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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
   FORM 10-Q   (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31,
2005
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File Number 1-16561 ANNUITY AND LIFE RE (HOLDINGS), LTD. (Exact Name of Registrant as Specified in Its Charter)
 Bermuda
    
    66-0619270(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)Cumberland House, 1 Victoria Street, Hamilton, Bermuda
    
    HM11(Address of Principal Executive Offices)
    
    (Zip Code)
 441-296-7667(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o The number of the registrants Common Shares (par value $1.00 per share) outstanding as of May
5, 2005 was 26,316,861.




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INDEX TO FORM 10-Q PAGEPART IFINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets March 31, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Operations Three Months ended March 31, 2005 and March 31, 2004
    
    
    2Condensed Consolidated Statements of Comprehensive (Loss) Income Three Months ended March 31, 2005 and March 31, 2004
    
    
    3Condensed Consolidated Statements of Changes in Stockholders Equity Three Months ended March 31, 2005 and March 31, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2005 and March 31, 2004
    
    
    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
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 6.
    
    Exhibits
    
    
    33Signatures
    
    
    
    
    34Rule 13a-14(a)/15d-14(a) Certification of the Company's Chief Executive OfficerRule 13a-14(a)/15d-14(a) Certification of the Company's Chief Financial OfficerSection 1350 Certification of the Company's Chief Executive OfficerSection 1350 Certification of the Company's Chief Financial Officer




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PART I
FINANCIAL INFORMATION 
 Item 1.Condensed Consolidated Financial Statements 
 ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars) March 31, 2005
    
    
    December 31, 2004(Unaudited)AssetsCash and cash equivalents
    
    $
    36,497,436
    
    
    $
    56,394,484Fixed income investments at fair value (amortized cost of
$63,976,362 and $80,767,893 at March 31, 2005 and December 31,
2004, respectively)
    
    
    63,855,193
    
    
    
    82,034,410Funds withheld at interest
    
    
    55,902,525
    
    
    
    56,415,386Accrued investment income
    
    
    840,696
    
    
    
    1,155,762Receivable for reinsurance ceded
    
    
    79,524,877
    
    
    
    82,433,270Other reinsurance receivables
    
    
    4,122,913
    
    
    
    4,306,931Deferred policy acquisition costs
    
    
    5,926,854
    
    
    
    6,084,488Other assets
    
    
    363,674
    
    
    
    580,625Total Assets
    
    $
    247,034,168
    
    
    $
    289,405,356LiabilitiesReserves for future policy benefits
    
    $
    109,115,788
    
    
    $
    109,860,843Interest sensitive contracts liability
    
    
    56,574,414
    
    
    
    57,754,009Other reinsurance liabilities
    
    
    14,589,434
    
    
    
    49,186,297Accounts payable and accrued expenses
    
    
    2,096,101
    
    
    
    6,186,995Total Liabilities
    
    
    182,375,737
    
    
    
    222,988,144Stockholders 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;
26,338,528 shares outstanding at March 31, 2005 and December
31, 2004)
    
    
    26,338,528
    
    
    
    26,338,528Additional paid-in capital
    
    
    333,807,041
    
    
    
    333,810,766Stock warrants
    
    
    1,350,000
    
    
    
    1,350,000Unamortized stock based compensation
    
    
    (346,600
    )
    
    
    (490,415
    )Accumulated other comprehensive income
    
    
    (113,947
    )
    
    
    1,016,260Accumulated deficit
    
    
    (296,376,591
    )
    
    
    (295,607,927
    )Total Stockholders Equity
    
    
    64,658,431
    
    
    
    66,417,212Total Liabilities and Stockholders Equity
    
    $
    247,034,168
    
    
    $
    289,405,356
 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 31,2005
    
    
    2004RevenuesNet premiums
    
    $
    5,488,266
    
    
    $
    14,310,641Investment income, net of related expenses
    
    
    1,666,008
    
    
    
    9,250,735Net realized investment gains
    
    
    401,150
    
    
    
    678,925Net change in fair value of embedded derivatives
    
    
    487,145
    
    
    
    607,388Surrender fees and other revenues
    
    
    30,636
    
    
    
    1,074,932Total Revenues
    
    
    8,073,205
    
    
    
    25,922,621Benefits and ExpensesClaim and policy benefits
    
    
    4,602,443
    
    
    
    10,244,658Interest credited to interest sensitive products
    
    
    369,178
    
    
    
    3,529,250Policy acquisition costs and other insurance expenses
    
    
    1,356,238
    
    
    
    8,180,997Operating expenses
    
    
    2,514,011
    
    
    
    2,767,362Total Benefits and Expenses
    
    
    8,841,870
    
    
    
    24,722,267(Loss) income before cumulative effect of a change
in accounting principle (Note 5)
    
    
    (768,665
    )
    
    
    1,200,354Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (365,960
    )Net (Loss) Income
    
    $
    (768,665
    )
    
    $
    834,394(Loss) income per common share before cumulative
effect of a change in accounting principle per
common shareBasic
    
    $
    (0.03
    )
    
    $
    0.04Diluted
    
    $
    (0.03
    )
    
    $
    0.04Cumulative effect of a change in accounting
principle per common shareBasic
    
    $
    
    
    
    $
    (0.01
    )Diluted
    
    $
    
    
    
    $
    (0.01
    )Net (loss) income per common shareBasic
    
    $
    (0.03
    )
    
    $
    0.03Diluted
    
    $
    (0.03
    )
    
    $
    0.03
 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 (LOSS) INCOME
(Unaudited and in U.S. dollars) For the Three Months Ended March 31,2005
    
    
    2004Net (loss) income for the period
    
    $
    (768,665
    )
    
    $
    834,394Other comprehensive (loss) income:Unrealized holding (losses) gains on securities arising during the period
    
    
    (729,057
    )
    
    
    1,388,631Less reclassification adjustment for realized gains
in net (loss) income
    
    
    401,150
    
    
    
    678,925Other comprehensive (loss) income
    
    
    (1,130,207
    )
    
    
    709,706Total Comprehensive (Loss) Income
    
    $
    (1,898,872
    )
    
    $
    1,544,100
 See accompanying notes to unaudited condensed consolidated financial statements -3-




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ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY
(Unaudited and in U.S. dollars) For the Three Months Ended March 31,2005
    
    
    2004Preferred shares par value $1.00Balance at beginning and end of period
    
    $
    
    
    
    $
    Common shares par value $1.00Balance at beginning of period
    
    $
    26,338,528
    
    
    $
    26,454,195Issuance of shares
    
    
    
    
    
    
    Balance at end of period
    
    
    26,338,528
    
    
    
    26,454,195Additional paid-in capitalBalance at beginning of period
    
    $
    333,810,766
    
    
    $
    334,418,029Cancellation of stock based compensation
    
    
    (3,725
    )
    
    
    Balance at end of period
    
    
    333,807,041
    
    
    
    334,418,029Stock WarrantsBalance at beginning of period
    
    $
    1,350,000
    
    
    $
    1,250,000Issuance of warrants
    
    
    
    
    
    
    Balance at end of period
    
    
    1,350,000
    
    
    
    1,250,000Unamortized stock based compensationBalance at beginning of period
    
    $
    (490,415
    )
    
    $
    (1,509,022
    )Cancellation of stock based compensation
    
    
    3,725
    
    
    
    Amortization of stock based compensation
    
    
    140,090
    
    
    
    218,178Balance at end of period
    
    
    (346,600
    )
    
    
    (1,290,844
    )Accumulated other comprehensive incomeBalance at beginning of period
    
    $
    1,016,260
    
    
    $
    1,840,849Net unrealized (losses) gains on fixed income investments
    
    
    (1,130,207
    )
    
    
    709,706Balance at end of period
    
    
    (113,947
    )
    
    
    2,550,555Accumulated DeficitBalance at beginning of period
    
    $
    (295,607,926
    )
    
    $
    (227,281,472
    )Net (loss) income
    
    
    (768,665
    )
    
    
    834,394Balance at end of period
    
    
    (296,376,591
    )
    
    
    (226,447,078
    )Total Stockholders Equity
    
    $
    64,658,431
    
    
    $
    136,934,857
 See accompanying notes to unaudited condensed consolidated financial statements -4-




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ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in U.S. dollars) For the Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activitiesNet (loss) income
    
    $
    (768,665
    )
    
    $
    834,394Adjustments to reconcile net (loss) income to cash used
from operating activities:Net realized investment gains
    
    
    (401,150
    )
    
    
    (678,925
    )Net change in fair value of embedded derivatives
    
    
    (487,145
    )
    
    
    (607,388
    )Amortization of premiums on fixed-income investments
    
    
    289,749
    
    
    
    246,249Amortization of stock based compensation
    
    
    140,090
    
    
    
    218,178Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    365,960Changes in:Accrued investment income
    
    
    315,066
    
    
    
    547,432Deferred policy acquisition costs
    
    
    157,634
    
    
    
    4,113,973Other reinsurance receivables
    
    
    3,092,411
    
    
    
    (123,311
    )Other assets
    
    
    216,951
    
    
    
    (959,861
    )Reserves for future policy benefits
    
    
    (745,055
    )
    
    
    1,829,067Interest sensitive contracts, net of funds withheld
    
    
    (179,589
    )
    
    
    (7,891,062
    )Other reinsurance liabilities
    
    
    (34,596,863
    )
    
    
    (32,656,031
    )Accounts payable and accrued expenses
    
    
    (4,090,894
    )
    
    
    (2,108,228
    )Net cash used by operating activities
    
    
    (37,057,460
    )
    
    
    (36,869,555
    )Cash flows from investing activitiesProceeds from sales and maturity of fixed-income investments
    
    $
    17,160,412
    
    
    $
    33,739,268Purchase of fixed-income investments
    
    
    
    
    
    
    (450,000
    )Net cash provided by investing activities
    
    
    17,160,412
    
    
    
    33,289,268Decrease in cash and cash equivalents
    
    
    (19,897,048
    )
    
    
    (3,580,287
    )Cash and cash equivalents, beginning of period
    
    
    56,394,484
    
    
    
    80,068,310Cash and cash equivalents, end of period
    
    $
    36,497,436
    
    
    $
    76,488,023Non-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
    
    
    
    
    
    
    38,398,730Cumulative effect of a change in accounting principle
    
    $
    
    
    
    $
    365,960
 See accompanying notes to unaudited condensed consolidated financial statements -5-




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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ANNUITY AND LIFE RE (HOLDINGS), LTD. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business 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, Ltd., Annuity and Life Re America, Inc. and Annuity and Life Reassurance America, Inc.
are collectively referred to herein as the Company. The Company has encountered significant difficulties during the last four years. In addition
to reporting significant operating losses for those years, the Company has reduced its operations
significantly through the novation, termination and recapture of many of its life and annuity
reinsurance agreements. The Company plans to continue to receive premiums and pay claims under its
remaining reinsurance treaties; however, it is not currently underwriting any new treaties or
accepting any new business from its existing treaties. 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, 2004. The accounting
policies used in preparing these unaudited condensed consolidated financial statements are
consistent with those described in Note 4 to the Companys audited consolidated financial
statements for the fiscal year ended December 31, 2004. 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, 2005 are not
necessarily indicative of results that may be expected for any other interim period or for the full
year. 2. Significant Events On December 31, 2004, the Company entered into a binding letter of intent with Transamerica
Occidental Life Insurance Company (Transamerica) that provided for the novation of its life
reinsurance agreements with Scottish Re Limited (Scottish Re) and Fidelity and Guaranty Life
Insurance Company (F&G) to Transamerica as of December 31, 2004. The letter of intent also
provided that, upon consummation of the novation of the life reinsurance agreements, Transamerica
would terminate its annuity reinsurance agreement with the Company and recapture all business ceded
under the agreement effective as of December 1, 2004. Pursuant to the letter of intent with Transamerica, on January 31, 2005, the Company executed
definitive documents and novated its life reinsurance agreements with Scottish Re and F&G to
Transamerica as of December 31, 2004. In consideration of the life reinsurance agreement novations,
the Company paid Transamerica $18.5 million. Also, on January 31, 2005, the Company executed an
amendment to its annuity reinsurance agreement with Transamerica which terminated the agreement and -6-




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resulted in Transamerica recapturing all business ceded under the agreement effective as of
December 1, 2004. In consideration of the annuity recapture, the Company paid a $14.0 million
premium to terminate and recapture the agreement and approximately $7.1 million for monthly
settlement amounts owed under the annuity reinsurance agreement through November 30, 2004. On and since December 4, 2002, certain of the Companys stockholders, seeking to act as class
representatives, filed lawsuits against the Company and certain of its present and former officers
and directors in the United States District Court for the District of Connecticut seeking
unspecified monetary damages. On July 20, 2004, the Company announced that it had reached an
agreement in principle with the plaintiffs, subject to full documentation by the parties to the
settlement, notice to the class, court approval and other steps required to consummate a class
action settlement, to settle the lawsuit. The Companys share of the settlement was $2.5 million in
cash, which it paid into escrow in August 2004, and an additional $2.5 million to be paid in cash
or in common shares (subject to a cap of 19.9% of the Companys outstanding shares) at the
Companys election. On January 10, 2005, the Company elected to pay the remaining $2.5 million in
cash, which it paid into escrow on that date. The Company recorded its $5.0 million portion of the
settlement as an operating expense in 2004. The
termination, recapture and novation transactions consummated by the
Company effective in 2004 had a
material impact on the Companys results of operations. The following unaudited table shows
summarized results of operations assuming that all of the termination, recapture and novation
transactions occurred on January 1, 2004. Annuity and Life Re (Holdings), Ltd.
Pro Forma Condensed Consolidated Statement of Operation for the Three Months Ended March 31, 2004
(Unaudited and in U.S. Dollars) Pro Forma
March 31, 2004Total Revenues
    
    $
    8,460,053Total Benefits and Expenses
    
    
    8,395,952Income before cumulative effect of a change in accounting principle
    
    $
    64,101Cumulative effect of a change in accounting principle
    
    
    Net income
    
    $
    64,101Income per common share before cumulative effect of a change in
accounting principle per common share:Basic
    
    $
    0.00Diluted
    
    $
    0.00Cumulative effect of a change in accounting principle per common share:Basic
    
    $
    0.00Diluted
    
    $
    0.00Net income per common share:Basic
    
    $
    0.00Diluted
    
    $
    0.00
 -7-




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3. (Loss) Income per Common Share The following table sets forth the computation of basic and diluted (loss) income per common
share for the three months ended March 31, 2005 and 2004: Three Months Ended March 31,2005
    
    
    2004(Loss) income before cumulative effect of a change
in accounting principle
    
    $
    (768,665
    )
    
    $
    1,200,354Cumulative effect of a change in accounting
principle (Note 5)
    
    
    
    
    
    
    (365,960
    )Net (loss) income
    
    $
    (768,665
    )
    
    $
    834,394Basic:Weighted average number of common shares outstanding
    
    
    26,014,845
    
    
    
    25,786,161(Loss) income per common share before cumulative
effect of a change in accounting principle
    
    $
    (0.03
    )
    
    $
    0.04Cumulative effect of a change in accounting
principle per common share
    
    
    
    
    
    
    (0.01
    )Net (loss) income per common share
    
    $
    (0.03
    )
    
    $
    0.03Diluted:Weighted average number of common shares outstanding
    
    
    26,014,845
    
    
    
    25,786,161Plus: incremental shares from assumed exercise of
options and warrants and vesting of restricted
stock outstanding
    
    
    
    
    
    
    340,290Diluted weighted average number of common shares
outstanding
    
    
    26,014,845
    
    
    
    26,126,451(Loss) income per common share before cumulative
effect of a change in accounting principle
    
    $
    (0.03
    )
    
    $
    0.04Cumulative effect of a change in accounting
principle per common share
    
    $
    
    
    
    $
    (0.01
    )Net (loss) income per common share
    
    $
    (0.03
    )
    
    $
    0.03
 At March 31, 2005, 5,689,713 warrants, 650,702 options, and 270,000 shares of unvested
restricted stock were outstanding. The calculation of the diluted loss per common share for the
three months ended March 31, 2005 does not include the incremental number of shares from the
assumed exercise of options and warrants, or the vesting of unvested restricted stock grants
because the inclusion of these potential common shares would be considered antidilutive. For the three months ended March 31, 2004, 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 because the inclusion of these potential common shares would be
considered antidilutive. -8-




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The following tables set forth the pro forma computation of basic and diluted income per share
after accounting for stock option grants made prior to the Companys January 1, 2003
adoption of the prospective method described in Statement of Financial Accounting Standards
(SFAS) No. 148 for the three month periods ended March 31, 2005 and 2004: Three Months Ended March 31,2005
    
    
    2004Net (loss) income  as reported
    
    $
    (768,665
    )
    
    $
    834,394Stock option expense recognized
    
    
    44,958
    
    
    
    20,833Pro forma effect on net income of
applying fair value accounting to all
stock option grants
    
    
    (97,987
    )
    
    
    (232,687
    )Net (loss) income  pro forma
    
    $
    (821,694
    )
    
    $
    622,540Net (loss) income per common share  as
reported:Basic
    
    $
    (0.03
    )
    
    $
    0.03Diluted
    
    $
    (0.03
    )
    
    $
    0.03Net (loss) income per common share -
pro forma:Basic
    
    $
    (0.03
    )
    
    $
    0.02Diluted
    
    $
    (0.03
    )
    
    $
    0.02
 The stock-based compensation expense, including restricted common stock issued to
employees, for the three months ended March 31, 2005 and 2004 was $140,090 and $218,178,
respectively. 4. Business Segments The Company separately tracks financial results of its life and annuity operations in
segments. Each segment is defined by a dominant risk characteristic inherent in all products in
that segment. The life segment consists of all products where the dominant risk characteristic is
mortality risk. The annuity segment comprises all products where the dominant risk characteristic
is investment risk, including those products that provide minimum guarantees on variable annuity
products. In addition, certain of the Companys modified coinsurance annuity reinsurance
agreements have features that constitute embedded derivatives that require bifurcation and separate
accounting under SFAS No. 133  Accounting for Derivative Instruments and Hedging Activities. The
change in fair value of these embedded derivatives are included in the annuity segment. Both the life and annuity segments have specific assets, liabilities, stockholders equity,
revenue, benefits and expenses that apply only to them. The corporate segment contains all
stockholders equity not otherwise deployed to the life or annuity segment. In addition, the
corporate segment includes all capital gains and losses from sales of securities in the Companys
portfolio and investment income on undeployed invested assets. Operating expenses are generally
allocated to the segments proportionately based upon the amount of stockholders equity deployed to
each segment. Costs associated with the Companys efforts to raise capital and pursue other
strategic alternatives and the cost of settling the purported shareholder class action lawsuit have
been allocated to the corporate segment. -9-




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Three Months Ended
    
    Life
    
    
    AnnuityMarch 31, 2005
    
    Reinsurance
    
    
    Reinsurance
    
    
    Corporate
    
    
    ConsolidatedRevenues
    
    $
    5,967,919
    
    
    $
    1,193,808
    
    
    $
    $911,478
    
    
    $
    8,073,205Benefits and Expenses.
    
    
    5,788,237
    
    
    
    756,650
    
    
    
    2,296,983
    
    
    
    8,841,870Segment Income (Loss).
    
    $
    179,682
    
    
    $
    437,158
    
    
    $
    (1,385,505
    )
    
    $
    (768,665
    )Total Assets
    
    $
    128,305,222
    
    
    $
    58,374,414
    
    
    $
    60,354,532
    
    
    $
    247,034,168
 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
 5. Accounting Standards Emerging Issues Task Force The Emerging Issues Task Force (EITF) of the FASB issued EITF Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments in late 2003. It
contains two aspects that impact the Company. First, it provides details regarding disclosures
about unrealized losses on available-for-sale debt and equity securities accounted for under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. These disclosures were
effective in annual financial statements for fiscal years ended after December 15, 2003. Second,
it provides additional guidance for evaluating whether an investment is other-than-temporarily
impaired. This guidance was scheduled to be effective for reporting periods beginning after June
30, 2004. However, the FASB has since determined that a delay in the effective date of these
provisions was necessary until it can issue additional guidance on the application of EITF Issue
No. 03-1. The Company will assess whether this guidance will have a material impact on the
Companys results of operations or financial condition once it is released. AICPA Statement of Position (SOP) 03-1 In July 2003, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountant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. On January 1, 2004, the Company adopted this new accounting standard. At that time, the
Company had a combined GMDB/GMIB agreement with Connecticut General Life Insurance Company
(CIGNA) and an annuity reinsurance agreement with Transamerica that were both affected by the
adoption of the new SOP. The cumulative effect of the change in accounting principle was a net loss
of $365,960 for the three months ended March 31, 2004. The Company no longer has any reinsurance
agreements that are affected by the SOP. -10-




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Share-Based Payments On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123 Accounting for Stock-Based Compensation
and supersedes APB opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123R
requires all entities to recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees and is effective as of the beginning of the first annual
reporting period that begins after June 15, 2005. Because the Company applies fair value accounting
to all employee stock options granted or modified subsequent to December 31, 2002, the impact of
this statement will be to record compensation expense utilizing fair value accounting for awards
vesting on or after July 1, 2005 that were granted on or before December 31, 2002. The pro forma
table in Note 3 illustrates the impact of SFAS No. 123 on the Companys unaudited condensed
consolidated statement of operations; SFAS No. 123R will have no impact on the Companys financial
position and results of operations. 6. Related Party Transactions XL Capital 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). 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 stockholder of the Company. 7. Restricted Stock In 2002, the Board of Directors adopted a Restricted Stock Plan (the Plan) under which it
may grant common shares to key employees. The aggregate number of common shares that may be granted
under the 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. As a result of certain employees terminating their employment with the Company, 227,133
shares of restricted stock were cancelled in 2003 and 115,667 shares of restricted stock were
cancelled in 2004. Also, 47,500 shares of restricted stock vested in 2003 and 2004 prior to certain
employees terminating their employment with the Company. The following table summarizes the vesting
schedule for the shares of restricted stock issued to current employees and outstanding as of March
31, 2005: -11-




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Employee SharesOutstanding at
    
    
    Shares Vested at
    
    
    Shares Vesting in
    
    
    Shares Vesting inGrant Date
    
    March 31, 2005
    
    
    March 31, 2005
    
    
    2005
    
    
    2006February 13, 2002
    
    
    40,700
    
    
    
    40,700
    
    
    
    
    
    
    
    September 30, 2002
    
    
    80,000
    
    
    
    53,333
    
    
    
    26,667
    
    
    
    February 28, 2003
    
    
    200,000
    
    
    
    133,333
    
    
    
    
    
    
    
    66,667June 25, 2003
    
    
    265,000
    
    
    
    88,333
    
    
    
    88,333
    
    
    
    88,334Total
    
    
    585,700
    
    
    
    315,699
    
    
    
    115,000
    
    
    
    155,001
 The fair value as determined at the date of grant of the restricted stock awards that
were outstanding on March 31, 2005 was approximately $1,514,000 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 $95,000 and $197,000 was expensed in
the three months ended March 31, 2005 and 2004, respectively. The unamortized balance of
outstanding restricted stock is reflected in the balance sheet as a component of unamortized
stock-based compensation and was $238,500 at March 31, 2005 and approximately $1,072,000 at March
31, 2004. 8. Vulnerability Due to Concentrations As a result of the life reinsurance agreements that were novated to Transamerica as of
December 31, 2004, certain of the Companys remaining agreements, which previously did not
represent a significant percentage of the Companys business, have become more prominent. The
Companys three largest life reinsurance agreements, as measured by gross premiums, are now with
National States Insurance Company (National States), John Hancock Life Insurance Company (John
Hancock) and Omega Reinsurance Corporation (Omega). For the three months ended March 31, 2005,
the Company recorded a loss of approximately $0.9 million related to its life reinsurance agreement
with National States. Premiums associated with this agreement for the three months ended March 31,
2005 were approximately $2.6 million. For the three months ended March 31, 2005, the Company
recorded gross profits of approximately $0.6 million related to its life reinsurance agreement with
John Hancock. Premiums associated with this agreement for the three months ended March 31, 2005
were approximately $0.6 million. For the three months ended March 31, 2005, the Company recorded
gross profits of approximately $0.4 million related to its life reinsurance agreement with Omega.
Premiums associated with this agreement for the three months ended March 31, 2005 were
approximately $0.5 million. The Company has a significant deferred annuity reinsurance agreement with Lafayette Life
Insurance Company (Lafayette). 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. Approximately $50.7 million, or 91%, of the Companys funds withheld at interest
receivable, approximately $56.6 million, or 100%, of the Companys interest sensitive contracts
liability, and approximately $3.1 million, or 52%, of the deferred acquisition costs on the
Companys unaudited condensed consolidated balance sheet was related to its reinsurance agreement
with Lafayette as of March 31, 2005. Since June 1, 2000, 100% of Annuity and Life Reassurance Americas life and annuity policies
that were in force prior to the Companys acquisition of Capitol Bankers Life Insurance Company
were reinsured with Reassure America Life Insurance Company (Reassure). Following the
acquisition, the -12-




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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. However, Annuity and Life
Reassurance America is not discharged from its primary liability as the direct insurer of the risks
reinsured should Reassure default on its obligations. Reserves ceded under this reinsurance
agreement amounted to approximately $79.4 million and $82.2 million at March 31, 2005 and December
31, 2004, respectively. As of March 31, 2005, Reassure is rated A+ (g) (superior) by A.M. Best. 9. Contingencies As described in Note 2, the Company and Transamerica entered into a Master Agreement to novate
the Companys reinsurance contracts with F&G and Scottish Re to Transamerica effective December 31,
2004. In accordance with the terms of the Master Agreement, the Company and Transamerica have been
in discussions regarding possible adjustments to the policy benefit reserves transferred to
Transamerica as part of the F&G novation. On March 30, 2005, the Company received a demand letter
from Transamerica stating that $7,000,000 was owed to Transamerica as an adjustment to the F&G
policy benefit reserves. If the Company and Transamerica are unable to resolve this issue through
continued discussions, the Company would seek adjudication of the dispute in accordance with the
provisions of the Master Agreement. While there can be no assurances, the Company believes that
Transamerica is not entitled to this $7,000,000. On October 8, 2003, the Company was served with a statutory demand for $640,000 from Imagine
Group Holdings Limited (Imagine), a Bermuda based reinsurance company, which was subsequently
withdrawn. Imagine has since instituted a civil proceeding in the Bermuda Supreme Court against the
Company, alleging that the Company is obligated to reimburse it for $640,000 of expenses incurred
by Imagine in connection with a proposed December 2002 capital raising transaction that was not
consummated. On March 11, 2004, the Company filed an amended defense with the court to which
Imagine responded on April 26, 2004. The Company does not believe that Imagine is entitled to
reimbursement of these expenses under the applicable agreement and is defending itself against
Imagines claims. The United States Internal Revenue Service (IRS) is currently conducting an audit of the
Companys United States operating 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 operations. While the Companys United States operating
subsidiaries have complied with the IRS requests for information, both the Company and its Bermuda
operating subsidiary have declined to supply the IRS with certain information in response to its
initial requests for information on May 7, 2002 and July 1, 2002. The Company did provide the IRS
with certain publicly available information in addition to minutes of the Board of Directors
meetings and committee meetings held from 1999 through to 2001. The Company has not received any
additional requests for information since July 1, 2002. 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 would have a
material effect on the Companys results of operation and financial condition. Pursuant to an engagement letter dated January 19, 2004, as amended (the Engagement Letter),
the Company engaged UBS Securities LLC (UBS) to serve as its financial advisor and capital
markets advisor in connection with identifying strategic alternatives available to the Company.
The Engagement -13-




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##### Table of Contents



Letter provides that if, during the term of the Engagement Letter, the Company closes an
equity investment, the Company is obligated to pay UBS a minimum transaction fee of $1,000,000. If
the Company closes a sale transaction during the term of the Engagement Letter, the Company is
obligated to pay UBS a minimum transaction fee of either $1,500,000 or $2,000,000, depending on
whether the other party to that transaction is one identified in the Engagement Letter. In any
case, the transaction fee payable to UBS may increase as the transaction value increases. Any
transaction fee payable to UBS under the Engagement Letter will be offset by certain fees paid by
the Company to UBS prior to the closing of the equity investment or sale transaction. At March 31,
2005, such fees totaled $270,000. The Company is also obligated to pay a transaction fee to UBS
if, during the one year period following the expiration or termination of the Engagement Letter,
the Company either consummates or enters into an agreement that results in an equity investment or
sale transaction with any party identified to the Company by UBS as part of their engagement or
with which the Company had discussions during the term of the Engagement Letter. On April 15, 2005, the Company and its wholly owned subsidiary Annuity and Life Reassurance,
Ltd were served with a Writ of Summons from the Bermuda Supreme Court, whereby Rodney Cordle, a
former employee of the Company, alleges that the Company and its subsidiary failed to pay a monthly
housing allowance to him in accordance with the terms of his employment agreement. Mr. Cordle is
seeking $287,403 plus damages, interest and costs. The Company and its subsidiary have engaged
attorneys to defend the litigation and cannot predict the outcome of this case at this time. -14-




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##### Table of Contents



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,
2004. Our company has encountered significant difficulties during the last four years. In addition
to reporting significant operating losses for those years, we have reduced our operations
significantly through the novation, termination and recapture of many of our life and annuity
reinsurance agreements. We plan to continue to receive premiums and pay claims under our remaining
reinsurance treaties; however, we are not currently underwriting any new treaties or accepting any
new business from our existing treaties. On December 31, 2004, we entered into a binding letter of intent with Transamerica Occidental
Life Insurance Company (Transamerica) that provided for the novation of our life reinsurance
agreements with Scottish Re Limited (Scottish Re) and with Fidelity and Guaranty Life Insurance
Company (F&G) to Transamerica as of December 31, 2004. The letter of intent also provided that,
upon consummation of the novation of the life reinsurance agreements, Transamerica would terminate
its annuity reinsurance agreement with us and recapture all business ceded under the agreement
effective as of December 1, 2004. Our annuity reinsurance agreement with Transamerica has generated
substantial losses since 2001 and has required us to make significant cash payments to
Transamerica. Terminating or restructuring this agreement had been a key strategic objective, as
well as a critical step to pursuing any strategic alternatives. Pursuant to our letter of intent with Transamerica, on January 31, 2005, we executed
definitive documents and novated our life reinsurance agreements with Scottish Re and F&G to
Transamerica as of December 31, 2004. In consideration of these novations, we paid Transamerica
$18.5 million, representing a transfer of reserves related to the life reinsurance agreements that
were novated. Also on January 31, 2005, we executed an amendment to our annuity reinsurance
agreement with Transamerica pursuant to which our agreement with Transamerica was terminated, and
Transamerica recaptured all business ceded under the agreement effective as of December 1, 2004. In
consideration of the recapture, we paid Transamerica all amounts owed under the annuity reinsurance
agreement through November 30, 2004, which was approximately $7.1 million, along with a termination
premium of $14.0 million. In connection with the novations of the life reinsurance agreements, approximately $28.9
million of collateral held in a trust established with respect to our life reinsurance agreement
with Scottish Re was transferred to Transamerica. In addition, $23.8 million of the letters of
credit we posted on behalf of our life reinsurance agreement with F&G were cancelled and the
collateral securing those letters of credit was released to us. Approximately $39.6 million was
paid to Transamerica in connection with the novation and recapture transactions from this
collateral, including $18.5 million as consideration for the novations, a $14.0 termination premium
and approximately $7.1 million for amounts due to Transamerica on December 1, 2004. Following those
payments, approximately $13.1 million of cash and securities -15-




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##### Table of Contents



previously posted as collateral was released to us. On March 30, 2005, we received a demand
letter from Transamerica stating that $7.0 million was owed to Transamerica as an adjustment to the
F&G policy benefit reserves. If we and Transamerica are unable to resolve this issue through
continued discussions, we would seek adjudication of the dispute in accordance with the provisions
of the Master Agreement. While there can be no assurances, we believe that Transamerica is not
entitled to this $7.0 million. Our remaining life reinsurance agreements are the reinsurance of ordinary life insurance,
primarily for mortality risk. Profitability of our life reinsurance line depends in large part on
the volume and amount of death claims incurred. While death claims are reasonably predictable over
a long time horizon, they are less predictable over shorter periods and are subject to fluctuation
from quarter to quarter and year to year, particularly given the relatively small size of our in
force business as a result of recaptures and terminations in previous periods. Significant
fluctuations from period to period could adversely affect the results of our operations. Similarly,
claims experience that exceeds what we anticipated at the time we enter into reinsurance agreements
can also adversely affect the results of our operations, as occurred in 2003 and 2002. At March 31,
2005 and December 31, 2004, the total face amount of our life insurance in force was approximately
$2.3 billion. Our remaining annuity reinsurance agreement reinsures general account fixed deferred
annuities. Profitability of this agreement 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 agreement is market and interest rate sensitive. Fluctuations in the general
level of interest rates and fixed income markets from period to period may cause fluctuations in
the profitability of this agreement. At March 31, 2005 and December 31, 2004, our liability for
annuity reinsurance agreements amounted to approximately $56.6 million and $57.8 million,
respectively. Because our financial results are heavily dependent on three life reinsurance agreements and
one remaining annuity reinsurance agreement, large fluctuations in actual experience under any one
of these agreements could cause volatility in our overall financial results. While we believe we have sufficient operating liquidity to sustain our operations for at least
the next twelve months, we continue to explore strategic alternatives to attempt to maximize
shareholder value. These alternatives include, but are not limited to, a merger, sale, joint
venture, sale of assets, including our remaining reinsurance agreements, or other comparable
transaction. We do not know the terms upon which these transactions might be available, if at all.
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 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
results of operations. 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, 2004, detail the more significant
estimates and assumptions used in the preparation of our unaudited condensed consolidated financial
statements. Deferred Policy Acquisition Costs.The costs of acquiring new business, principally
allowances, which vary with and are primarily related to the production of new business, are
deferred. For traditional life and annuity policies with life contingencies, deferred policy
acquisition costs are charged to expense -16-




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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 results of operations 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 and
2004, which caused us to incur significant deferred acquisition cost write-downs. For example, we
completed the termination and recapture of our annuity reinsurance agreement with Transamerica
effective as of December 1, 2004, which resulted in a write off of deferred acquisition costs of
approximately $63,100,000 in 2004. We will consider other transactions that are 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 agreements. These assumptions have a direct impact on our
estimated expected gross profits on our annuity reinsurance agreements and, therefore, on the
recoverability of the deferred acquisition costs carried on our balance sheet for these agreements.
While these estimates are based upon historical results and information provided to us by our
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 record additional
charges, which would adversely impact our results of operations. Consistent with our accounting policies, we review the key assumptions used in determining the
carrying value of our deferred acquisition cost associated with our annuity reinsurance agreement
each quarter. A change in these assumptions could result in additional charges that would adversely
impact future results of operations. If our assumptions for total returns prove to be inaccurate,
or if lapse rates exceed our assumptions, we may be required to record additional write downs of
deferred acquisition costs, which would adversely impact future results of operations. For example,
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 $1,600,000 as of March 31, 2005. Embedded Derivatives.We have concluded that there is an embedded derivative within the Funds
withheld at interest receivable related to our annuity reinsurance agreement with
Lafayette Life Insurance Company (Lafayette) 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 Lafayette. 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
agreement. The fair value of the embedded derivative is influenced by changes in credit risk,
changes in expected future cash flows under the 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. -17-




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##### Table of Contents



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 our annuity
reinsurance agreement with Lafayette. The application of this accounting policy has increased the
volatility of our reported results of operations. 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. Changes in our assumptions could have a significant impact on the fair value of the
embedded derivative and our reported results of operations. 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 lifetime minimum interest guarantee payments. We make estimates at the
end of each reporting period regarding premiums and benefits for ceding companies who do not report
such information in a timely manner. These estimates can have a significant effect on the amounts
we report in our financial statements. Reserves for Policy Benefits, Including Claims Incurred but not Reported (IBNR) and Interest
Sensitive Contracts 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. Our obligations arising from our fixed annuity reinsurance agreements came from our agreement
with Lafayette and, in 2004, our agreement with Transamerica. Our obligations for these fixed
annuity agreements were reflected on our balance sheet as interest sensitive contracts liability.
On December 31, 2004, we entered into a binding letter of intent with Transamerica which provided
that it would terminate its annuity reinsurance agreement with us and recapture all business ceded
under the agreement effective as of December 1, 2004. Pursuant to this letter of intent, on January
31, 2005, we executed definitive documents and completed the termination and recapture of our
annuity reinsurance agreement with Transamerica. AICPA Statement of Position (SOP) 03-1. In July 2003, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 03-1 (SOP), Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Contracts and for Separate Accounts, which provides guidance on
accounting and reporting by insurance enterprises for certain nontraditional long-duration
contracts and for separate accounts. The SOP is effective for financial statements for fiscal years
beginning after December 15, 2003. We adopted the SOP as of January 1, 2004. The impact of our
adoption of the SOP is discussed below in Operating Results for the three months ended March 31,
2004. Stock-Based Compensation.On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123 Accounting for -18-




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##### Table of Contents



Stock-Based Compensation and supersedes APB opinion No. 25 Accounting for Stock Issued to
Employees. SFAS No. 123R requires all entities to recognize compensation expense in an amount
equal to the fair value of share-based payments granted to employees and is effective as of the
beginning of the first annual reporting period that begins after June 15, 2005. We already record
compensation expense for awards of stock options and restricted stock to employees based on the
fair value of the awards, consequently this statement will not impact our results of operations or
financial condition. If actual events differ significantly from the underlying estimates and assumptions used by us
in the application of any of the aforementioned accounting policies, there could be a material
adverse effect on our results of operations and financial condition. Operating Results Net (Loss) Income.For the three months ended March 31, 2005, we had a net loss of
$(768,665), or $(0.03) per basic and fully diluted common share, as compared to 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, for the three months ended March 31, 2004. Our loss for the three
months ended March 31, 2005 was the result of our operating expenses exceeding our net investment
income as a result of the significantly reduced size of our remaining book of business. In
addition, during the first quarter of 2005 we also experienced losses from three life reinsurance
agreements that were partially offset with income from other agreements and favorable experience
relative to our assumptions at December 31, 2004 on the Scottish Re and F&G life reinsurance
agreements that were novated to Transamerica at December 31, 2004. Net Premiums. Net premium revenue for the three months ended March 31, 2005 decreased 62% to
$5,488,266, as compared with $14,310,641 for the three months ended March 31, 2004. 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
novations of our life reinsurance agreements with Scottish Re and F&G as of December 31, 2004. At
March 31, 2005, the total face amount of life insurance in force decreased to approximately $2.3
billion, as compared with approximately $16.7 billion at March 31, 2004. Our largest life
reinsurance agreement represented approximately $0.3 billion of life insurance in force at March
31, 2005 and $2.6 million of premium revenue for the three months ended March 31, 2005. Net Investment Income. Total net investment income for the three months ended March 31, 2005
was $1,666,008, as compared with $9,250,735 for the three months ended March 31, 2004. Net
investment income is comprised of income earned on our general account assets and income earned on
assets held and managed by our reinsurance ceding companies under modified coinsurance contracts,
which we refer to as Funds withheld. Net investment income earned on our general account assets for the three months ended March
31, 2005 was approximately $987,000, as compared to approximately $1,555,000 for the three month
period ended March 31, 2004. The average annualized yield rate earned on our general account
assets for the three months ended March 31, 2005 was 3.31%, as compared with 3.46% for the three
months ended March 31, 2004. Because the amount of our cash and invested assets has decreased
significantly due to payments associated with the novation of certain life reinsurance agreements
to Transamerica as of December 31, 2004, we expect our net investment income earned on our general
account assets for 2005 to be substantially less than 2004. -19-




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Net investment income earned on Funds withheld for the three months ended March 31, 2005 was
approximately $679,000, as compared to approximately $7,696,000 for the three months ended March
31, 2004. The decrease in investment income on our Funds withheld was the result of our annuity
reinsurance agreement with Transamerica being recaptured as of December 1, 2004. Approximately $7.0
million of net investment income earned on Funds withheld for the three months ended March 31, 2004
related to our annuity reinsurance agreement with Transamerica. The average annualized yield rate
earned on Funds withheld was approximately 4.87% for the three months ended March 31, 2005,
compared with 4.76% for the three months ended March 31, 2004. For purposes of calculating the
average yield rates earned on our Funds withheld at interest, we include our share of the
investment income and net realized capital gains and losses as reported to us through our
settlements with our ceding companies. Net Realized Investment Gains.Net realized investment gains for the three months ended March
31, 2005 were $401,150, as compared with net realized investment gains of $678,925 for the three
months ended March 31, 2004. The level of net realized investment gains for both periods reflected
the transfer and sale of securities in our investment portfolio to ceding companies in connection
with the termination and recapture of certain of our reinsurance agreements in the first quarter of
2005 and 2004. Although we have begun to move a greater portion of our invested assets into longer
duration investments, we plan to continue to hold a relatively large portion of our assets in short
duration investments until we conclude that interest rates are not going to rise further 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 No. 133, we have been required
to bifurcate and separately account for the embedded derivatives contained in our annuity
reinsurance agreement with Lafayette. Unrealized changes in the fair value of the embedded
derivative are reflected in our results of operations. For the three months ended March 31, 2005,
the net change in fair value of embedded derivatives was an unrealized gain of $487,145, as
compared to an unrealized gain of $607,388 for the three months ended March 31, 2004. Surrender Fees and Other Revenue.Surrender fees and other revenue for the three months ended
March 31, 2005 were $30,636, as compared with $1,074,932 for the three months ended March 31, 2004.
For the three months ended March 31, 2005, this income was solely derived from surrender fees
related to our fixed annuity agreement with Lafayette. Approximately $1.0 million of surrender fee
revenue was generated on account of our annuity reinsurance agreement with Transamerica for the
three months ended March 31, 2004. In light of the termination and recapture of our
annuity reinsurance agreement with Transamerica, effective as of December 1, 2004, we do not expect
to report significant surrender fee revenue in future periods. Claims and Policy Benefits.Claims and policy benefits include both life and variable annuity
benefits, which, during the first quarter of 2004, included GMDB and GMIB. Claims and policy
benefits for the three months ended March 31, 2005 were $4,602,443, or 84% of net premium, as
compared with $10,244,658, or 72% of net premium, for the three months ended March 31, 2004. The
absolute decline in claims and policy benefits compared to the same quarter in 2004 was the result
of the significant reduction of life insurance in force from approximately $16.7 billion at March
31, 2004 to approximately $2.3 billion at March 31, 2005. This included the termination
of our GMDB/GMIB agreement with CIGNA which was effective July 1, 2004 as well as the novation of
our life reinsurance agreements with Scottish Re and F&G to Transamerica as of December 31, 2004.
While the novations of these life reinsurance agreements will reduce claims and policy benefits
throughout 2005, they may increase volatility in the level of claims and policy benefits as a
percentage of premiums. -20-




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Interest Credited to Interest Sensitive Products. Interest credited to interest sensitive
products, which are liabilities we assume under certain annuity reinsurance agreements, was
$369,178 for the three months ended March 31, 2005, as compared with $3,529,250 for the three
months ended March 31, 2004. The reduction in Interest credited to Interest sensitive products for
the three months ended March 31, 2005 as compared to the same period in 2004 was due to the
recapture and termination of our annuity reinsurance agreement with Transamerica which was
effective December 1, 2004. For the three months ended March 31, 2005, Interest credited to
interest sensitive products related entirely to our fixed annuity agreement with Lafayette.
Interest credited to interest sensitive products for the three months ended March 31, 2004 included
lifetime minimum interest guarantee payments of approximately $1,828,000 related to our
Transamerica agreement. 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, 2005 were $1,356,238, as compared
with $8,180,997 for the three months ended March 31, 2004. The decrease for the three months ended
March 31, 2005 reflects the reduction in the size of our book of business as a result of the
termination and recapture of our annuity reinsurance agreement with Transamerica and the novation
of our life reinsurance agreements with Scottish Re and F&G to Transamerica in 2004. Operating Expenses. Operating expenses for the three months ended March 31, 2005 were
$2,514,011 or 33% of total revenue (excluding the net change in fair value of embedded
derivatives), as compared with $2,767,362 or 11% of total revenue (excluding the net change in fair
value of embedded derivatives) for three months ended March 31, 2004. The proportionate increase in
operating expenses for the three months ended March 31, 2005 reflects higher professional and
consulting fees as a result of the strategic alternatives we continue to explore and the ongoing
costs of compliance with section 404 of the Sarbanes-Oxley Act of 2002. This has meant that our
operating expenses have remained comparable to the prior year despite a significant reduction in
premium revenue and investment income. Segment Results We separately track financial results of our life and annuity operations in segments. Each
segment is defined by a dominant risk characteristic inherent in products in that segment. The life
segment consists of all products where the dominant risk characteristic is mortality risk. The
annuity segment comprises all products where the dominant risk characteristic is investment risk.
In addition, our remaining modified coinsurance annuity reinsurance agreement has 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. Both the life and annuity segments
have specific assets, liabilities, stockholders equity, revenue, benefits and expenses that apply
only to them. The corporate segment contains all stockholders equity not otherwise deployed to the
life or annuity segment. In addition, the corporate segment includes all capital gains and losses
from sales of securities in our portfolio and investment income on undeployed invested assets.
Operating expenses are generally allocated to the segments proportionately based upon the amount of
stockholders equity deployed to the segment. Costs associated with our efforts to raise capital
and pursue other strategic alternatives and the costs of settling the shareholder class action
lawsuit have been completely allocated to the corporate segment. Segment results are reported in
Note 4 to our unaudited condensed consolidated financial statements. Life Segment.Our life reinsurance segment is the reinsurance of ordinary life insurance,
primarily for mortality risks. Ordinary life reinsurance generally is the reinsurance of individual
term life insurance -21-




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policies, whole life insurance policies and joint and survivor insurance policies on yearly
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, 2005 was $179,682, as compared with $174,580 for the three months
ended March 31, 2004. Segment revenues for the three months ended March 31, 2005 declined 59% to
$5,967,919 from $14,615,501 for the three months ended March 31, 2004. This decline reflects our
reduced levels of life insurance in force as a result of novations of life reinsurance agreements
at the end of 2004. In addition, net investment income attributable to the life segment for the
first quarter of 2005 decreased by approximately $473,000, as compared with the first quarter of
2004, reflecting reduced invested assets in the life segment as a result of the novations to
Transamerica in 2004. Segment policy benefits and expenses declined 60% to $5,788,237 for the three months ended
March 31, 2005, as compared with $14,440,921 for the three months ended March 31, 2004. The decline
is attributable to the significant reduction in life insurance in force at the end of 2004 when our
agreements with F&G and Scottish Re were novated to Transamerica. While novations of life
reinsurance agreements in 2004 have reduced claims and policy benefits in the first quarter of
2005, 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 has historically consisted of the
reinsurance of general account fixed deferred annuities and certain minimum guarantees arising from
variable annuities. We currently have only one remaining annuity reinsurance agreement, which
covers individual general account single premium deferred annuity policies, which involve the
tax-deferred accumulation of interest on a single premium paid by the policyholder (accumulation
phase policies). Accumulation phase policies are subject primarily to investment risk and
persistency (lapse) risk. Historically, we have also reinsured certain guarantees associated with
variable annuity agreements, including GMDB and GMIB. At March 31, 2005, we no longer reinsured any
GMDB or GMIB due to the recapture of our reinsurance agreement with CIGNA in 2004. Our annuity segment has historically contained the majority of our assets and exposes us to
significant volatility in our results from operations due to the application of SFAS No. 133 
Accounting for Derivative Instruments and Hedging Activities. We must currently bifurcate and
separately account for the embedded derivative associated with our annuity reinsurance agreement
with Lafayette, and we have had to do so for other annuity reinsurance agreements in the past. This
unrealized change in the value of the derivative is reported in our statement of operations 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. Annuity segment income was $437,158 for the three months ended March 31, 2005, as compared
with income of $967,653 for the three months ended March 31, 2004. The segment income for the three
months ended March 31, 2005 was largely the result of the net unrealized gain on our embedded
derivatives of $487,145 on Lafayette. The decline in segment income is due to the termination and
recapture of the Transamerica annuity agreement and the GMDB/GMIB contract with CIGNA, both of
which had contributed to income reported in the first quarter of 2004. Total revenue for our annuity segment declined 88% to $1,193,808 for the three months ended
March 31, 2005, as compared with $9,920,074 for the three months ended March 31, 2004. This decline
is due to the termination and recapture of our annuity reinsurance agreement with Transamerica in
2004 and was primarily caused by decreased investment income on our Funds withheld assets as a
result of smaller asset -22-




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base. Approximately $7.0 million of net investment income earned on Funds withheld for the
three months ended March 31, 2004 was related to our annuity reinsurance agreement with
Transamerica. Policy benefits and expenses for the annuity segment decreased 91% to $756,650 for the three
months ended March 31, 2005, as compared with $8,586,461 for the three months ended March 31, 2004.
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 to the termination and recapture of our
annuity reinsurance agreement with Transamerica as of December 1, 2004. Policy benefits and
expenses for 2004 included minimum interest guarantee payments on the Transamerica annuity
reinsurance agreement of approximately $1,828,000 for the first quarter of 2004. Corporate Segment. The corporate segment includes all of our capital gains and losses,
investment income on undeployed invested assets, costs associated with our efforts to raise capital
and pursue other strategic alternatives, costs relating to the settlement of the shareholder class
action lawsuit and a proportionate share of operating expenses based upon how stockholders equity
is deployed to the life and annuity segments. As a result, the corporate segment, while small
relative to our total company, will likely have volatile results. Corporate segment loss was $(1,385,505) for the three months ended March 31, 2005, as compared
with $(307,839) for the three months ended March 31, 2004. Revenues declined 34% to $911,478 for
the three months ended March 31, 2005, as compared with $1,387,046 for the three months ended March
31, 2004. The decreases in segment revenues and income were primarily the result of lower realized
capital gains and investment income on general account assets as a result of reduced invested
assets. Segment benefits and expenses increased 36% to $2,296,983 for the three months ended March 31,
2005, as compared with $1,694,885 for the three months ended March 31, 2004. The increase reflects
a rise in the percentage of operating expenses allocated to the corporate segment in the first
quarter of 2005 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 2004. Financial Condition Investments At March 31, 2005 and December 31, 2004, a large portion 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, 2005, our invested assets,
including cash and cash equivalents, had an aggregate fair value of $100,352,629, as compared with
an aggregate fair value of $138,428,894 at December 31, 2004. The decline in our invested assets
during the first quarter of 2005 was primarily due to the payment to Transamerica of $18,500,000 as
consideration for the novations of our agreements with Scottish Life and F&G to Transamerica,
$14,000,000 for the termination and recapture of our annuity reinsurance agreement with
Transamerica and approximately $7,100,000 for amounts due to Transamerica through November 30,
2004. At March 31, 2005, gross unrealized losses totaled $113,947, as compared to gross unrealized
gains of $1,266,517 at December 31, 2004. At March 31, 2005 and December 31, 2004, the weighted
average duration of the fixed income securities included in our invested assets was 2.7 and 2.9
years, respectively, and the weighted average investment quality rating was AA at the end of each
period. -23-




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Our investments are governed by investment guidelines established and approved by our Board of
Directors. Our investment objectives are to achieve above average risk-adjusted total returns,
maintain a high quality portfolio, maximize current income, maintain an adequate level of liquidity
in our portfolio and match the cash flows of our investments to our related insurance liabilities.
Our investment guidelines require our overall fixed income portfolio to maintain a minimum weighted
average credit quality of A and limit investment in fixed income securities that are non-rated or
below investment grade at the time of purchase to an aggregate of $3,000,000. In 2004, we invested
approximately $900,000 in securities that were non-rated at the time of their purchase. While any
investment carries some risk, the risks associated with non-rated or lower-rated securities
generally are greater than the risks associated with investment grade securities. A fixed income
security rated A by Standard & Poors is considered to be somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than higher rated issuers;
however, the issuers capacity to meet its financial commitment on the security is still considered
to be strong. We currently do not invest in any fixed income securities in emerging markets. Prudential Investment Corporation serves as our advisor for our general account investment
portfolio. Our management agreement with Prudential may be terminated by either party with 45 days
notice. Our Board of Directors periodically reviews the performance of Prudential and the fees
associated with this arrangement. We do not engage in trading activities to generate realized investment gains and, thus,
do not have a trading portfolio. However, we evaluate the desirability of continuing to hold a
security when market conditions, creditworthiness or other measurement factors change. These
changes may relate to a change in the credit risk of an issuer and a decision to sell may be made
to avoid further declines in realizable value. Securities also may be sold prior to maturity to
provide liquidity, as was the case in 2003 and 2004. As a result, our securities are classified as
available for sale and are carried at fair value on our balance sheet. At both March 31, 2005 and at December 31, 2004, there was one below investment-grade security
held in the portfolio. The market value of non-rated securities held at March 31, 2005 was
approximately $900,000. The fair value of such investments varies depending on economic and market
conditions, the level of interest rates and the perceived creditworthiness of the issuer. As noted
above, our investment guidelines 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, 2005 and December 31, 2004, there were no
impaired securities in our portfolio. At March 31, 2005, mortgage-backed securities represented approximately 8% of our invested
assets, including cash and cash equivalents, as compared with approximately 7% at December 31,
2004. 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, 2005 and December 31, 2004. -24-




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At March 31, 2005, approximately 20% of our mortgage-backed investment portfolio consisted of
securities with planned repayment schedules, as compared with 17% at December 31, 2004. 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 31,2005
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands)Total invested assets,
including cash and
equivalents (1)
    
    $
    100,353
    
    
    $
    162,154
    
    
    $
    138,429
    
    
    $
    197,881
    
    
    $
    306,346Investment income, net
of related expenses
    
    $
    987
    
    
    $
    1,555
    
    
    $
    5,335
    
    
    $
    5,924
    
    
    $
    25,931Effective yield rate (2)
    
    
    3.31
    %
    
    
    3.46
    %
    
    
    3.51
    %
    
    
    2.53
    %
    
    
    5.28
    %Realized investment gains
    
    $
    401
    
    
    $
    679
    
    
    $
    440
    
    
    $
    6,407
    
    
    $
    19,749
   (1)
    
    Fair value at end of the indicated period.(2)
    
    The effective yield rate equals (i) net investment income divided by (ii) the average of
total adjusted invested assets (fixed maturities at amortized cost, including assets on
deposit with reinsurers) at the end of each calendar quarter included in the indicated
period. Funds Withheld at Interest As of March 31, 2005, our ceding companies had approximately $55.9 million in assets that were
held and managed by them under our modified coinsurance and coinsurance funds withheld
arrangements. Approximately $50.7 million of the funds withheld at interest relates to our
modified coinsurance annuity reinsurance agreement with Lafayette, with the remaining $5.2 million
related to a coinsurance funds withheld life reinsurance agreement. Our remaining annuity reinsurance agreement covers general account fixed deferred annuity
policies and is structured as a modified coinsurance arrangement. 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 agreement structured as
a modified coinsurance arrangement with us, a portion of the ceding companys liability to the
policyholders is ceded to us. Our remaining modified coinsurance arrangement is 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 -25-




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portfolio underlying the statutory reserve. The average yield rate earned on the invested premiums funding our annuity obligations to
Lafayette was approximately 4.9% for the three months ended March 31, 2005 and approximately 4.0%
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. -26-




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The performance of the assets held and managed by our ceding companies depends to a great
extent on the ability of the ceding company and its investment managers to make appropriate
investments consistent with their investment guidelines. If these assets do not achieve investment
returns sufficient to meet our obligations on the underlying policies, we could experience
unexpected losses. Lafayette Annuity Reinsurance Agreement Approximately $50.7 million, or 91%, of our funds withheld at interest receivable,
approximately $56.6 million, or 100%, of our interest sensitive contracts liability, and
approximately $3.1 million, or 52%, of the deferred acquisition costs on our balance sheet related
to our annuity reinsurance agreement with Lafayette as of March 31, 2005. As a result of the
termination and recapture of our annuity reinsurance agreement with Transamerica effective as of
December 1, 2004, we expect that the assets and liabilities associated with the Lafayette agreement
will represent a significant portion of our total assets and liabilities in future periods. The
amount of deferred acquisition costs we record as an asset on our balance sheet related to our
agreement with Lafayette is based on a series of assumptions related to the investment performance
of the assets supporting our 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. While we believe our
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 results of operations in future periods. The assets funding the policyholder obligations under our annuity reinsurance agreement with
Lafayette have an average credit quality of A- and an average duration of 3.4 years. The average
yield rates on the assets held and managed by Lafayette was approximately 4.7% as of March 31,
2005. At March 31, 2005, none of the assets were invested in below investment grade or non-rated
securities. The premiums paid in connection with the underlying policies have been invested in
investment grade bonds and mortgage backed securities. According to information provided by Lafayette, at March 31, 2005, the assets funding the
policyholder obligations under our annuity reinsurance agreement were comprised of the following: % of TotalType of Security
    
    Book Value(1)
    
    
    Market Value
    
    
    Market ValueInvestment grade U.S. corporate bonds
    
    
    46,640,435
    
    
    
    48,078,135
    
    
    
    83.4
    %Mortgage-backed securities
    
    
    6,240,183
    
    
    
    6,643,736
    
    
    
    11.5
    %Short-term securities
    
    
    2,943,927
    
    
    
    2,943,927
    
    
    
    5.1
    %Total invested assets
    
    $
    55,824,545
    
    
    $
    57,665,798
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    869,217Total market value, including
accrued investment income
    
    
    
    
    
    $
    58,535,015
   (1)
    
    Book values are statutory book values reported to us by Lafayette 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 Lafayette. We believe this presents a better understanding of potential future
returns and cash flows under the agreement. -27-




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According to information provided by Lafayette, at March 31, 2005, the credit ratings of
the assets (excluding accrued investment income) funding the policyholder obligations under our
annuity reinsurance agreement were approximately as follows: % of TotalRatings(1)
    
    Book Value(2)
    
    
    Market Value
    
    
    Market ValueAAA
    
    $
    5,247,568
    
    
    $
    5,211,574
    
    
    
    9.0
    %AA
    
    
    3,308,024
    
    
    
    3,399,394
    
    
    
    5.9
    %A
    
    
    16,883,450
    
    
    
    17,448,285
    
    
    
    30.3
    %BBB
    
    
    30,385,503
    
    
    
    31,606,545
    
    
    
    54.8
    %Total invested assets
    
    $
    55,824,545
    
    
    $
    57,665,798
    
    
    
    100.0
    %Accrued investment income
    
    
    
    
    
    
    869,217Total market value,
including accrued
investment income
    
    
    
    
    
    $
    58,535,015
   (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 Lafayette 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 Lafayette. We believe this presents a better understanding of potential future
returns and cash flows under the agreement. According to information provided by Lafayette, at March 31, 2005, the maturity
distribution of the assets funding the policyholder obligations under our annuity reinsurance
agreement was as follows: % of TotalMaturity
    
    Book Value (1)
    
    
    Market Value
    
    
    Book ValueWithin one year
    
    $
    12,803,623
    
    
    $
    12,933,757
    
    
    
    22.4
    %From one to five years
    
    
    18,023,504
    
    
    
    18,910,904
    
    
    
    32.8
    %From six to ten years.
    
    
    20,645,557
    
    
    
    21,195,164
    
    
    
    36.8
    %More than ten years
    
    
    4,351,861
    
    
    
    4,625,973
    
    
    
    8.0
    %Total all years
    
    $
    55,824,545
    
    
    $
    57,665,798
    
    
    
    100.0
    %
   (1)
    
    Book values are those statutory book values reported to us by Lafayette 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 Lafayette. We believe this presents a better understanding of
potential future returns and cash flows under the agreement. Liquidity and Capital Resources Our liquidity and capital resources are a measure of our overall financial strength and our
ability to generate cash flows from our operations to meet our operating and growth needs. Our
principal sources of funds are premiums received, net investment income, proceeds from investments
called, redeemed or sold and cash and short-term investments. Our principal obligations and uses of
the funds are to post collateral for the statutory reserves ceded to us by U.S. based insurers and
reinsurers, the payment of policy benefits, acquisition and operating expenses and the purchase of
investments. -28-




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Under the terms of our reinsurance agreements, we are required to provide letters of credit or
fund trust accounts with liquid assets to satisfy the collateral requirements of our ceding
companies. At March 31, 2005 and December 31, 2004, letters of credit totaling $13,200,000 and
$35,100,000, 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, 2005 and December 31, 2004, cash and
investments of approximately $14,800,000 and $41,300,000, respectively, were pledged as collateral
for letters of credit. At March 31, 2005 and December 31, 2004, cash and investments of nil and
approximately $28,900,000, respectively, were held in trust for the benefit of certain of our
ceding insurance companies to provide security and to meet regulatory requirements. At March 31,
2005, we had satisfied the collateral requirements of all of our ceding companies. We have two reinsurance operating subsidiaries, one of which is based in and operates out of
Bermuda, and the other of which is based in and operates out of the United States. Our Bermuda
operating subsidiary reinsures a large portion of the reinsurance business written by our U.S.
operating subsidiary. The primary purpose of this reinsurance is to provide reinsurance capacity to
our U.S. operating subsidiary so that it can compete in its market place. Our Bermuda operating
subsidiary also has made capital infusions into the U.S. operating subsidiary to allow the U.S.
company to maintain targeted statutory surplus levels and to provide cash and securities as
collateral for the reinsurance cessions the U.S. operating subsidiary makes to the Bermuda
operating company. At March 31, 2005, approximately $51,300,000 of our cash and cash equivalents
and fixed income securities were held by the U.S. operating subsidiary and were not available to us
or our Bermuda operating subsidiary to fund our liquidity or collateral needs. In connection with the novations of the life reinsurance agreements, approximately $28,900,000
of collateral held in a trust established with respect to our life reinsurance agreement with
Scottish Re was transferred to Transamerica. In addition, $23,800,000 of letters of credit we
posted on behalf of our life reinsurance agreement with F&G was cancelled and the collateral
securing those letters of credit was released to us. Approximately $39,600,000 was paid to
Transamerica in connection with the novation and recapture transactions from this collateral,
including $18,500,000 as consideration for the novations, a $14,000,000 termination premium and
approximately $7,100,000 for amounts due to Transamerica as of December 1, 2004. Following those
payments, approximately $13,100,000 of cash and securities previously posted as collateral was
released to us. On March 30, 2005, we received a demand letter from Transamerica stating that
$7,000,000 was owed to Transamerica as an adjustment to the F&G policy benefit reserves. If we and
Transamerica are unable to resolve this issue through continued discussions, we would seek
adjudication of the dispute in accordance with the provisions of the Master Agreement. While there can be no assurances, we believe that Transamerica is
not entitled to this $7,000,000. Although our liquidity position has improved following the novation and recapture transactions
we completed with Transamerica, a large portion of our cash and investments is held by our U.S.
operating subsidiary or is posted as collateral under our remaining life reinsurance agreements and
is unavailable to fund our operations or those of our Bermuda operating subsidiary. At March 31, 2005, our total capitalization, which consisted entirely of equity, was
$64,658,431. 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, 2005, no shares had been repurchased under this program. -29-




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For the three months ended March 31, 2005, we utilized $37,057,460 of our cash and equivalents
to fund our operating activities, as compared with using cash and equivalents of $36,869,555 to
fund our operating activities for the three months ended March 31, 2004. The utilization of our
cash and equivalents during the first quarter of 2005 reflects the $18,500,000 payment as
consideration for the novations of our agreements with Scottish Life and F&G to Transamerica, the
$14,000,000 premium paid to Transamerica for the termination and recapture of our annuity
reinsurance agreement and approximately $7,100,000 for amounts due to Transamerica for monthly
settlements under our annuity reinsurance agreement through November 30, 2004. We have no material commitments for capital expenditures as of March 31, 2005. 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. While we believe we have sufficient operating liquidity to sustain our operations through
at least the next twelve months, we continue to explore strategic alternatives to attempt to
maximize shareholder value. These alternatives include, but are not limited to, a merger, sale,
joint venture, sale of assets, including our remaining reinsurance agreements, or other comparable
transaction. We do not know the terms upon which these transactions might be available, if at all. Both we and our Bermuda operating subsidiary, Annuity and Life Reassurance, are required to
comply with the provisions of the Bermuda Companies Act that regulate the payment of dividends and
the making of distributions from contributed surplus. Neither we nor Annuity and Life Reassurance
may declare or pay a dividend, or make a distribution out of contributed surplus, if there are
reasonable grounds for believing that: (i) the relevant company is, or would be after the payment,
unable to pay its liabilities as they become due; or (ii) the realizable value of the relevant
companys assets would thereby be less than the aggregate of its liabilities and its issued share
capital and share premium accounts. As of 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 results of operations 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. Forward-Looking 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; the loss of a key executive; our ability to pursue
strategic alternatives on favorable terms; the outcome of pending legal proceedings involving us;
our ability to -30-




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obtain adequate financial ratings; the ability of our ceding companies to manage successfully
assets they hold on our behalf; our success in managing our investments; our ability to list our
common shares for trading on a national exchange or automated quotation system; changes in
mortality, morbidity and claims experience; our ability to make accurate estimates and assumptions
regarding future mortality, persistency, lapses, expenses and investment performance based upon
historical results and information provided to us by our ceding companies; 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; regulatory changes (such as changes in U.S. tax law and insurance
regulation that directly affect the competitive environment for our products); and a prolonged
economic downturn. Investors are also directed to consider the risks and uncertainties discussed in
other documents we have filed with the Securities and Exchange Commission, and in particular, our
Annual Report on Form 10-K for the year ended December 31, 2004. We do not undertake to update any
forward-looking statement that may be made from time to time by or on our behalf. 
 Item 3.Quantitative and Qualitative Disclosures about Market Risk There have been no material changes since December 31, 2004 with respect to our market risk
exposure described in our Annual Report on Form 10-K for the year ended December 31, 2004. 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, 2004. 
 Item 4.Controls and Procedures Evaluation of disclosure controls and procedures The Companys principal executive officer and its principal financial officer, based on their
evaluation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)), have concluded that the
Companys disclosure controls and procedures were effective for the purposes set forth in the
definition thereof in Exchange Act Rule 13a-15(e) as of March 31, 2005. Changes in internal control over financial reporting There were no changes to the Companys system of internal control during the three months
ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. Please refer to Item 9a. Controls and
Procedures in our Annual Report on Form 10-K for the year ended December 31, 2004. In April 2005, the Company resolved one of the material weaknesses that had been identified in
its system of internal control caused by a lack of segregation of duties by transferring its
computer network administrator responsibilities to an external network management firm. -31-




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PART II OTHER INFORMATION 
 Item 1.Legal Proceedings On and since December 4, 2002, certain of our shareholders, seeking to act as class
representatives, filed lawsuits against us and certain of our present and former officers and
directors in the United States District Court for the District of Connecticut seeking unspecified
monetary damages. The plaintiffs claim that the defendants violated certain provisions of the
United States securities laws by making various alleged material misstatements and omissions in
public filings and press releases. The plaintiffs filed a single consolidated amended complaint in
July 2003, adding as defendants XL Capital Ltd and two additional directors. On October 1, 2003, we
answered the amended and consolidated complaint and denied liability on the claims the plaintiffs
had 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
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) and
KPMG in Bermudas respective motions to dismiss. On July 20, 2004, we announced that we had reached an agreement in principle with the
plaintiffs, subject to full documentation by the parties to the settlement, notice to the class,
court approval and other steps required to consummate a class action settlement, to settle the
lawsuit. In August 2004, the parties to the settlement executed and filed a Stipulation setting
forth their settlement agreement, and sought court approval. The parties to the settlement are the
plaintiffs and the class (which consists, subject to certain exclusions, of persons who purchased
our common shares between March 15, 2000 and November 19, 2002), our company, all individual
defendants and XL Capital Ltd. The settlement is without any admission of liability or wrongdoing.
We, along with our directors and officers liability carrier and XL Capital Ltd, agreed to pay an
aggregate of $16.5 million. Our share of the settlement was $2.5 million in cash, which we paid
into escrow in August 2004, and an additional $2.5 million to be paid in cash or in common shares
(subject to a cap of 19.9% of the Companys outstanding shares) at our election. On January 10,
2005, we elected to pay the remaining $2.5 million in cash, which we paid into escrow on that date. In October 2004, the court ordered that notice of the settlement be given to class members,
set deadlines for class members to exclude themselves from the class or file objections to the
settlement, and scheduled a Settlement Fairness Hearing for January 2005. Following the Settlement
Fairness Hearing, the District Court entered an order and final judgment approving the settlement
in January 2005. Robert P. Johnson, one of our current directors, has filed a proof of claim to
participate in the settlement based on his transactions in our common shares during the class
period and prior to joining our board of directors. 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 incurred by Imagine in
connection with a proposed December 2002 capital raising transaction that was not consummated. On
March 11, 2004, we filed an amended defense with the court to which Imagine responded on April 26,
2004. We do not believe that Imagine is entitled to reimbursement of these expenses under the
applicable agreement -32-




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and intend to defend ourselves against Imagine Res claims. On April 15, 2005 the Company and its wholly owned subsidiary Annuity and Life Reassurance,
Ltd. were served with a Writ of Summons from the Bermuda Supreme Court, whereby Rodney Cordle, a
former employee of the Company, alleges that the Company and its subsidiary failed to pay a monthly
housing allowance to him in accordance with the terms of his employment agreement. Mr. Cordle is
seeking $287,403 plus damages, interest and costs. The Company and its subsidiary have engaged
attorneys to defend the litigation, and cannot predict the outcome of this case at this time. There are no other material arbitration or other legal proceedings currently in process in
which we were involved. 
 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, 2005: Total Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value of Shares thatpart of Publicly
    
    
    May Yet Be PurchasedTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Under thePeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Programs
    
    
    Plans or Programs (1)January 1  January 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000February 1  February 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,000,000March 1  March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    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, 2005, no shares had been repurchased under the
program. 
 Item 6.Exhibits  *10.1
    Master Agreement by and between Annuity and Life Reassurance,
Ltd. and Transamerica Occidental Life Insurance Company, dated
as of January 31, 2005 (Exhibit 10.1 to the Companys Form 8-K
filed on February 4, 2005).*10.2
    Amendment by and between Transamerica Occidental Life Insurance
Company and Annuity and Life Reassurance, Ltd., effective
December 1, 2004 (Exhibit 10.2 to the Companys Form 8-K filed
on February 4, 2005).  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.*
    
    Previously filed with the Commission and incorporated herein by reference -33-




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ANNUITY AND LIFE RE (HOLDINGS), LTD. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANNUITY AND LIFE RE (HOLDINGS), LTD./s/ John F. BurkeName: John F. BurkeDate: May 10, 2005
    
    Title: Chief Executive Officer/s/ John W. LockwoodName: John W. LockwoodDate: May 10, 2005
    
    Title: Chief Financial Officer
 -34-




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Exhibit Index  *10.1
    Master Agreement by and between Annuity and Life Reassurance,
Ltd. and Transamerica Occidental Life Insurance Company, dated
as of January 31, 2005 (Exhibit 10.1 to the Companys Form 8-K
filed on February 4, 2005).*10.2
    Amendment by and between Transamerica Occidental Life Insurance
Company and Annuity and Life Reassurance, Ltd., effective
December 1, 2004 (Exhibit 10.2 to the Companys Form 8-K filed
on February 4, 2005).  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.*
    
    Previously filed with the Commission and incorporated herein by reference -35-