheld at interest receivable; approximately $611 million,
or 90%, of our Interest sensitive contracts liability; and approximately $66
million of the deferred policy acquisition costs assets on our balance sheet
related to this contract. As a result of the changes to our remaining book of
business during 2003, especially the termination of our annuity reinsurance
agreement with Ohio National, we expect that the assets and liabilities
associated with the Transamerica contract will continue to represent a
significant portion of our total assets and liabilities in future periods.
While we expect that our adoption of the AICPA SOP 03-1 on January 1, 2004 will
increase the volatility of our income for the contract on a quarterly basis, we
do not expect the Transamerica contract to generate significant income over the
long term. The amount of deferred acquisition costs we record as an asset on
our balance sheet related to the Transamerica contract is based on a series of
assumptions related to the investment performance of the assets supporting our
liabilities under the contract, as well as future lapse rates for the
underlying policies. These assumed lapse rates include assumptions regarding
future full surrenders, partial withdrawals, annuitizations and policyholder
deaths. While we believe the investment and lapse estimates to be reasonable,
they are estimates of future events and we cannot assure you that they will
prove to be accurate. If such assumptions turn out to be inaccurate, we could
be required to write off additional deferred acquisition costs, which would
have a significant adverse impact on our net income in future periods. At March 31, 2004, the assets funding the policyholder obligations under
the Transamerica contract had an average credit quality of A- and an average
duration of 4.8 years, as compared with an average credit quality of A- and
an average duration of 6.1 years at December 31, 2003. The contract is a
retrocessional arrangement covering VisionMark fixed annuity products issued by
IL Annuity. AmerUS Capital Management, the investment manager appointed by IL
Annuity, manages the assets underlying the Transamerica contract. At March 31,
2004 and December 31, 2003, AmerUS Capital Management had invested
approximately 61% and 64%, respectively, of the premiums paid in connection
with the underlying policies in investment grade convertible bonds and had
invested the remaining premiums in investment grade bonds, government bonds,
mortgage-backed securities and high yield bonds. 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. 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 three months ended March 31, 2004 and March 31, 2003, we
paid approximately $1,828,000 and $5,107,000, respectively, under our annuity
reinsurance contract with Transamerica to cover our proportionate share of the
shortfall that arose because the net investment returns on the assets related
to these policies substantially underperformed the minimum interest guarantees
for surrendered policies. -33-




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According to data provided to us by Transamerica, at March 31, 2004, the
assets held by IL Annuity and managed by AmerUS Capital were comprised of the
following: % of TotalType of Security
    
    Book Value(1)
    
    Market Value
    
    Market ValueInvestment grade convertible bonds
    
    $
    350,731,003
    
    
    $
    365,508,814
    
    
    
    60.5
    %Investment grade U.S. corporate bonds
    
    
    120,570,832
    
    
    
    125,677,647
    
    
    
    20.8
    %U.S. Government bonds
    
    
    49,996,473
    
    
    
    50,354,512
    
    
    
    8.3
    %Mortgage-backed securities
    
    
    31,834,963
    
    
    
    31,998,426
    
    
    
    5.3
    %Below investment grade U.S. corporate bonds
    
    
    29,356,229
    
    
    
    30,698,627
    
    
    
    5.1
    %Total invested assets
    
    $
    582,489,500
    
    
    $
    604,238,026
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    4,424,672Total market value, including accrued
investment
    
    
    
    
    
    $
    608,662,698
   (1)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
Transamerica. We believe this presents a better understanding of
potential future returns and cash flows under the contract. According to data provided to us by Transamerica, at March 31, 2004, the
credit ratings of the assets (excluding accrued investment income) held by IL
Annuity and managed by AmerUS Capital were approximately as follows: % of TotalRatings(1)
    
    Book Value(2)
    
    Market Value
    
    Market ValueAAA
    
    $
    93,590,632
    
    
    $
    94,296,872
    
    
    
    15.6
    %AA
    
    
    43,249,131
    
    
    
    43,239,434
    
    
    
    7.2
    %A
    
    
    143,871,529
    
    
    
    147,220,947
    
    
    
    24.4
    %BBB
    
    
    272,421,979
    
    
    
    288,782,146
    
    
    
    47.8
    %BB and below
    
    
    29,356,229
    
    
    
    30,698,627
    
    
    
    5.1
    %Total invested assets
    
    $
    582,489,500
    
    
    $
    604,238,026
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    4,424,672Total market value,
including accrued
investment income
    
    
    
    
    
    $
    608,662,698
   (1)
    
    As assigned by Standard & Poors, or, if unrated by Standard &
Poors, based on an equivalent rating assigned by the National
Association of Insurance Commissioners.(2)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
Transamerica. We believe this presents a better understanding of
potential future returns and cash flows under the contract. -34-




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According to data provided to us by Transamerica, at March 31, 2004, the
maturity distribution of the assets held by IL Annuity and managed by AmerUS
Capital was approximately as follows: % of TotalMaturity
    
    Book Value(1)
    
    Market Value
    
    Book ValueWithin one year
    
    $
    27,359,370
    
    
    $
    27,476,645
    
    
    
    4.6
    %From one to five years
    
    
    87,483,072
    
    
    
    91,290,888
    
    
    
    15.1
    %From six to ten years
    
    
    126,355,744
    
    
    
    128,798,180
    
    
    
    21.3
    %More than ten years
    
    
    341,291,314
    
    
    
    356,672,313
    
    
    
    59.0
    %Total all years
    
    $
    582,489,500
    
    
    $
    604,238,026
    
    
    
    100.0
    %
   (1)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
Transamerica. We believe this presents a better understanding of
potential future returns and cash flows under the contract. Other Annuity Reinsurance Contract At March 31, 2004, we had one other annuity reinsurance contract. At
March 31, 2004, the assets funding the policyholder obligations under this
contract had an average credit quality of A and an average duration of
approximately 4.23 years, as compared with an average credit quality of A and
an average duration of approximately 3.95 years at December 31, 2003. -35-




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According to information provided by the ceding company under this annuity
reinsurance contract, at March 31, 2004, the assets held and managed by this
ceding company were comprised of the following: % of TotalType of Security
    
    Book Value(1)
    
    Market Value
    
    Market ValueInvestment grade U.S. corporate bonds
    
    
    55,469,692
    
    
    
    59,513,252
    
    
    
    85.7
    %Mortgage-backed securities
    
    
    6,378,953
    
    
    
    7,060,568
    
    
    
    10.2
    %Below investment grade bonds
    
    
    2,072,385
    
    
    
    2,105,433
    
    
    
    3.0
    %Government bonds
    
    
    729,810
    
    
    
    729,810
    
    
    
    1.1
    %Total invested assets
    
    $
    64,650,840
    
    
    $
    69,409,063
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    1,095,405Total market value, including
accrued investment income
    
    
    
    
    
    $
    70,504,468
   (1)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
the ceding company under the contract. We believe this presents a
better understanding of potential future returns and cash flows under
the contract. According to information provided by the ceding company under this annuity
reinsurance contract, at March 31, 2004, the credit ratings of the assets
(excluding accrued investment income) held and managed by the ceding company
were approximately as follows: % of TotalRatings(1)
    
    Book Value(2)
    
    Market Value
    
    Market ValueAAA
    
    $
    2,913,044
    
    
    $
    2,925,437
    
    
    
    4.2
    %AA
    
    
    5,019,854
    
    
    
    5,312,465
    
    
    
    7.7
    %A
    
    
    21,727,683
    
    
    
    23,342,216
    
    
    
    33.6
    %BBB
    
    
    32,853,843
    
    
    
    35,662,235
    
    
    
    51.4
    %BB and below
    
    
    2,136,416
    
    
    
    2,166,710
    
    
    
    3.1
    %Total invested assets
    
    $
    64,650,840
    
    
    $
    69,409,063
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    1,095,405Total market value,
including accrued
investment income
    
    
    
    
    
    $
    70,504,468
   (1)
    
    As assigned by Standard & Poors, or, if unrated by Standard &
Poors, based on an equivalent rating assigned by the National
Association of Insurance Commissioners.(2)
    
    Book values are statutory book values reported to us by the ceding
company for the underlying investments and represent the value of our
Funds withheld at interest receivable. We present statutory book values
in the above table because that is the basis upon which we settle with
the ceding company under the contract. We believe this presents a
better understanding of potential future returns and cash flows under
the contract. -36-




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##### Table of Contents



According to information provided by the ceding company under this annuity
reinsurance contract, at March 31, 2004, the maturity distribution of the
assets held and managed by the ceding company was approximately as follows: % of TotalMaturity
    
    Book Value (1)
    
    Market Value
    
    Book ValueWithin one year
    
    $
    6,930,441
    
    
    $
    7,026,831
    
    
    
    10.1
    %From one to five years
    
    
    26,546,495
    
    
    
    29,111,157
    
    
    
    41.9
    %From six to ten years
    
    
    22,132,522
    
    
    
    23,725,022
    
    
    
    34.2
    %More than ten years
    
    
    9,041,382
    
    
    
    9,546,053
    
    
    
    13.8
    %Total all years
    
    $
    64,650,840
    
    
    $
    69,409,063
    
    
    
    100.0
    %
   (1)
    
    Book values are those statutory book values reported to us by the
ceding company for the underlying investments and represent the value
of our Funds withheld at interest receivable. We present statutory book
values in the above table because that is the basis upon which we
settle with the ceding company under the contract. We believe this
presents a better understanding of potential future returns and cash
flows under the contract. Liquidity and Capital Resources Our liquidity and capital resources are a measure of our overall financial
strength and our ability to generate cash flows from our operations to meet our
operating and growth needs. Our principal sources of funds are premiums
received, net investment income, proceeds from investments called, redeemed or
sold and cash and short-term investments. The principal obligations and uses
of the funds are to post collateral for the statutory reserves ceded to us by
U.S. based insurers and reinsurers, the payment of policy benefits, acquisition
and operating expenses and the purchase of investments. Under the terms of our
reinsurance agreements, we are required to provide letters of credit or fund
trust accounts with liquid assets to satisfy the collateral requirements of our
cedents. At March 31, 2004 and December 31, 2003, letters of credit totaling
$48,000,000 and $54,000,000, 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 March 31, 2004 and December 31, 2003, cash
and investments of approximately $68,000,000 and $56,000,000, respectively,
were pledged as collateral for letters of credit. At March 31, 2004 and
December 31, 2003, cash and investments of $31,000,000 and $96,000,000,
respectively, were held in trust for the benefit of certain of our ceding
insurance companies to provide security and to meet regulatory requirements. We have two reinsurance operating subsidiaries, the largest of which is
based in and operates out of Bermuda. Our other reinsurance operating
subsidiary is based in and operates out of the United States. Our Bermuda
operating subsidiary reinsures a large portion of the reinsurance business
written by our U.S. operating subsidiary. The primary purpose of this
reinsurance is to provide underwriting capacity to our U.S. operating
subsidiary so that it can compete in its market place. Our Bermuda operating
subsidiary also has made capital infusions into the U.S. operating subsidiary
to allow the U.S. operating subsidiary 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 March 31, 2004 approximately $54,000,000 of our cash and cash equivalents
and fixed income securities were held by the U.S. operating subsidiary and were
not available to us or to our Bermuda operating subsidiary to fund our
liquidity or collateral needs. -37-




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As of March 31, 2004, we had satisfied all the collateral requirements of
our remaining ceding companies with the exception of those asserted by CIGNA.
As of March 31, 2004, CIGNA was seeking $49 million of collateral in addition
to the $11 million of collateral we had previously provided. We do not agree
that the aggregate $60 million collateral requirement currently asserted by
CIGNA is required to be posted and have not posted any additional collateral
for this agreement. If CIGNAs asserted collateral requirement is valid, we do
not have sufficient available cash and investments to satisfy CIGNAs request.
We are attempting to restructure the reinsurance agreement or otherwise meet or
reduce CIGNAs request for collateral. If these negotiations are unsuccessful,
CIGNA could initiate arbitration or litigation proceedings against us. The
specific relief sought and the outcome of any proceedings that CIGNA could
initiate cannot be determined at this time. 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. Transamerica has alleged that we, as of October 31, 2003, owed $17.6
million under our annuity reinsurance agreement with Transamerica. On February
3, 2004, we paid Transamerica $12.6 million, representing the net amount we
believed was due under the reinsurance agreement as of October 31, 2003 after
deducting $5.0 million for investment related expenses that we believe was owed
to us by Transamerica. Transamerica is currently pursuing arbitration with us,
asserting that the $5.0 million offset is not justified and that we owe it that
amount and interest on the amounts that Transamerica previously alleged were
due. In addition, through October 31, 2003, we had received monthly settlement
reports from Transamerica on a basis that we believe conformed with the
reinsurance agreement between us. For the period subsequent to
October 31, 2003, we have only received settlement reports from Transamerica prepared on
a basis that Transamerica alleges is appropriate, but which we believe is not
consistent with the reinsurance agreement. The principal difference relates to
how realized gains and losses related to the invested assets supporting the
annuity obligations are settled between us. The method used by Transamerica,
if appropriate, would require us to pay Transamerica approximately $6 million
more than we believe is required under the agreement for the period from October 31, 2003 through March 31, 2004. Transamerica has
not provided us with realized gain and loss information on the basis we believe
is appropriate. As a result, in preparing our financial statements, we have
adjusted the amounts reported to us by Transamerica in the monthly settlement
reports for periods subsequent to October 31, 2003 to reflect what we believe
is the appropriate treatment of realized capital gains and losses. This dispute
will be included in the pending arbitration. At March 31, 2004, our total capitalization, which consisted entirely of
equity, was $136,934,857. During 2001, our Board of Directors approved a share
repurchase program of up to an aggregate of $25,000,000 of our common shares
from time to time in the future if market conditions so dictate. As of March
31, 2004, no shares had been repurchased under this program. For the three months ended March 31, 2004, we utilized $37,115,802 of our
cash and equivalents to fund our operating activities, as compared with using
cash and equivalents of $8,435,060 from our operating activities for the three
months ended March 31, 2003. The utilization of our cash and equivalents
during the first quarter of 2004 reflects the payment of unearned premiums
associated with the recapture of our life reinsurance agreement with
MetLife and
the $12,600,000 payment to Transamerica. We have no material commitments for capital expenditures as of March 31,
2004, but as noted above, we would not be able to meet the collateral
requirements asserted by CIGNA if they were deemed valid. We plan to continue
to receive premiums and pay claims under our remaining reinsurance treaties; -38-




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##### Table of Contents



however, we are not currently underwriting any new treaties or accepting any
new business from our existing treaties. We are currently exploring whether we
can, should or will begin selling new insurance and reinsurance products in the
future, but we cannot assure you that we will be able to successfully develop,
underwrite or market any products currently being considered. While we reported net income for the first quarter of 2004, there can be
no assurance that we will be able to continue to improve our operations and
liquidity. If we are unable to reposition our investment portfolio to achieve a
substantially higher yield within our investment guidelines, successfully
defend against the pending purported shareholder class action suit, experience
continued improvement in the performance of our reinsurance agreement with
Transamerica and restructure our reinsurance agreement with CIGNA, we may not
be able to meet our future 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. Both we and our Bermuda operating subsidiary, Annuity and Life
Reassurance, are required to comply with the provisions of the Bermuda
Companies Act that regulate the payment of dividends and the making of
distributions from contributed surplus. Under the Act, neither we nor Annuity
and Life Reassurance may declare or pay a dividend, or make a distribution out
of contributed surplus, if there are reasonable grounds for believing that: (i)
the relevant company is, or would be after the payment, unable to pay its
liabilities as they become due; or (ii) the realizable value of the relevant
companys assets would thereby be less than the aggregate of its liabilities
and its issued share capital and share premium accounts. As of and since
December 31, 2002, we have not declared a dividend to shareholders and we do
not expect to declare or pay dividends to shareholders in the near future. The
declaration and payment of future dividends to holders of our common shares
will be at the discretion of our Board of Directors and will depend upon our
earnings and financial condition, capital requirements of our subsidiaries, the
ability of our operating subsidiaries to pay dividends to us, regulatory
considerations and other factors the Board of Directors deems relevant. -39-




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Forward-Looking and Cautionary Statements This report, together with other statements and information we may
provide, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements may include, but are not limited to, projections
of revenues, income or loss, capital expenditures, plans for future operations
and financing needs or plans, as well as assumptions relating to the foregoing.
The words expect, project, estimate, predict, anticipate, believe
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements include these expressions.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance and achievements could differ materially from those set
forth in, contemplated by or underlying the forward-looking statements. Factors
that could materially and adversely affect our operations and financial
condition and/or cause our actual results of operations or financial condition
to differ from those expressed or implied in our forward-looking statements
include, but are not necessarily limited to, our ability to meet the
obligations associated with our current business and to fund our continuing
operations; our ability to reduce or otherwise satisfy our collateral
obligations; the outcome of pending legal proceeding in which we are involved;
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 our Annual Report on Form 10-K for the year ended December 31, 2003, as
amended. We do not undertake to update any forward-looking statement that may
be made from time to time by us or on our behalf. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk Except as noted below with respect to the impact of our adoption of AICPA
SOP 03-1 effective January 1, 2004, there have been no material changes since
December 31, 2003 with respect to our market risk exposure described in our
Annual Report on Form 10-K for the year ended December 31, 2003, as amended.
Please refer to Item 7A: Quantitative and Qualitative Disclosures About Market
Risk in our Annual Report on Form 10-K for the year ended December 31, 2003,
as amended. On January 1, 2004, we adopted AICPA Statement of Position (SOP) 03-1.
One requirement of the SOP is for us to record the largest contractually
determinable amount payable to the policyholder of each underlying policy
comprising our Interest sensitive contract liabilities as our reserve for those
policies, rather than simply recording reserves based solely on the
policyholder account values. The computation of amounts due policyholders
under our reinsurance contract with Transamerica includes a market value
adjustment and, to the extent the market value adjustment would require
payments to policyholders in excess of the minimum guarantee amount under the
policies, the reserve required under the SOP is directly influenced by changes
in the value of the underlying assets. The SOP modified the accounting for
liabilities recorded in connection with our reinsurance contracts, but did not
modify the accounting for the assets supporting the liabilities. As a result,
changes in our reserve levels resulting from underlying asset value changes
will not be offset with corresponding changes in our Funds withheld -40-




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asset values. This mismatch will cause volatility in net income on a
quarterly basis, but we believe it will have no effect on the underlying
profitability of the Transamerica contract over the long term. To the extent
that the minimum guarantee payable under the policy exceeds the payment that
would be required as a result of the market value adjustment, the reserves
required under the SOP would be based upon the minimum guarantee and the
mismatch between liabilities and assets is less significant. If we computed our
reserves as if the amounts payable to the policyholders under the Transamerica
contract exceeded the minimum guarantee amount, a 1% increase (decrease) in
underlying asset values would cause a $6 million charge (benefit) to net
income. 
 Item 4.Controls and Procedures In a letter dated March 24, 2004, KPMG in Bermuda, the Companys
independent auditor for the year ended December 31, 2003, advised the Companys
management and the Audit Committee of the Companys Board of Directors of a
reportable condition under standards established by the American Institute of
Certified Public Accountants. The reportable condition related primarily to
the size of the Companys financial department and the complexity of the
accounting process for the Companys annuity reinsurance contract with
Transamerica. KPMG recommended that the Company simplify the accounting
process for the contract and strengthen its review procedures to include
quarterly reconciliations of a single set of accounting records to settlement
reports provided by Transamerica and independent reviews of accounting entries
relating to the contract. As of the end of the period covered by this Form 10-Q, the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Companys disclosure
controls and procedures. Included in this evaluation were considerations of
the points raised in KPMGs letter. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the points
raised in KPMGs letter were not indicative of a deficiency in the Companys
system of disclosure controls and procedures and that the Companys disclosure
controls and procedures were effective. However, in response to KPMGs letter,
the Company has instituted a process requiring formal review of each entry in
its general ledger relating to its Transamerica contract by both its Chief
Executive Officer and Chief Financial Officer, and has modified its procedures
to better document the completion of such reviews. The Company has also
engaged an internationally recognized consulting firm to provide additional
financial oversight to the Company in high risk areas. These efforts are in
addition to the process of reviewing, assessing, and formalizing the Companys
internal controls in light of the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which the Company had commenced prior to the
receipt of KPMGs March 24, 2004 letter. Other than the foregoing, there have
been no changes in the Companys internal controls over financial reporting
during the period ended March 31, 2004 that materially affected, or are
reasonably likely to materially affect, the Companys internal controls over
financial reporting. -41-




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PART II OTHER INFORMATION 
 Item 1.Legal Proceedings On and since December 4, 2002, certain of our shareholders 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. In January 2004, the court ordered that a related action that
the plaintiffs filed against KPMG LLP (United States) and KPMG in Bermuda be
consolidated with the action against us. In February 2004, the court denied
certain individual defendants motions to dismiss the action. In March 2004,
the court denied motions to dismiss filed by certain other individual
defendants and XL Capital Ltd. Also in March 2004, KPMG LLP (United States) and
KPMG in Bermuda filed motions to dismiss the action. The court has not yet
ruled on KPMG LLPs (United States), KPMG in Bermudas and one individual
defendants respective motions to dismiss. No assurance can be given that we
will not be required to pay monetary damages in connection with this lawsuit. Transamerica has alleged that we, as of October 31, 2003, owed $17.6
million under our annuity reinsurance agreement with Transamerica. On February
3, 2004, we paid Transamerica $12.6 million, representing the net amount we
believed was due under the reinsurance agreement as of October 31, 2003 after
deducting $5.0 million for investment related expenses that we believe was owed
to us by Transamerica. Transamerica is currently pursuing arbitration with us,
asserting that the $5.0 million offset is not justified and that we owe it that
amount and interest on the amounts that Transamerica previously alleged were
due. In addition through October 31, 2003, we had received monthly settlement
reports from Transamerica on a basis that we believe conformed with the
reinsurance agreement between us. For the period subsequent to October 31,
2003, we have only received settlement reports from Transamerica on a basis
that Transamerica alleges is appropriate, but which we believe is not
consistent with the reinsurance agreement. The principal difference relates to
how realized gains and losses related to the invested assets supporting the
annuity obligations are settled between us. The method used by Transamerica,
if appropriate, would require us to pay Transamerica approximately
$6 million more than we believe is required under the agreement
for the period from October 31, 2003 through March 31, 2004. Transamerica has
not provided us with realized gain and loss information on the basis we believe
is appropriate. As a result, in preparing our financial statements, we have
adjusted the amounts reported to us by Transamerica in the monthly settlement
reports for periods subsequent to October 31, 2003 to reflect
what we
believe is the appropriate treatment of realized capital gains and losses.
This dispute will be included in the pending arbitration. On October 8, 2003, we were served with a statutory demand for $640,000
from Imagine Group Holdings Limited (Imagine), a Bermuda based reinsurance
company, which was subsequently withdrawn. Imagine has since instituted a civil
proceeding in the Bermuda Supreme Court against us, alleging that we are
obligated to reimburse it for $640,000 of expenses it incurred in connection
with a proposed December 2002 capital raising transaction that was not
consummated. On March 11, 2004, we filed an amended defense with the court to
which Imagine responded on April 26, 2004. We do not -42-




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believe that Imagine is entitled to reimbursement of these expenses under
the applicable agreement and intend to defend ourselves against Imagines
claims. There are no other material arbitration or other legal proceedings
currently in process. -43-




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Item 2.Changes in Securities, Use of Proceeds and Issuer, Purchases of Equity
Securities The
following table summarizes our equity security repurchases during
the three months ended March 31, 2004: Total Number of
    
    Approximate DollarShare Purchased
    
    Value of Shares thatas part of Publicly
    
    May Yet Be PurchasedTotal Number of
    
    Average Price Paid
    
    Announced Plans
    
    Under thePeriod
    
    Shares Purchased
    
    per Share
    
    or Programs
    
    Plans or Programs (1)January 1  January 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000February 1  February 29,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000March 1  March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000
   (1)
    
    During 2001, the Companys Board of Directors approved a share repurchase
program to allow the Company to repurchase up to an aggregate $25,000,000
of its common shares in the future if market conditions so dictate. As of
March 31, 2004, no shares had been repurchased under the program. 
 Item 5.Other Information Effective February 28, 2004, John F. Burke, relinquished responsibility as
our Chief Financial Officer and Secretary; he continues to serve as our
President and Chief Executive Officer. Also effective as of that date, our
Board of Directors approved the selection of John W. Lockwood, formerly the
Controller and V.P. of Finance of the U.S. Operating Subsidiary, as our Chief
Financial Officer and Secretary. 
 Item 6.Exhibits and Reports on Form 8-K (a) Exhibits   10.1
    
    Employment Agreement, dated as of February 18, 2004, by and between
Annuity and Life Re (Holdings), Ltd. and John W. Lockwood.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer.32.1
    
    Section 1350 Certification of the Companys Chief Executive Officer.32.2
    
    Section 1350 Certification of the Companys Chief Financial Officer. (b) Reports on Form 8-K  Current Report dated March 8, 2004 was furnished to the Commission on
March 9, 2004 reporting Results of Operations and Financial Condition under
Item 12. Current Report dated March 30, 2004 was filed with the Commission on April
6, 2004 reporting Changes in Registrants Certifying Accountant under Item 4. Current Report dated April 21, 2004 was filed with the Commission on April
22, 2004 reporting Changes in Registrants Certifying Accountant under Item
4. Current Report dated May 11, 2004 was furnished to the Commission on May
11, 2004 reporting Results of Operations and Financial Condition under Item
12. -44-




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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ANNUITY AND LIFE RE (HOLDINGS), LTD./s/ John F. BurkeName: John F. BurkeDate: May 17, 2004
    
    Title: Chief Executive Officer/s/ John W. LockwoodName: John W. LockwoodDate: May 17, 2004
    
    Title: Chief Financial Officer
 -45-




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Exhibit Index  10.1
    
    Employment Agreement, dated as of February 18, 2004, by and between
Annuity and Life Re (Holdings), Ltd. and John W. Lockwood.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer.32.1
    
    Section 1350 Certification of the Companys Chief Executive Officer.32.2
    
    Section 1350 Certification of the Companys Chief Financial Officer. -46-