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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


FORM 10-Q/A-1

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended
    September 30, 2002                                       
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-23625

ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact name of registrant as specified in its
charter)


|                                                                                                              |  |                                         
|------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Bermuda                                                                                                       |  | Not applicable                          
|(State or other jurisdiction of
    incorporation or organization)                                            |  | (IRS Employer
    Identification Number)
|                                                                                                             
|Cumberland House, 1 Victoria Street, Hamilton,
    HM 11, Bermuda(Address of principal executive
    offices)

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 o          No þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act)     Yes þ          No o

The number of the registrants Common Shares
(par value $1.00 per share) outstanding as of November 5,
2002 was 26,106,328.



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TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|EXPLANATORY NOTE            
|PART I FINANCIAL INFORMATION
|                             | CONSOLIDATED BALANCE SHEETS                                                                  
|                             | CONSOLIDATED STATEMENTS OF OPERATIONS                                                        
|                             | CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME                                       
|                             | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                        
|                             | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY                                   
|                             | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                         
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                             | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings                                                                    
|                             | Item 2. Changes in Securities and Use of Proceeds                                            
|                             | Item 5. Other Information                                                                    
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  



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INDEX TO FORM 10-Q/A

|               |  |                                                                                                                                          |    |      |    | 
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                                                          |    | Page
|               |  |                                                                                                                                          |    |     
|               |  | PART I  FINANCIAL
    INFORMATION                                                                                                       |    |      |    | 
|               |  | Explanatory Note                                                                                                                         |    |      | 1  | 
|ITEM 1.        |  | Unaudited Consolidated Financial Statements                                                                                              |    |      |    | 
|               |  | Consolidated Balance Sheets
    September 30, 2002 and December 31, 2001 (as restated)                                                   |    |      | 2  | 
|               |  | Consolidated Statements of Operations
    Three and Nine Months ended September 30, 2002 and 2001 (as
    restated)                      |    |      | 3  | 
|               |  | Consolidated Statements of Comprehensive (Loss)
    Income
    Three and Nine Months ended September 30, 2002 and 2001 (as
    restated) |    |      | 4  | 
|               |  | Consolidated Statements of Cash Flows
    Nine Months ended September 30, 2002 and 2001 (as restated)                                    |    |      | 5  | 
|               |  | Consolidated Statements of Changes in
    Stockholders Equity
    Nine Months ended September 30, 2002 and 2001 (as restated)           |    |      | 6  | 
|               |  | Notes to Unaudited Consolidated Financial
    Statements                                                                                 |    |      | 7  | 
|ITEM 2.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                |    |      | 16 | 
|ITEM 3.        |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                           |    |      | 40 | 
|ITEM 4.        |  | Controls and Procedures                                                                                                                  |    |      | 40 | 
|               |  | PART II  OTHER
    INFORMATION                                                                                                          |    |      |    | 
|ITEM 1.        |  | Legal Proceedings                                                                                                                        |    |      | 41 | 
|ITEM 2.        |  | Changes in Securities and Use of Proceeds                                                                                                |    |      | 41 | 
|ITEM 5.        |  | Other Information                                                                                                                        |    |      | 41 | 
|ITEM 6.        |  | Exhibits and Reports on Form 8-K                                                                                                         |    |      | 42 | 
|Signatures     |  |                                                                                                                                          | 43 |     
|Certifications |  |                                                                                                                                          | 44 |     



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EXPLANATORY NOTE

This Amendment No. 1 to our Quarterly Report
on Form 10-Q for the fiscal quarter ended
September 30, 2002 is being filed to revise and supplement
certain information provided in response to Item 1:
Unaudited Consolidated Financial Statements and Item 2:
Managements Discussion and Analysis of Financial Condition
and Results of Operations to reflect the completion of the
restatement of our financial statements for the fiscal years
ended December 31, 2000 and 2001 and the fiscal periods
ended March 31, and June 30, 2002. In addition, the
certifications required by 18 U.S.C. Section 1350 and
Rule 13a-14 promulgated under the Securities Exchange Act
of 1934, as amended, accompany this Amendment No. 1.

Except for Note 10 to the Unaudited
Consolidated Financial Statements included in this Amendment
No. 1 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2002, this amendment
does not update information that was presented in our original
Quarterly Report on Form 10-Q to reflect developments that
have occurred since we filed our original Form 10-Q.

Additional information about our company can be
found in the other filings we have made with the Securities and
Exchange Commission.

1



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##### Table of Contents






PART I

FINANCIAL INFORMATION


ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED BALANCE SHEETS


(U.S. dollars)


|                                                                                                                                                                 |                                            |               |               |               |  |   |               |               | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------- | ------------- | ------------- |  | - | ------------- | ------------- | 
|                                                                                                                                                                 |                                            | September 30, |               | December 31, 
|                                                                                                                                                                 |                                            | 2002          |               | 2001         
|                                                                                                                                                                 |                                            |               |               |              
|                                                                                                                                                                 |                                            | (unaudited)   |               | (as restated)
|Assets                                                                                                                                                           |                                            |               |               |               |  |   |               |              
|Cash and cash equivalents                                                                                                                                        |                                            | $             | 120,052,568   |               |  | $ | 104,793,019   |              
|Fixed maturity investments at fair value
    (amortized cost of $338,889,854 and $312,420,719 at
    September 30, 2002 and December 31, 2001)                   |                                            |               | 355,160,595   |               |  |   | 318,987,432   |              
|Funds withheld at interest                                                                                                                                       |                                            |               | 1,415,120,437 |               |  |   | 1,489,689,347 |              
|Accrued investment income                                                                                                                                        |                                            |               | 4,063,797     |               |  |   | 4,897,063     |              
|Receivable for investments sold                                                                                                                                  |                                            |               | 10,814,271    |               |  |   | 23,815        |              
|Receivable for reinsurance ceded                                                                                                                                 |                                            |               | 94,310,286    |               |  |   | 97,807,529    |              
|Deposits and other reinsurance receivables                                                                                                                       |                                            |               | 81,851,829    |               |  |   | 76,139,222    |              
|Deferred policy acquisition costs                                                                                                                                |                                            |               | 228,089,222   |               |  |   | 209,074,192   |              
|Other assets                                                                                                                                                     |                                            |               | 11,195,455    |               |  |   | 9,360,971     |              
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                 | Total Assets                               |               | $             | 2,320,658,460 |  |   | $             | 2,310,772,590 | 
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              
|Liabilities                                                                                                                                                      |                                            |               |               |               |  |   |               |              
|Reserves for future policy benefits                                                                                                                              |                                            | $             | 280,915,909   |               |  | $ | 221,865,755   |              
|Interest sensitive contracts liability                                                                                                                           |                                            |               | 1,464,667,709 |               |  |   | 1,519,596,075 |              
|Other deposit liabilities                                                                                                                                        |                                            |               | 147,000,000   |               |  |   | 137,000,000   |              
|Other reinsurance liabilities                                                                                                                                    |                                            |               | 22,901,107    |               |  |   | 17,340,304    |              
|Payable for investments purchased                                                                                                                                |                                            |               | 10,194,428    |               |  |   | 2,030,516     |              
|Accounts payable and accrued expenses                                                                                                                            |                                            |               | 15,737,008    |               |  |   | 10,751,098    |              
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                 | Total Liabilities                          |               | $             | 1,941,416,161 |  |   | $             | 1,908,583,748 | 
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              
|Stockholders Equity                                                                                                                                             |                                            |               |               |               |  |   |               |              
|Preferred shares (par value $1.00; 50,000,000
    shares authorized; no shares outstanding)                                                                      |                                            | $             |              |               |  | $ |              |              
|Common shares (par value $1.00; 100,000,000
    shares authorized; 26,106,328 and 25,705,328 shares outstanding
    at September 30, 2002 and December 31, 2001) |                                            |               | 26,106,328    |               |  |   | 25,705,328    |              
|Additional paid-in capital                                                                                                                                       |                                            |               | 335,334,932   |               |  |   | 332,447,062   |              
|Notes receivable from stock sales                                                                                                                                |                                            |               | (1,603,076    | )             |  |   | (1,317,259    | )            
|Restricted stock (367,625 shares at
    September 30, 2002)                                                                                                      |                                            |               | (2,747,526    | )             |  |   |              |              
|Accumulated other comprehensive income                                                                                                                           |                                            |               | 16,091,693    |               |  |   | 6,418,469     |              
|Retained earnings                                                                                                                                                |                                            |               | 6,059,948     |               |  |   | 38,935,242    |              
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                 | Total Stockholders Equity                 |               | $             | 379,242,299   |  |   | $             | 402,188,842   | 
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                 | Total Liabilities and Stockholders Equity |               | $             | 2,320,658,460 |  |   | $             | 2,310,772,590 | 
|                                                                                                                                                                 |                                            |               |               |               |  |   |               |              

See accompanying Notes to Unaudited Consolidated
Financial Statements

2



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ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited and in U.S. dollars)


|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |       |             |  
|-------------------------------------------------------------------------------------------- | ------- | -------------------------- | ----------- | ------------------------- | ----------- | ---- | ----------- | ------------- | ----------- | - | ----------- | ----- | ----------- | - | ----------- | ----- | ----------- | -
|                                                                                             |         |                            |             |                          
|                                                                                             |         | For the Three Months Ended |             | For the Nine Months Ended
|                                                                                             |         | September 30,              |             | September 30,            
|                                                                                             |         |                            |             |                          
|                                                                                             |         | 2002                       |             | 2001                      |             | 2002 |             | 2001         
|                                                                                             |         |                            |             |                           |             |      |             |              
|                                                                                             |         |                            |             | (as restated)             |             |      |             | (as restated)
|Revenues                                                                                     |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Net premiums                                                                                 |         | $                          | 84,934,401  |                           |             | $    | 66,813,664  |               |             | $ | 255,007,035 |       |             | $ | 181,955,760 |      
|Investment income, net of related expenses                                                   |         |                            | 31,127,396  |                           |             |      | 24,239,602  |               |             |   | 82,083,855  |       |             |   | 66,934,606  |      
|Net realized investment gains                                                                |         |                            | 9,297,351   |                           |             |      | 1,078,933   |               |             |   | 10,813,315  |       |             |   | 1,425,183   |      
|Net change in fair value of embedded derivatives                                             |         |                            | (13,277,823 | )                         |             |      | (5,265,396  | )             |             |   | (18,254,530 | )     |             |   | (3,567,342  | )    
|Surrender fees and other revenues                                                            |         |                            | 3,549,362   |                           |             |      | 5,512,939   |               |             |   | 13,606,694  |       |             |   | 13,291,100  |      
|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Total Revenues                                                                               |         | $                          | 115,630,687 |                           |             | $    | 92,379,742  |               |             | $ | 343,256,369 |       |             | $ | 260,039,307 |      
|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Benefits and expenses                                                                        |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Claim and policy benefits                                                                    |         | $                          | 91,381,831  |                           |             | $    | 74,873,807  |               |             | $ | 224,640,576 |       |             | $ | 161,699,922 |      
|Interest credited to interest sensitive products                                             |         |                            | 18,345,349  |                           |             |      | 14,401,290  |               |             |   | 57,215,862  |       |             |   | 30,490,167  |      
|Policy acquisition costs and other insurance
    expenses                                    |         |                            | 17,492,342  |                           |             |      | 43,306,421  |               |             |   | 73,700,329  |       |             |   | 95,220,905  |      
|Collateral costs                                                                             |         |                            | 3,731,580   |                           |             |      |            |               |             |   | 6,080,321   |       |             |   |            |      
|Operating expenses                                                                           |         |                            | 3,826,602   |                           |             |      | 2,478,698   |               |             |   | 10,626,666  |       |             |   | 7,832,813   |      
|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Total Benefits and Expenses                                                                  |         | $                          | 134,777,704 |                           |             | $    | 135,060,216 |               |             | $ | 372,263,754 |       |             | $ | 295,243,807 |      
|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Net (loss) before cumulative effect of a change
    in accounting principle                  |         | $                          | (19,147,017 | )                         |             | $    | (42,680,474 | )             |             | $ | (29,007,385 | )     |             | $ | (35,204,500 | )    
|Cumulative effect of a change in accounting
    principle (Note 2)                           |         |                            |            |                           |             |      |            |               |             |   |            |       |             |   | (3,665,735  | )    
|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|                                                                                             |         | Net (Loss)                 |             | $                         | (19,147,017 | )    |             | $             | (42,680,474 | ) |             | $     | (29,007,385 | ) |             | $     | (38,870,235 | )
|                                                                                             |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|Net (loss) per common share before
    cumulative effect of a change in accounting principle |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|                                                                                             | Basic   |                            | $           | (0.74                     | )           |      | $           | (1.66         | )           |   | $           | (1.13 | )           |   | $           | (1.38 | )          
|                                                                                             | Diluted |                            | $           | (0.74                     | )           |      | $           | (1.66         | )           |   | $           | (1.13 | )           |   | $           | (1.38 | )          
|Cumulative effect of a change in accounting
    principle per common share                   |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|                                                                                             | Basic   |                            | $           |                          |             |      | $           |              |             |   | $           |      |             |   | $           | (0.14 | )          
|                                                                                             | Diluted |                            | $           |                          |             |      | $           |              |             |   | $           |      |             |   | $           | (0.14 | )          
|Net (loss) per common share                                                                  |         |                            |             |                           |             |      |             |               |             |   |             |       |             |   |             |      
|                                                                                             | Basic   |                            | $           | (0.74                     | )           |      | $           | (1.66         | )           |   | $           | (1.13 | )           |   | $           | (1.52 | )          
|                                                                                             | Diluted |                            | $           | (0.74                     | )           |      | $           | (1.66         | )           |   | $           | (1.13 | )           |   | $           | (1.52 | )          

See accompanying Notes to Unaudited Consolidated
Financial Statements

3



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME


(Unaudited and in U.S. dollars)


|                                                                      |  |                            |             |                           |  |      |             |               |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------- |  | -------------------------- | ----------- | ------------------------- |  | ---- | ----------- | ------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                      |  |                            |             |                          
|                                                                      |  | For the Three Months Ended |             | For the Nine Months Ended
|                                                                      |  | September 30,              |             | September 30,            
|                                                                      |  |                            |             |                          
|                                                                      |  | 2002                       |             | 2001                      |  | 2002 |             | 2001         
|                                                                      |  |                            |             |                           |  |      |             |              
|                                                                      |  |                            |             | (as restated)             |  |      |             | (as restated)
|Net (loss) for the period                                             |  | $                          | (19,147,017 | )                         |  | $    | (42,680,474 | )             |  | $ | (29,007,385 | ) |  | $ | (38,870,235 | )
|Other comprehensive income:                                           |  |                            |             |                           |  |      |             |               |  |   |             |   |  |   |             |  
|Unrealized holding gains on securities arising
    during the period  |  |                            | 17,633,359  |                           |  |      | 7,740,625   |               |  |   | 20,486,539  |   |  |   | 9,652,655   |  
|Less reclassification adjustment for realized
    gains in net (loss) |  |                            | 9,297,351   |                           |  |      | 1,078,933   |               |  |   | 10,813,315  |   |  |   | 1,425,183   |  
|                                                                      |  |                            |             |                           |  |      |             |               |  |   |             |   |  |   |             |  
|Other comprehensive income                                            |  | $                          | 8,336,008   |                           |  | $    | 6,661,692   |               |  | $ | 9,673,224   |   |  | $ | 8,227,472   |  
|                                                                      |  |                            |             |                           |  |      |             |               |  |   |             |   |  |   |             |  
|Total Comprehensive (Loss)                                            |  | $                          | (10,811,009 | )                         |  | $    | (36,018,782 | )             |  | $ | (19,334,161 | ) |  | $ | (30,642,763 | )
|                                                                      |  |                            |             |                           |  |      |             |               |  |   |             |   |  |   |             |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

4



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited and in U.S. dollars)


|                                                                                  |                                                  |                           |              |               |   |   |              |             |  
|--------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------- | ------------ | ------------- | - | - | ------------ | ----------- | -
|                                                                                  |                                                  |                          
|                                                                                  |                                                  | For the Nine Months Ended
|                                                                                  |                                                  | September 30,            
|                                                                                  |                                                  |                          
|                                                                                  |                                                  | 2002                      |              | 2001         
|                                                                                  |                                                  |                           |              |              
|                                                                                  |                                                  |                           |              | (as restated)
|Cash flows from operating activities                                              |                                                  |                           |              |               |   |   |              |            
|Net (loss)                                                                        |                                                  | $                         | (29,007,385  | )             |   | $ | (38,870,235  | )          
|Adjustments to reconcile net (loss) to cash
    provided by operating activities: |                                                  |                           |              |               |   |   |              |            
|Cumulative effect of change in accounting
    principle                           |                                                  |                           |             |               |   |   | 3,665,735    |            
|Net realized investments (gains)                                                  |                                                  |                           | (10,813,315  | )             |   |   | (1,425,183   | )          
|Net change in fair value of embedded derivatives                                  |                                                  |                           | 18,254,530   |               |   |   | 3,567,342    |            
|Unrealized loss on interest rate swap                                             |                                                  |                           | 2,005,000    |               |   |   |             |            
|Amortization of restricted stock                                                  |                                                  |                           | 541,344      |               |   |   |             |            
|Changes in:                                                                       |                                                  |                           |              |               |   |   |              |            
|Accrued investment income                                                         |                                                  |                           | 833,266      |               |   |   | (288,492     | )          
|Deferred policy acquisition costs                                                 |                                                  |                           | (19,015,030  | )             |   |   | 4,114,995    |            
|Deposits and other reinsurance receivables                                        |                                                  |                           | (2,215,364   | )             |   |   | (19,165,559  | )          
|Other assets                                                                      |                                                  |                           | 1,834,484    |               |   |   | (1,057,573   | )          
|Reserves for future policy benefits                                               |                                                  |                           | 59,050,154   |               |   |   | 39,726,121   |            
|Interest sensitive contracts, net of funds
    withheld                           |                                                  |                           | 1,386,015    |               |   |   | (25,777,751  | )          
|Other reinsurance liabilities                                                     |                                                  |                           | 5,560,803    |               |   |   | 35,146,924   |            
|Accounts payable                                                                  |                                                  |                           | 2,980,910    |               |   |   | 3,329,510    |            
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|                                                                                  | Net cash provided by operating activities        |                           | $            | 27,726,444    |   |   | $            | 2,965,834   |  
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|Cash flows from investing activities                                              |                                                  |                           |              |               |   |   |              |            
|Proceeds from sales of fixed maturity investments                                 |                                                  | $                         | 467,314,155  |               |   | $ | 186,398,746  |            
|Purchase of fixed maturity investments                                            |                                                  |                           | (485,627,324 | )             |   |   | (196,561,747 | )          
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|                                                                                  | Net cash (used) by investing activities          |                           | $            | (18,313,169   | ) |   | $            | (10,163,001 | )
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|Cash flows from financing activities                                              |                                                  |                           |              |               |   |   |              |            
|Issuance of shares                                                                |                                                  | $                         |             |               |   | $ | 2,846,205    |            
|Interest accrued on notes receivable                                              |                                                  |                           | (74,437      | )             |   |   | (78,540      | )          
|Interest collected on notes receivable                                            |                                                  |                           | 38,620       |               |   |   |             |            
|Issuance of note receivable                                                       |                                                  |                           | (250,000     | )             |   |   |             |            
|Dividends paid to stockholders                                                    |                                                  |                           | (3,867,909   | )             |   |   | (3,834,558   | )          
|Increase in deposit liability                                                     |                                                  |                           | 10,000,000   |               |   |   |             |            
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|                                                                                  | Net cash provided (used) by financing activities |                           | $            | 5,846,274     |   |   | $            | (1,066,893  | )
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|Increase (decrease) in cash and cash equivalents                                  |                                                  | $                         | 15,259,549   |               |   | $ | (8,264,060   | )          
|Cash and cash equivalents, beginning of period                                    |                                                  |                           | 104,793,019  |               |   |   | 52,691,974   |            
|                                                                                  |                                                  |                           |              |               |   |   |              |            
|Cash and cash equivalents, end of period                                          |                                                  | $                         | 120,052,568  |               |   | $ | 44,427,914   |            
|                                                                                  |                                                  |                           |              |               |   |   |              |            

See accompanying Notes to Unaudited Consolidated
Financial Statements

5



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY


(Unaudited and in U.S. dollars)


|                                           |  |                           |             |               |  |   |             |  
|------------------------------------------ |  | ------------------------- | ----------- | ------------- |  | - | ----------- | -
|                                           |  |                          
|                                           |  | For the Nine Months Ended
|                                           |  | September 30,            
|                                           |  |                          
|                                           |  | 2002                      |             | 2001         
|                                           |  |                           |             |              
|                                           |  |                           |             | (as restated)
|Preferred shares par value $1.00           |  |                           |             |               |  |   |             |  
|Balance at beginning and end of period     |  | $                         |            |               |  | $ |            |  
|                                           |  |                           |             |               |  |   |             |  
|Common shares par value $1.00              |  |                           |             |               |  |   |             |  
|Balance at beginning of period             |  | $                         | 25,705,328  |               |  | $ | 25,499,999  |  
|Issuance of shares                         |  |                           | 401,000     |               |  |   | 185,829     |  
|                                           |  |                           |             |               |  |   |             |  
|Balance at end of period                   |  | $                         | 26,106,328  |               |  | $ | 25,685,828  |  
|                                           |  |                           |             |               |  |   |             |  
|Additional paid-in capital                 |  |                           |             |               |  |   |             |  
|Balance at beginning of period             |  | $                         | 332,447,062 |               |  | $ | 329,496,091 |  
|Issuance of shares                         |  |                           | 2,887,870   |               |  |   | 2,660,376   |  
|                                           |  |                           |             |               |  |   |             |  
|Balance at end of period                   |  | $                         | 335,334,932 |               |  | $ | 332,156,467 |  
|                                           |  |                           |             |               |  |   |             |  
|Notes receivable from stock sales          |  |                           |             |               |  |   |             |  
|Balance at beginning of period             |  | $                         | (1,317,259  | )             |  | $ | (1,367,241  | )
|Issuance of note receivable                |  |                           | (250,000    | )             |  |   |            |  
|Interest collected on notes receivable     |  |                           | 38,620      |               |  |   |            |  
|Accrued interest during period             |  |                           | (74,437     | )             |  |   | (78,540     | )
|                                           |  |                           |             |               |  |   |             |  
|Balance at end of period                   |  | $                         | (1,603,076  | )             |  | $ | (1,445,781  | )
|                                           |  |                           |             |               |  |   |             |  
|Restricted stock                           |  |                           |             |               |  |   |             |  
|Balance at beginning of period             |  | $                         |            |               |  | $ |            |  
|Issuance of shares                         |  |                           | (3,288,870  | )             |  |   |            |  
|Amortization of restricted stock           |  |                           | 541,344     |               |  |   |            |  
|                                           |  |                           |             |               |  |   |             |  
|Balance at end of period                   |  | $                         | (2,747,526  | )             |  | $ |            |  
|                                           |  |                           |             |               |  |   |             |  
|Accumulated other comprehensive
    income |  |                           |             |               |  |   |             |  
|Balance at beginning of period             |  | $                         | 6,418,469   |               |  | $ | 2,064,971   |  
|Net unrealized gains on securities         |  |                           | 9,673,224   |               |  |   | 8,227,472   |  
|                                           |  |                           |             |               |  |   |             |  
|Balance at end of period                   |  | $                         | 16,091,693  |               |  | $ | 10,292,443  |  
|                                           |  |                           |             |               |  |   |             |  
|Retained earnings                          |  |                           |             |               |  |   |             |  
|Balance at beginning of period             |  | $                         | 38,935,242  |               |  | $ | 84,636,497  |  
|Net (loss)                                 |  |                           | (29,007,385 | )             |  |   | (38,870,235 | )
|Stockholder dividends                      |  |                           | (3,867,909  | )             |  |   | (3,834,558  | )
|                                           |  |                           |             |               |  |   |             |  
|Balance at end of period                   |  | $                         | 6,059,948   |               |  | $ | 41,931,704  |  
|                                           |  |                           |             |               |  |   |             |  
|Total Stockholders Equity                 |  | $                         | 379,242,299 |               |  | $ | 408,620,661 |  
|                                           |  |                           |             |               |  |   |             |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

6



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


1.     Organization

Annuity and Life Re (Holdings), Ltd.
(Holdings) was incorporated on December 2, 1997
under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned
subsidiaries: Annuity and Life Reassurance, Ltd., which is
licensed under the laws of Bermuda as a long term insurer; and
Annuity and Life Re America, Inc., an insurance holding company
based in the United States, and Annuity and Life Reassurance
America, Inc., a life insurance company domiciled in the United
States. Holdings, Annuity and Life Reassurance, Annuity and Life
Re America and Annuity and Life Reassurance America are
collectively referred to herein as the Company.

2.     Restatement

The Company has restated its financial statements
for the fiscal year ended December 31, 2001 to reflect the
application of Statement of Financial Accounting Standard
133  Accounting for Derivative Instruments and
Hedging Activities, which requires the Company to bifurcate and
separately account for embedded derivatives contained in certain
of the Companys annuity reinsurance contracts. The Company
is required to carry these embedded derivatives on its balance
sheet at fair value and the unrealized changes in the value of
these embedded derivatives are reflected in net income as Net
change in fair value of embedded derivatives. The fair value of
these embedded derivatives at January 1, 2001 was a loss of
$3,665,735 and this has been accounted for as a cumulative
effect of a change in accounting principle. The change in fair
value of the Companys embedded derivatives during 2001 was
a gain of $5,029,027. Additionally, an adjustment of $1,320,184
has been made in 2001 to increase the amortization of deferred
acquisition costs to reflect the revised emergence of profits on
the affected reinsurance agreements as a result of the change in
fair value of the embedded derivatives. For the year ended
December 31, 2001, the net impact on reported earnings was
a $43,107 gain.

In the fourth quarter of 2001, the Company
recorded a charge of $33,000,000 in connection with minimum
interest guarantees associated with its largest annuity
reinsurance contract. The $33,000,000 charge was made up of
$13,500,000 of estimated minimum interest guarantee payments
made in 2001 and a $19,500,000 reserve for estimated future
minimum interest guarantee payments. The Company had originally
recorded the $19,500,000 reserve component of the $33,000,000
charge as an increase to its Interest sensitive contracts
liability. In its restated financial statements for the fiscal
year ended December 31, 2001, the Company has reclassified
the $19,500,000 as a write down of deferred acquisition costs.
The reclassification did not change the Companys reported
net (loss) for the year; however, certain components of the
Companys Consolidated Balance Sheet as of
December 31, 2001 and Consolidated Statements of Operations
for the year then ended have changed as a result of this
restatement.

7



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Further, based on information now available to
the Company, the Company has also restated its financial
statements for the fiscal years ended December 31, 2001 and
2000 to recognize approximately $13,500,000 and $2,800,000,
respectively, of minimum interest guarantee payments made in the
periods in which they were paid. The $13,500,000 of payments
made in 2001 were included in the $33,000,000 charge taken in
the fourth quarter of 2001. The Company originally recorded the
full $13,500,000 expense in the fourth quarter of 2001 because
that was the quarter in which the Company first received data
that enabled it to estimate the amount of such payments
accurately. As part of the restatement of the Companys
financial statements for the fiscal year ended December 31,
2001, the $13,500,000 expense has been reallocated to the
quarterly periods in that year in which the payments were made.
Similarly, the Company has recognized the $2,800,000 of minimum
interest guarantee payments made in 2000 as an expense rather
than as a reduction in Interest sensitive contracts liabilities.
There was a corresponding decrease of $1,914,853 in the
amortization of deferred acquisition costs in 2000 as a result
of the minimum interest guarantee payments made in that year.
The net effect on the Companys net income in 2000 was a
reduction of $885,459. The decrease in the amortization of
deferred acquisition costs in 2000 had the effect of increasing
the amount of unamortized deferred acquisition costs as at
December 31, 2000. Because the Company determined that
deferred acquisition costs on the Companys largest annuity
reinsurance contract should be written down to their estimated
recoverable amount during 2001, the write down in costs in 2001
has been adjusted to reflect the increased balance of
unamortized deferred acquisition costs that existed at
December 31, 2000. The impact of this aspect of the
restatement on net income in 2001 was a reduction of $1,914,853.
Certain components of the Companys Consolidated Balance
Sheets as of December 31, 2001 and 2000 and Consolidated
Statements of Operations for the years then ended have changed
as a result of this restatement. Further, the Company has
allocated portions of the $19,500,000 reserve component of the
$33,000,000 charge taken in the fourth quarter of 2001, and a
similar $24,700,000 charge taken in the third quarter of 2001 in
connection with the same contract, across prior quarters in that
year. This reallocation does not affect the reported net (loss)
for the year ended December 31, 2001, but it does affect
reported net income (loss) for each of the quarters in that year.

The following table summarizes the effect of
these changes to the Companys previously issued financial
statements for the fiscal year ended December 31, 2001 and
for the three and nine month periods ended September 30,
2001. The restatement described above had no net effect on the
Companys cash flows provided by operating activities for
the periods then ended, so no information regarding the
Companys Consolidated Statements of Cash Flows is
presented in the table.

|                                                    |  |          |               |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |               | 
|--------------------------------------------------- |  | -------- | ------------- | --------- |  | ---------------- | ---------- | --------- |  | -------- | ----------- | - |  | - | ---------- | - |  | - | ------------- | 
|                                                    |  |          |               |           |  |                 
|                                                    |  |          |               | Effect of |  |                 
|                                                    |  |          |               |           |  |                 
|                                                    |  | As       |               |           |  | Minimum          |            | As       
|                                                    |  | Reported |               | FAS 133   |  | Reclassification |            | Guarantee |  | Restated
|                                                    |  |          |               |           |  |                  |            |           |  |         
|Consolidated balance sheet at
    December 31, 2001 |  |          |               |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |               | 
|Funds withheld at interest                          |  | $        | 1,488,326,056 |           |  | $                | 1,363,291  |           |  | $        |            |   |  | $ |           |   |  | $ | 1,489,689,347 | 
|Deferred acquisition costs                          |  |          | 229,894,376   |           |  |                  | (1,320,184 | )         |  |          | (19,500,000 | ) |  |   |           |   |  |   | 209,074,192   | 
|Interest sensitive contracts liability              |  |          | 1,536,295,763 |           |  |                  |           |           |  |          | (19,500,000 | ) |  |   | 2,800,312  |   |  |   | 1,519,596,075 | 
|Stockholders Equity                                |  |          | 404,946,046   |           |  |                  | 43,107     |           |  |          |            |   |  |   | (2,800,312 | ) |  |   | 402,188,842   | 

8



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                               |  |          |             |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |             |  
|------------------------------------------------------------------------------ |  | -------- | ----------- | --------- |  | ---------------- | ---------- | --------- |  | -------- | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                               |  |          |             |           |  |                 
|                                                                               |  |          |             | Effect of |  |                 
|                                                                               |  |          |             |           |  |                 
|                                                                               |  | As       |             |           |  | Minimum          |            | As       
|                                                                               |  | Reported |             | FAS 133   |  | Reclassification |            | Guarantee |  | Restated
|                                                                               |  |          |             |           |  |                  |            |           |  |         
|Consolidated statements of operations for the
    year ended December 31, 2001 |  |          |             |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |             |  
|Net change in fair value of embedded derivatives                               |  | $        |            |           |  | $                | 5,029,027  |           |  | $        |            |   |  | $ |           |   |  | $ | 5,029,027   |  
|Interest credited to interest sensitive products                               |  |          | 68,758,418  |           |  |                  |           |           |  |          | (19,500,000 | ) |  |   |           |   |  |   | 49,258,418  |  
|Policy acquisition and other insurance expenses                                |  |          | 105,045,512 |           |  |                  | 1,320,184  |           |  |          | 19,500,000  |   |  |   | 1,914,853  |   |  |   | 127,780,549 |  
|Cumulative effect of a change in accounting
    principle                      |  |          |            |           |  |                  | (3,665,735 | )         |  |          |            |   |  |   |           |   |  |   | (3,665,735  | )
|Net (Loss)                                                                     |  |          | (38,709,686 | )         |  |                  | 43,107     |           |  |          |            |   |  |   | (1,914,853 | ) |  |   | (40,581,431 | )

|                                                                                              |  |   |             |   |  |   |            |   |  |   |   |  |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------- |  | - | ----------- | - |  | - | ---------- | - |  | - | - |  |  | - | ----------- | - |  | - | ----------- | -
|Consolidated statements of operations for the
    three month period ended September 30, 2001 |  |   |             |   |  |   |            |   |  |   |   |  |  |   |             |   |  |   |             |  
|Net change in fair value of embedded derivatives                                              |  | $ |            |   |  | $ | (5,265,396 | ) |  | $ |  |  |  | $ |            |   |  | $ | (5,265,396  | )
|Interest credited to interest sensitive products                                              |  |   | 10,001,290  |   |  |   |           |   |  |   |  |  |  |   | 4,400,000   |   |  |   | 14,401,290  |  
|Policy acquisition and other insurance expenses                                               |  |   | 49,117,632  |   |  |   | (269,009   | ) |  |   |  |  |  |   | (5,542,202  | ) |  |   | 43,306,421  |  
|Net (Loss)                                                                                    |  |   | (38,826,289 | ) |  |   | (4,996,387 | ) |  |   |  |  |  |   | 1,142,202   |   |  |   | (42,680,474 | )
|Consolidated statements of operations for the
    nine month period ended September 30, 2001  |  |   |             |   |  |   |            |   |  |   |   |  |  |   |             |   |  |   |             |  
|Net change in fair value of embedded derivatives                                              |  | $ |            |   |  | $ | (3,567,342 | ) |  | $ |  |  |  | $ |            |   |  | $ | (3,567,342  | )
|Interest credited to interest sensitive products                                              |  |   | 21,190,167  |   |  |   |           |   |  |   |  |  |  |   | 9,300,000   |   |  |   | 30,490,167  |  
|Policy acquisition and other insurance expenses                                               |  |   | 86,792,638  |   |  |   | (1,410,724 | ) |  |   |  |  |  |   | 9,838,992   |   |  |   | 95,220,905  |  
|Cumulative effect of a change in accounting
    principle                                     |  |   |            |   |  |   | (3,665,735 | ) |  |   |  |  |  |   |            |   |  |   | (3,665,735  | )
|Net (Loss)                                                                                    |  |   | (13,908,890 | ) |  |   | (5,822,353 | ) |  |   |  |  |  |   | (19,138,992 | ) |  |   | (38,870,235 | )

9



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Basis of
Presentation

The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP) for interim financial
information and in accordance with Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included
in these financial statements. These consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in
the Companys amended Form 10-K for the fiscal year
ended December 31, 2001. In addition to the accounting
policies noted in the Companys amended Form 10-K for
the fiscal year ended December 31, 2001, the Company notes
the following:



| |                                                                       
| | ----------------------------------------------------------------------
| | Reserves for Guarantees Associated with
    Variable Annuity Contracts

The Company reinsures certain minimum guarantees
associated with variable annuity contracts. These include
guaranteed minimum death benefits, guaranteed minimum income
benefits, and enhanced earnings benefits. The Companys
accounting policy is to establish reserves for expected future
claims based upon the long term view of expected losses over the
life of the underlying policies, based upon the original pricing
assumptions. The Companys reserving policy allows the
Company to strengthen reserves if claim amounts or volume exceed
what was anticipated in pricing. During the third quarter of
2002, the Company increased its reserves for minimum guarantees
associated with variable annuities by approximately $7,760,000
as a result of increasing claim activity over recent quarters.
The Company may be required to increase these reserves in future
periods if claims activity continues at the current level or
higher.

The Accounting Standards Executive Committee (a
committee of the American Institute of Certified Public
Accountants) has issued a proposed Statement of Position that
could set a new standard for accounting for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
that, if adopted, could require the Company to establish
additional reserves for certain guarantees associated with
variable annuity contracts. These reserve adjustments will
likely be volatile because they are influenced by the
performance of the financial markets. Had the Company followed
these proposed standards, on December 31, 2001, no reserves
would have been necessary, while on June 30, 2002,
approximately $2 million of reserves would have been
required. Given recent fluctuations in the financial markets,
the reserve required under the proposed standard would have
risen to approximately $22 million by September 30,
2002, and then fallen to approximately $9 million by
October 31, 2002. For all of the periods mentioned, the
assumptions underlying the reserve calculations are the same.
The Company anticipates that this volatility will continue in
future periods and, if the proposed standard is adopted as
currently written, this volatility will affect the
Companys reported results of operations.



| |                    
| | -------------------
| | Interest Rate Swaps

In the third quarter of 2002, the Company entered
into two interest rate swaps with a nominal value of $67,000,000
to manage interest rate risk associated with a deposit liability
whereby the Company is required to pay a variable rate of
interest based upon LIBOR. The interest rate swaps do not meet
the effectiveness criteria specified in FAS 133 to qualify as a
hedge. The swaps are carried at fair value within accounts
payable with the change in fair value recorded as an adjustment
to the income statement item to which they relate. In the third
quarter of 2002, the Company charged approximately $2,155,000
related to these swaps to Collateral costs.

10



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     (Loss) Per
Share

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

|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | ----------------- |  | ---- | ----------- | ------------ |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                             |  |                    |             |                  
|                                                                                                             |  | Three Months Ended |             | Nine Months Ended
|                                                                                                             |  | September 30,      |             | September 30,    
|                                                                                                             |  |                    |             |                  
|                                                                                                             |  | 2002               |             | 2001              |  | 2002 |             | 2001        
|                                                                                                             |  |                    |             |                   |  |      |             |             
|                                                                                                             |  |                    |             | (dollars, as      |  |      |             | (dollars, as
|                                                                                                             |  |                    |             | restated)         |  |      |             | restated)   
|Net (loss) available to common shareholders
    before cumulative effect of a change in accounting principle |  | $                  | (19,147,017 | )                 |  | $    | (42,680,474 | )            |  | $ | (29,007,385 | ) |  | $ | (35,204,500 | )
|Cumulative effect of a change in accounting
    principle                                                    |  |                    |            |                   |  |      |            |              |  |   |            |   |  |   | (3,665,735  | )
|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Net (loss) available to common shareholders                                                                  |  | $                  | (19,147,017 | )                 |  | $    | (42,680,474 | )            |  | $ | (29,007,385 | ) |  | $ | (38,870,235 | )
|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Basic:                                                                                                       |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Weighted average number of common shares
    outstanding                                                     |  |                    | 25,733,141  |                   |  |      | 25,683,328  |              |  |   | 25,722,016  |   |  |   | 25,592,914  |  
|Net (loss) per share before cumulative effect of
    a change in accounting principle                        |  | $                  | (0.74       | )                 |  | $    | (1.66       | )            |  | $ | (1.13       | ) |  | $ | (1.38       | )
|Cumulative effect of a change in accounting
    principle                                                    |  | $                  |            |                   |  | $    |            |              |  | $ |            |   |  | $ | (0.14       | )
|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Net (loss) per share                                                                                         |  | $                  | (0.74       | )                 |  | $    | (1.66       | )            |  | $ | (1.13       | ) |  | $ | (1.52       | )
|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Diluted:                                                                                                     |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Weighted average number of common shares
    outstanding                                                     |  |                    | 25,733,141  |                   |  |      | 25,683,328  |              |  |   | 25,722,016  |   |  |   | 25,592,914  |  
|Net (loss) per share before cumulative effect of
    a change in accounting principle                        |  | $                  | (0.74       | )                 |  | $    | (1.66       | )            |  | $ | (1.13       | ) |  | $ | (1.38       | )
|Cumulative effect of a change in accounting
    principle                                                    |  | $                  |            |                   |  | $    |            |              |  | $ |            |   |  | $ | (0.14       | )
|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  
|Net (loss) per share                                                                                         |  | $                  | (0.74       | )                 |  | $    | (1.66       | )            |  | $ | (1.13       | ) |  | $ | (1.52       | )
|                                                                                                             |  |                    |             |                   |  |      |             |              |  |   |             |   |  |   |             |  

5.     Business
Segments

During the first quarter of 2002, the
Companys management began to separately track financial
results of the Companys life and annuity operations in
segments, as reflected in this report. 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 minimum guarantees
associated with variable annuity products. In addition, as
discussed in Note 2 above, certain of the Companys
modified coinsurance and coinsurance funds withheld annuity
reinsurance agreements have features that constitute embedded
derivatives that require bifurcation and separate accounting
under FAS 133  Accounting for Derivative Instruments
and Hedging Activities. The cumulative effect of the application
of FAS 133 to the agreements through January 1, 2001 and
the change in the fair value of these embedded derivatives are

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ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 allocated to the segments proportionately based
upon the amount of stockholders equity deployed to the
segment. The Company believes that investors will better
understand the Companys profitability, risk profile and
capital deployment through this change. There are no
intersegment transactions. The following table displays several
key measurements for each of our business segments.

|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | -
|Three Months Ended    |  | Life        |             | Annuity     |  |           |               |             
|September 30, 2002    |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                      |  |             |             |             |  |           |               |             
|Revenues              |  | $           | 86,708,167  |             |  | $         | 18,535,565    |              |  | $ | 10,386,955  |  |  | $ | 115,630,687   |  
|Benefits and Expenses |  |             | 96,858,456  |             |  |           | 36,882,014    |              |  |   | 1,037,234   |  |  |   | 134,777,704   |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Segment (Loss) Income |  | $           | (10,150,289 | )           |  | $         | (18,346,449   | )            |  | $ | 9,349,721   |  |  | $ | (19,147,017   | )
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Total Assets          |  | $           | 655,417,016 |             |  | $         | 1,549,867,709 |              |  | $ | 115,373,735 |  |  | $ | 2,320,658,460 |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  

|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|------------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | -
|Three Months Ended        |  | Life        |             | Annuity     |  |           |               |             
|September 30, 2001        |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                          |  |             |             |             |  |           |               |             
|(as restated, see Note 2) |  |             |             |             |  |           |               |             
|Revenues                  |  | $           | 65,951,358  |             |  | $         | 22,025,046    |              |  | $ | 4,403,338   |  |  | $ | 92,379,742    |  
|Benefits and Expenses     |  |             | 86,375,896  |             |  |           | 47,410,846    |              |  |   | 1,273,474   |  |  |   | 135,060,216   |  
|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Segment (Loss) Income     |  | $           | (20,424,538 | )           |  | $         | (25,385,800   | )            |  | $ | 3,129,864   |  |  | $ | (42,680,474   | )
|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Total Assets              |  | $           | 401,683,367 |             |  | $         | 1,713,508,054 |              |  | $ | 218,103,053 |  |  | $ | 2,333,294,474 |  
|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  

|                      |  |   |             |  |  |   |             |   |  |   |            |  |  |   |             |  
|--------------------- |  | - | ----------- |  |  | - | ----------- | - |  | - | ---------- |  |  | - | ----------- | -
|Nine Months Ended     |  |   |             |  |  |   |             |  
|September 30, 2002    |  |   |             |  |  |   |             |  
|                      |  |   |             |  |  |   |             |  
|Revenues              |  | $ | 260,319,388 |  |  | $ | 66,846,669  |   |  | $ | 16,090,312 |  |  | $ | 343,256,369 |  
|Benefits and Expenses |  |   | 256,829,025 |  |  |   | 112,065,166 |   |  |   | 3,369,563  |  |  |   | 372,263,754 |  
|                      |  |   |             |  |  |   |             |   |  |   |            |  |  |   |             |  
|Segment Income (Loss) |  | $ | 3,490,363   |  |  | $ | (45,218,497 | ) |  | $ | 12,720,749 |  |  | $ | (29,007,385 | )
|                      |  |   |             |  |  |   |             |   |  |   |            |  |  |   |             |  

|                                                                                     |  |   |             |   |  |   |             |   |  |   |            |  |  |   |             |  
|------------------------------------------------------------------------------------ |  | - | ----------- | - |  | - | ----------- | - |  | - | ---------- |  |  | - | ----------- | -
|Nine Months Ended                                                                    |  |   |             |   |  |   |             |  
|September 30, 2001                                                                   |  |   |             |   |  |   |             |  
|                                                                                     |  |   |             |   |  |   |             |  
|(as restated, see Note 2)                                                            |  |   |             |   |  |   |             |  
|Revenues                                                                             |  | $ | 179,367,569 |   |  | $ | 68,325,130  |   |  | $ | 12,346,608 |  |  | $ | 260,039,307 |  
|Benefits and Expenses                                                                |  |   | 188,280,834 |   |  |   | 102,659,123 |   |  |   | 4,303,850  |  |  |   | 295,243,807 |  
|                                                                                     |  |   |             |   |  |   |             |   |  |   |            |  |  |   |             |  
|Segment (Loss) Income before cumulative effect of
    change in accounting principle |  |   | (8,913,265  | ) |  |   | (34,333,993 | ) |  |   | 8,042,758  |  |  |   | (35,204,500 | )
|Cumulative effect of a change in accounting
    principle                            |  |   |            |   |  |   | (3,665,735  | ) |  |   |            |  |  |   | (3,665,735  | )
|                                                                                     |  |   |             |   |  |   |             |   |  |   |            |  |  |   |             |  
|Segment (Loss) Income                                                                |  | $ | (8,913,265  | ) |  | $ | (37,999,728 | ) |  | $ | 8,042,758  |  |  | $ | (38,870,235 | )
|                                                                                     |  |   |             |   |  |   |             |   |  |   |            |  |  |   |             |  

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Accounting
Standards

In July 2001, the FASB issued Statement Number
141  Business Combinations and Statement Number
142  Goodwill and Intangible Assets. These statements
changed how the Company accounts for business combinations and
for purchased goodwill and other intangible assets that arise
from these combinations. The Company adopted the new standards
on January 1, 2002.

The standards require that all business
combinations be accounted for using the purchase method and
establish specific criteria for the recognition of intangible
assets separately from goodwill. Under the standards, goodwill
is no longer amortized but will be subject to an impairment test
on at least an annual basis. At September 30, 2002 and
December 31, 2001, Other assets included unamortized
goodwill of $2.1 million. Goodwill amortization for the
year ended December 31, 2001 was $116,000.

7.     Related Party
Transactions

In the first quarter of 2002, the Company
purchased a $10,000,000 excess of loss reinsurance policy from a
subsidiary of XL Capital Ltd, a related party, to provide
protection against minimum interest guarantee payments under the
Companys annuity reinsurance contract with Transamerica
Occidental Life Insurance Company occurring after
January 1, 2002, in excess of a $33,000,000 deductible. The
premium paid for this protection was $1.5 million.

Also during the first quarter of 2002, the
Company purchased an aggregate catastrophe excess of loss cover
from a subsidiary of XL Capital providing protection from a
single event, excluding acts of terrorism, causing a claim for
more than five policyholders. The premium for this coverage was
$1,000,000.

8.     Restricted
Stock

In 2002, the Company adopted a restricted stock
incentive compensation program and made two awards to employees.
Under the first award to employees, the Company issued
133,500 shares of restricted stock that vest on the third
anniversary of the grant date. Under the second award, certain
employees of the Company were irrevocably offered an aggregate
267,500 shares of restricted stock, conditioned upon the
execution of a retention agreement with the Company. These
shares vest in three equal annual installments commencing on the
first anniversary of the grant date. The fair value of the
restricted stock awards on the date of award and assuming all
shares vest was $3,289,000, which is reflected in the
Companys balance sheet as common stock and paid in
capital. The fair value of these grants is being amortized on a
straight line basis over the three year vesting period. The
unamortized balance of the grants is reflected in the balance
sheet as restricted stock.

9.     Contingencies

During the second quarter of 2002, the Company
initiated arbitration proceedings in connection with two of its
life reinsurance agreements. During the third quarter of 2002,
the Company settled its arbitration with one of the ceding
companies, resulting in the recapture by that company of the
contract that had been the subject of the arbitration. The
impact of that contract on the third quarter, including the
recapture, was a net loss of $6,189,000. With respect to the
remaining life arbitration claim, the Company is seeking
monetary damages and/or equitable relief from the ceding company
based upon its contention that the ceding company failed to
disclose material facts, known to them, about the block of
business being reinsured when it was underwritten. No assurance
can be given that monetary recovery or equitable relief will
occur.

On January 21, 2002, the Company served
written notice of arbitration in connection with the
Companys annuity reinsurance contract with Transamerica
Occidental Life Insurance Company. In the arbitration, the
Company was seeking monetary damages and/or equitable relief
from Transamerica based on the Companys claim that certain
actions and/or omissions by Transamerica deprived the Company of
the benefit of the reinsurance transaction. On November 8,
2002, the Company announced that its claim against Transamerica

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

had been denied by the arbitration panel assigned
to the matter. The arbitration panel upheld Transamericas
position that the Companys annuity reinsurance contract
was a valid and enforceable contract and that Transamerica had
acted in a commercially reasonable manner.

Based on the Companys projections of its
ceding companies statutory reserve cessions, in order to
satisfy its obligations under its existing reinsurance
agreements, the Company will need to post up to approximately
$210.0 million of additional collateral by
December 31, 2002. The Company will seek to meet or reduce
these additional security requirements by negotiating the
recapture, retrocession or sale of certain of its reinsurance
agreements, accessing its collateral funding facility and/or
raising capital. The Company has not been able to successfully
raise capital or access its collateral funding facility in
recent months given, among other things, the uncompleted
restatement of the Companys financial statements for 2000
and 2001. If the Company is unable to meet the security
requirements of its cedents, the Company may be required to
cease writing new business and the Company may be in violation
of its existing reinsurance contracts and become subject to the
remedies set forth therein. The Companys cedents may also
ask that the agreements be recaptured. These recaptures could
result in losses, but could also improve the Companys
liquidity and its ability to meet the collateral requirements of
its remaining cedents.

The Company currently has unsecured letters of
credit of approximately $49,000,000 outstanding under a letter
of credit facility with Citibank. In October 2002, Citibank
agreed to extend this unsecured letter of credit facility into
next year in exchange for the Companys agreement to
secure, or otherwise eliminate, the letter of credit facility by
June 30, 2003.

As of September 30, 2002, the Company had
$45,000,000 of unsecured letters of credit outstanding under a
letter of credit facility with Manulife Financial that had been
posted as security to allow the Companys United States
operating subsidiary to take credit on its statutory financial
statements for reinsurance ceded to the Companys Bermuda
operating company. During October of 2002, Manulife requested
that the unsecured letters of credit it had issued on the
Companys behalf be secured. Consequently, in November
2002, the Companys Bermuda operating subsidiary deposited
$15,000,000 with the Companys United States operating
subsidiary as funds withheld. Further, one of the Companys
United States operating subsidiarys ceding companies has
recaptured its contracts, reducing the subsidiarys
collateral needs by an additional $15,000,000. The Company has
committed to securing or eliminating the remaining $15,000,000
in letters of credit issued by Manulife under the Companys
letter of credit facility by December 31, 2002. Due to
Manulifes request to secure its letter of credit facility
and the Companys inability thus far to post sufficient
security for the Companys United States operating
subsidiary, the Connecticut Insurance Department has requested
that all financial transactions, except those related to the
normal course of business, between the Company and its United
States operating subsidiary be preapproved by the insurance
department.

10.     Going Concern
and Subsequent Events

The accompanying unaudited consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. However, the
Company incurred significant operating losses in the second and
third quarters of 2002, and has announced that it anticipates
reporting a significant loss for the year 2002. Further, the
financial strength ratings of the Companys operating
subsidiaries were downgraded in July, 2002 by A.M. Best,
Standard & Poors, and Fitch Ratings, and there have
been further downgrades since that date. Also, the Company is
required to post collateral for the statutory reserves ceded to
it by U.S. based insurers and reinsurers. The Company did not
have sufficient available cash and investments to satisfy the
collateral requirements asserted by its cedents as of
December 31, 2002 under certain of its reinsurance
treaties. The Companys cedents now assert that the Company
must satisfy additional collateral requirements of approximately
$140 million, which includes collateral requirements
asserted as of December 31, 2002 and additional collateral
requirements asserted since that date. The Company is currently
analyzing these asserted collateral

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ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

requirements and has not concluded that such
amounts are in fact required to be posted as collateral under
the relevant reinsurance contracts. Certain providers of letters
of credit issued on behalf of the Company totaling approximately
$59 million have also demanded the return or
collateralization of those letters of credit. As a result of the
Companys inability to satisfy its obligations, certain
parties have claimed that the Company is in breach of its
agreements. As a consequence, certain parties have sought and
others may seek remedies for such claimed breaches by the
Company, and the Company may be required to enter into
arbitration or litigation proceedings with those parties. The
Company has also been served with a statutory demand under
Bermuda law related to the Companys alleged failure to
satisfy certain obligations. If such statutory demand is held to
be valid and the Company is unable to satisfy the related
obligations, the party making such demand would be entitled to
institute proceedings seeking the liquidation of the Company.

On November 20, 2002, the State of
Connecticut Insurance Department indicated that it is monitoring
the financial condition of the Companys United States
operating subsidiary and requested that certain financial
transactions entered into by the subsidiary, including the
disposal of assets, payment of dividends and settlement of
inter-company balances with the Companys Bermuda operating
subsidiary, be pre-approved by the Insurance Department.

The Company engaged a financial advisor in
September 2002 to assist it in seeking to raise capital, but the
Company has not been able to successfully raise new capital to
date. The Company has ceased to write new business and has
notified its existing clients that it will not be accepting any
new business under existing treaties on their current terms.
These aforementioned factors raise substantial doubt about the
Companys ability to continue as a going concern.

The Companys plans involve attempting to
meet or reduce the additional collateral requirements of its
ceding companies by continuing to negotiate the recapture,
retrocession, novation or sale of certain of its reinsurance
agreements, although there can be no assurance that the Company
will be able to negotiate favorable terms for such transactions.
The Company has also announced substantial premium rate
increases on all of its non-guaranteed premium yearly renewable
term contracts.

There can be no assurance that the Companys
plans will be successful in improving its operations and
liquidity. If the Company is not successful in implementing its
plans, management believes that the Company will not be able to
satisfy its obligations in 2003. The accompanying unaudited
consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue
as a going concern.

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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.

The business of reinsurance generally consists of
reinsurers, such as Annuity and Life Re, entering into
contractual arrangements (known as treaties) with primary
insurers (known as ceding companies or cedents) whereby the
reinsurer agrees to indemnify the ceding company for all or a
portion of the risks associated with an underlying insurance
policy in exchange for a reinsurance premium payable to the
reinsurer. Reinsurers also may enter into retrocessional
reinsurance arrangements with other reinsurers, which operate in
a manner similar to the underlying reinsurance arrangement
described above. Under retrocessional reinsurance arrangements,
the reinsurer shifts a portion of the risk associated with an
underlying reinsurance contract to other reinsurers.

Reinsurance agreements may be written on an
automatic treaty basis or facultative basis. An automatic treaty
provides for a ceding company to cede contractually agreed-upon
risks on identified types of business that meet established
criteria to a reinsurer and binds that reinsurer to accept such
risks without obtaining further approval from that reinsurer.
Facultative reinsurance is the reinsurance of individual risks,
which allows a reinsurer the opportunity to analyze and
separately underwrite a risk before agreeing to accept the risk.
Both automatic treaty and facultative reinsurance may be written
on either a quota share basis, where a percentage of each risk
in the reinsured class of risk is assumed by the reinsurer from
the ceding company, or an excess of retention basis, where the
amount of risk of each life in excess of the ceding
companys retention is reinsured. Under either basis,
premiums are paid to the reinsurer in proportion to the risk
assumed by the reinsurer. Reinsurance can also be on an excess
of loss basis, where a reinsurer indemnifies the ceding company
for a portion of claims exceeding a specified amount retained by
the ceding company in consideration of non-proportional premiums
being paid to the reinsurer. The reinsurers obligation
under an excess of loss contract may be limited to a specified
amount of such excess claim.

We write reinsurance generally in the form of
yearly renewable term, coinsurance, modified coinsurance or
coinsurance funds withheld. Under yearly renewable term, we
share only in the mortality risk for which we receive a premium.
In coinsurance, modified coinsurance and coinsurance funds
withheld arrangements, we generally share proportionately in all
or a portion of the risks inherent in the underlying policies,
including mortality, persistency and fluctuations in investment
results. Under such agreements, we agree to indemnify the
primary insurer for all or a portion of the risks associated
with the underlying insurance policies in exchange for a
proportionate share of premiums. Coinsurance differs from
modified coinsurance and coinsurance funds withheld with respect
to ownership of the assets supporting the reserves. Under our
coinsurance arrangements, ownership of these assets is
transferred to us, whereas, in modified coinsurance and
coinsurance funds withheld arrangements, the ceding company
retains ownership of these assets, but we share in the
investment income and risk associated with the assets.

Our reinsurance treaties may provide for
recapture rights, permitting the ceding company to reassume all
or a portion of the risk ceded to us after an agreed-upon period
of time (generally 10 years for our life reinsurance
treaties), subject to certain other conditions. Some of our
reinsurance treaties allow the ceding company to recapture the
ceded risk if we fail to maintain a specified rating or if other
financial conditions relating to us are not satisfied. Recapture
of business previously ceded does not affect earned premiums
paid to us prior to the recapture of such business and may
involve the payment to us of a recapture fee. Nevertheless, we
may have to liquidate substantial assets in order to return the
assets supporting the reserve liabilities. In addition, we would
no longer be entitled to receive any investment income from the
premiums paid by the policyholders underlying the recaptured
business and, consequently, we may have to accelerate the
amortiza-

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##### Table of Contents



tion of any unamortized deferred acquisition
costs associated with the recaptured business, which would
reduce our earnings.


Risks Reinsured

We write reinsurance predominantly on a direct
basis with primary life insurance companies. Our major business
lines are traditional life reinsurance and annuity reinsurance,
which expose us to the following categories of risks:
(i) mortality, (ii) investment, (iii) persistency
(or lapse) and (iv) expense.

Mortality risk is the risk that death claims
differ from what we expect. With respect to our life segment, a
greater frequency or higher average size of death claims than we
expected can cause us to pay greater death benefits, adversely
affecting the profitability of our reinsurance contracts. Even
if the total death benefits paid over the life of our contracts
do not exceed the expected amount, unexpected timing of deaths,
such as occurred with the attack on the World Trade Center, can
cause us to pay more death benefits in a given time period than
expected, adversely impacting profitability in that period. We
try to address these risks by analyzing each block of business
based on an evaluation of the ceding companys underwriting
efficacy, history, management, target market, concentration of
risk, products and underwriting criteria relative to the
industry. We target primarily first dollar quota
share pools of top producing direct writing companies under
which we participate proportionately with other reinsurers on
all of the ceded risks. We seek to mitigate our risk of exposure
to any one block of business or any one individual life by
typically requiring our ceding companies to retain at least 10%
of every life insurance risk reinsured. We further address the
risk of any one large claim by limiting our own net liability on
any single-life risk to $1,000,000. Certain of the annuity
policies we reinsure are in the payout phase, and are therefore
subject to the risk that policyholders will survive for longer
periods than we assumed when pricing the reinsurance contract.
If policyholders live longer than we assumed, we may be required
to pay greater than expected annuity payout benefits in future
periods.

We are subject to investment risk with respect to
our own investments and with respect to the assets held and
managed by our ceding companies or others under our modified
coinsurance and coinsurance funds withheld arrangements. Our
investments, which primarily consist of investment grade fixed
income securities, are subject to interest rate and credit risk.
Significant changes in interest rates expose us to the risk of
earning less income during periods when interest rates are
falling, or realizing losses if we are forced to sell securities
during periods when interest rates are rising. We are also
subject to prepayment risk on certain securities in our
investment portfolio, including mortgage-backed securities and
collateralized mortgage obligations, which generally prepay
faster during periods of falling interest rates as the
underlying mortgage loans are repaid and refinanced by borrowers
in order to take advantage of lower interest rates.

Our cedents have over $1.4 billion in assets
that are held and managed by or for them under our modified
coinsurance and coinsurance funds withheld arrangements. While
we do not own these assets, they are used to fund our
obligations under our annuity reinsurance contracts. We record a
receivable called Funds withheld at interest based
on the amounts due to us under these contracts and are exposed
to the risks associated with the securities the assets
supporting the receivable are invested in. Those assets are
primarily invested in fixed income securities and, with respect
to our largest annuity reinsurance contract, in investment grade
convertible bonds. The fixed income securities in which the
assets are invested are subject to risks similar to those
described above with respect to our own investments. The value
of convertible bonds in which these assets are invested is a
function of their investment value (determined by comparing
their yield with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege)
and their conversion value (their market value if converted into
the underlying common stock). The investment value of
convertible bonds is influenced by changes in interest rates,
with investment value declining as interest rates increase and
increasing as interest rates decline, and by the credit standing
of the issuer and other factors. The conversion value of
convertible bonds is determined by the market price of the
underlying common stock. If the conversion price is above the
market value of the underlying common stock, the price of the
convertible bonds is governed principally by their investment
value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of
the convertible bonds will be increasingly influenced by their
conversion value. Consequently, the value of convertible bonds
may be influenced by changes in the equity markets.

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##### Table of Contents



We are also subject to investment risk based on
the difference between the interest rates earned on the
investments managed by us or our ceding companies and the
credited interest rates paid under policies reinsured by us.
Both rising and declining interest rates can affect the income
we derive from these interest rate spreads. During periods in
which prevailing market interest rates are falling, any new
investments made in fixed income securities to replace
investments that mature or are prepaid will likely bear lower
interest rates, reducing our investment income. We may not be
able to fully offset the decline in our investment income with
lower crediting rates on our contracts for the reinsurance of
annuities or life insurance policies with cash value components.
During periods of rising interest rates, our ceding companies
may need to increase the crediting rates on the annuities or
life insurance policies with cash value components that we
reinsure. We may not, however, be able to acquire investments
with interest rates sufficient to offset these increased
crediting rates. Significant declines in the financial markets
generally also increase our investment risk, because the return
we receive on our assets may not be sufficient to fully offset
the cost of benefits due under certain reinsured policies.
Certain policy benefits, such as guaranteed minimum death
benefits, ratchet up the death benefit when
policyholder account values increase, but do not reduce the
death benefit when policyholder account values decrease. During
periods in which the general value of the financial markets and
policyholder account values are falling, claims from such
guaranteed minimum death benefits increase because the spread
between the policyholder account value and the ratcheted-up
death benefit increases. Further, because the premiums charged
for such benefits are based on policyholder account values, we
would receive reduced premiums for this benefit when financial
markets are declining.

We may use interest rate swaps and other hedging
instruments as tools to mitigate the effects of asset/ liability
mismatches or the effect of interest rate changes on our balance
sheet. In general, however, we have not hedged our investment
risk, but we may do so in the future.

Persistency or lapse risk is the risk that
policyholders maintain their policies for different periods of
time than expected. This includes policy surrenders and policy
lapses. Surrenders are the voluntary termination of a policy by
the policyholder, while lapses are the termination of the policy
due to non-payment of premium. Surrender and lapse rates that
are higher than what we assumed when pricing a contract can
cause us to increase the rate of amortization of our deferred
acquisition costs for the annuity policies and certain types of
life insurance that we reinsure, which would adversely affect
our results of operations. If the actual surrender and lapse
rates remain too high for too long, as has been the case with
our annuity reinsurance contract with Transamerica Occidental
Life Insurance Company, we may conclude that the contract could
be unprofitable over its expected lifetime, and we could be
required to write down our deferred acquisition costs.
Surrenders also usually involve the return of the policys
cash surrender value to the policyholder, which reduces the
asset base on which we earn investment income and, in some
cases, premiums. In addition, with respect to our Transamerica
contract, a surrendering policyholder is entitled to a
guaranteed minimum interest rate on his or her invested
premiums, and we are required to pay our proportionate share of
any shortfall between that guaranteed amount and the actual
value of the policyholders account. We have been required
to make significant minimum interest guarantee payments under
this contract, as discussed below. During periods in which the
financial markets are falling, increases in partial surrenders
under certain reinsurance policies do not reduce the guaranteed
minimum death benefits we are obligated to pay by the same
proportion by which the premiums supporting the guaranteed
minimum death benefit obligations are reduced. The risk of
partial surrenders impacting our guaranteed minimum death
benefit obligations may have an effect on the profitability of
our largest reinsurance contract reinsuring such benefits.

Certain of our life reinsurance products provide
level premiums to us for a fixed period of time, typically 10 to
20 years. The premiums we receive on these level premium
contracts exceed the death benefits payable to the underlying
policyholders during the early years of the contract. The death
benefits we expect to pay under these contracts generally
increase over time, while the premiums we receive are expected
to generally remain level, so the death benefits payable under
the policy ultimately exceed the premiums we receive in later
years. With respect to these level premium contracts, if the
surrender and lapse rates of the policies are significantly
lower than we assumed when pricing the reinsurance contract, the
profitability of the contract may be adversely affected.

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Expense risk is the risk that our actual expenses
will be higher than we anticipated, or that our operations are
less efficient than anticipated.

Business Written

The following table sets forth selected
information for the indicated periods concerning our insurance
operations:

Policy Revenues, Insurance in Force and
Annuity Reinsurance Deposits

|                                                   |                     |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |   |            |             | 
|-------------------------------------------------- | ------------------- | ----------------- | ------------- | -------------------------------- | ----------- | ----------- | ------------- | ---------- | ----------- | ----------- | ------------- | ---------- | ---------- | ----------- | ------------- | - | ---------- | ----------- | 
|                                                   |                     |                   |               |                                 
|                                                   |                     | Nine Months Ended |               | Twelve Months Ended December 31,
|                                                   |                     | September 30,     |               |                                 
|                                                   |                     | 2002              |               | 2001                             |             | 2000        |               | 1999      
|                                                   |                     |                   |               |                                  |             |             |               |           
|Policy revenues                                    |                     |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |  
|                                                   | Life reinsurance    |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |   |           
|                                                   |                     | First year        |               | $                                | 71,463,760  |             |               | $          | 94,746,734  |             |               | $          | 55,047,163 |             |               | $ | 72,268,437 |            
|                                                   |                     | Renewal           |               |                                  | 175,435,259 |             |               |            | 141,607,931 |             |               |            | 96,151,918 |             |               |   | 28,566,570 |            
|                                                   | Annuity reinsurance |                   |               | 8,108,016                        |             |             |               | 15,438,572 |             |             |               | 17,204,941 |            |             |               |  |           
|                                                   |                     |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |  
|                                                   |                     |                   | Total         |                                  | $           | 255,007,035 |               |            | $           | 251,793,237 |               |            | $          | 168,404,022 |               |   | $          | 100,835,007 | 
|                                                   |                     |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |  
|Insurance in force at end of period (in thousands) |                     | $                 | 150,948,700   |                                  |             | $           | 117,400,000   |            |             | $           | 77,019,000    |            |            | $           | 45,407,000    |  
|                                                   |                     |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |  
|Annuity reinsurance deposits                       |                     | $                 | 1,464,667,709 |                                  |             | $           | 1,519,596,075 |            |             | $           | 1,597,928,818 |            |            | $           | 1,603,382,955 |  
|                                                   |                     |                   |               |                                  |             |             |               |            |             |             |               |            |            |             |               |  

Our life reinsurance segment is the reinsurance
of ordinary life insurance, primarily for mortality risks.
Ordinary life reinsurance generally is the reinsurance of
individual term life insurance policies, whole life insurance
policies and joint and survivor insurance policies on yearly
renewable term basis. In addition, we reinsure the mortality
risk inherent in universal life insurance policies, variable
universal life insurance policies and variable life insurance
policies.

Our annuity reinsurance segment is the
reinsurance of general account fixed deferred annuities, general
account payout annuity obligations and certain risks arising
from variable annuities. With respect to the general account
fixed annuities we reinsure, our agreements generally relate to
individual general account single premium deferred annuity
policies, which either involve the tax-deferred accumulation of
interest on a single premium paid by the policyholder
(accumulation phase policies) or are annuities that pay fixed
amounts periodically to policyholders over a fixed period of
time or their lives (payout phase policies). Accumulation phase
policies are subject primarily to investment risk and
persistency (lapse) risk, while payout phase policies are
primarily subject to investment risk and mortality (longevity)
risk. Most of the fixed annuities we reinsure are accumulation
phase policies. All of the fixed annuity products we reinsure
have minimum interest guarantee provisions required under state
law that entitle the policyholder to a specified minimum annual
return over the life of the policy. These lifetime guarantees
are typically 3% to 3.5% annually. Further, policyholders are
typically guaranteed interest rates in excess of the state
required minimums for the initial year of the policy. After the
expiration of the period in which the crediting rate is
guaranteed, the primary insurer has the discretionary ability to
adjust the crediting rate annually to any rate at or above the
guaranteed minimum rate required under state law. Policyholders
are typically permitted to withdraw all or a part of their
premium paid, plus an accumulation amount equal to the accrued
interest credited to the account, subject to the assessment of a
surrender charge for withdrawals in excess of specified limits.

Certain policies reinsured by us guarantee the
policyholder a crediting rate beyond the initial policy year,
including those policies covered by our annuity reinsurance
contract with The Ohio National Life Insurance Company. In
addition to the lifetime minimum guaranteed interest rate
required under state law, the Ohio

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National policies reinsured by us guarantee a
crediting rate to the policyholders for six years. During that
six year period, each years crediting rate is guaranteed
to exceed the prior years actual crediting rate by 0.15%.
For the nine months ended September 30, 2002 and the fiscal
year ended December 31, 2001, the average crediting rate of
the policies underlying the Ohio National contract was 5.3% and
5.6%, respectively. The average yield rate on the assets managed
by Ohio National that are funding these policyholder obligations
for the nine month period ended September 30, 2002 and the
fiscal year ended December 31, 2001 was 7.36% and 7.91%,
respectively. The Ohio National reinsurance contract is our
second largest annuity reinsurance contract and represented
approximately 25% and 15% of our Funds withheld receivable as of
September 30, 2002 and December 31, 2001, respectively.


Under our Transamerica annuity reinsurance
contract, the minimum interest guarantee provisions take effect
when the policyholder dies, his or her policy annuitizes or his
or her policy is surrendered. Our aggregate minimum interest
guarantee exposure under this contract equals our proportionate
share of the amount by which each policyholders premiums
deposited compounded at the minimum guarantee interest rate
exceeds the policyholders actual account value. The actual
account value is calculated after expenses are deducted from the
gross investment returns and such expenses generally accrue at a
rate of approximately 2.75% of the assets annually. Our minimum
interest guarantee exposure is calculated on a policyholder by
policyholder basis. The amount by which the value of certain
policyholder accounts exceeds the minimum guarantee amount with
respect to those accounts does not offset our exposure to the
amount by which the value of other policyholder accounts is less
than the minimum guarantee amount with respect to such other
accounts. This exposure generally arises during periods in which
investment returns fall near or below the minimum guaranteed
rate, as has occurred in recent years.

If we conclude that we are exposed to these
minimum interest guarantees under a reinsurance contract, we
then estimate the expected minimum interest guarantee payments
that we may be required to make by projecting the anticipated
future investment performance of the assets supporting the
policyholder accounts and by applying projected surrender,
annuitization and mortality assumptions to the exposed amounts.
Because we assume that the investment performance of the
underlying assets will exceed the minimum guaranteed interest
rate on the underlying annuity policies over their life, we
anticipate that any minimum interest guarantee exposure we have
will decrease over time. The amount of expected minimum interest
guarantee payments is therefore dependent upon our estimate of
the number of policyholders that will die, annuitize or
surrender their policy prior to the value of the underlying
assets increasing to a level where it equals or exceeds the
policyholders minimum guarantee amounts. Our minimum
interest guarantee exposure can increase during any period in
which the actual investment performance of the underlying assets
less expenses lags the minimum guaranteed interest rate.

We also reinsure certain guarantees associated
with variable annuity contracts, including guaranteed minimum
death benefits, enhanced earnings benefits and guaranteed
minimum income benefits. Under contracts with a guaranteed
minimum death benefit, a policyholders beneficiary is
entitled upon the policyholders death to receive the
greater of the policyholders account value or a guaranteed
minimum benefit payment. The majority of the guaranteed minimum
death benefit contracts we reinsure are written on a
ratchet basis, which means that the guaranteed
minimum death benefit payable to the policyholders
beneficiary equals the highest policyholder account value
achieved over the course of the contract, as measured annually
on each anniversary date of the policy until the policyholder
reaches the attained age under the policy (typically
80 years of age). Other guaranteed minimum death benefit
contracts are written on a roll-up basis, which
means that the guaranteed minimum death benefit equals the
premiums paid by the policyholder compounded at a defined
interest rate (typically 3% to 6%), which accrues until the
policyholder reaches the attained age or the roll-up death
benefit reaches a predetermined amount, typically double the
premiums paid. Some policies offer an enhanced version of the
guaranteed minimum death benefit, under which the
policyholders beneficiary receives the greater of the
actual cash value, the ratcheted value or the roll-up value.
Such policies may be particularly disadvantageous to us in light
of the recent extended decline in the financial markets.
Regardless of whether a policy is written on a ratchet or a
roll-up basis, if the policyholder survives beyond the policy
maturity date, which is typically when the policyholder reaches
90 years of age, he or she is no longer entitled to receive
the guaranteed minimum death benefit amount.

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Before that time, the issuer of the policy bears
the risk that protracted under-performance of the financial
markets could result in guaranteed minimum death benefits
payable to the policyholders beneficiary upon the
policyholders death that are higher than the actual
policyholder account value. As a reinsurer, we are obligated to
reimburse the issuer of such policies for our share of any
shortfall between the guaranteed minimum death benefit amount
and the actual policyholder account values upon death.


We have entered into two large contracts
reinsuring guaranteed minimum death benefits. As of
September 30, 2002, the guaranteed minimum death benefit
amount at risk (i.e., the amount by which guaranteed death
benefits exceed related account values) under our largest such
contract was approximately $1.2 billion. Also as of
September 30, 2002, the guaranteed minimum death benefit
amount at risk under the other such contract was between
$37 million and $175 million, depending on the
resolution of a dispute between our ceding company under the
contract and one of the primary carriers from which it had
assumed risk. These amounts are an aggregate measure of our
exposure to guaranteed minimum death benefits assuming 100%
mortality experience at September 30, 2002. Our expected
liability for future guaranteed minimum death benefit payments,
based on our mortality assumptions, is substantially less.
Because the premium paid to the ceding company under our largest
such reinsurance agreement, and to us under that reinsurance
agreement, is derived from asset-based charges levied against
the account value, there may be circumstances during periods of
reduced performance in the financial markets when we could be
under compensated for reinsuring the guaranteed minimum death
benefit. Under our largest such reinsurance agreement, we are
subject to additional risks beyond those described above when
the underlying policies are partially surrendered. Unlike the
policies underlying the other such reinsurance contract, the
policies underlying our largest such agreement provide that the
guaranteed minimum death benefit is not proportionally reduced
when a policyholder withdraws some, but not all, of the policy
value (a partial surrender), but rather is reduced on a dollar
for dollar basis. As a result, partial surrenders of those
underlying policies do not reduce the guaranteed minimum death
benefits we are obligated to pay by the same proportion by which
the premiums supporting the guaranteed minimum death benefit
obligations are reduced. However, under that same reinsurance
agreement, the maximum amount of guaranteed minimum death
benefit payments we would have to make in a calendar year would
be limited to no more than 2% of the aggregate account values of
all of the underlying policyholders in that calendar year. Any
partial surrenders of the underlying policies will reduce the
aggregate account value and may lower the amount of payments we
could be required to make. The account values would, however,
have to decline substantially for the 2% cap to have any
meaningful effect.

Policies with the enhanced earnings benefit
provide that if a policyholder dies prior to the maturity date
of his or her policy, the issuer of the policy will pay the
policyholders beneficiary the death benefit otherwise
payable under the policy plus an additional amount generally
equal to 25% to 40% of the actual increase in the
policyholders account value. The enhanced earnings benefit
is designed to increase the total payments to the policyholder
with an amount sufficient to pay income taxes on the increase in
the account value. Our net amount at risk under our largest
reinsurance contract reinsuring this benefit is less than
$250,000.

Policies providing a guaranteed minimum income
benefit entitle a policyholder to purchase a lifetime annuity
payment stream after the expiration of a stipulated waiting
period of at least 7 years based upon the initial premium
paid by the policyholder compounded at a predetermined rate,
usually 3% or 6%, depending on the age of the policyholder. The
annuity purchase rate used to calculate the income stream the
policyholder is entitled to receive is a predetermined rate that
is based upon more conservative investment and mortality
assumptions than would otherwise be used to calculate prevailing
annuity purchase rates following the expiration of the waiting
period. We are subject to investment risk to the extent that
investment returns on the assets supporting the liabilities
under these policies will not be sufficient to fund the payment
stream the policyholder is entitled to receive. However, because
the annuity purchase rates applicable to the guaranteed minimum
income benefits are often less favorable than prevailing annuity
purchase rates when the underlying policy annuitizes,
policyholders may receive a preferable stream of annuity
payments using the actual account value at prevailing annuity
purchase rates as opposed to utilizing the predetermined
guaranteed minimum income benefit purchase rate under the
policy. To the degree this occurs, any difference in annuity
purchase rates will offset the investment risk. Because none of
the guaranteed minimum income benefit policies we reinsure have
reached the end of the stipulated waiting period, we cannot
estimate accurately the effect the

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unfavorable annuity purchase rates will have on
policyholders desire to utilize this benefit under various
market conditions.


Critical Accounting Policies

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require our
management to make estimates and assumptions that affect the
amounts of our assets, liabilities, stockholders equity
and net income. We believe that the following critical
accounting policies, as well as those set forth in our amended
Form 10-K for the year ended December 31, 2001, detail
the more significant estimates and assumptions used in the
preparation of our consolidated financial statements.

In preparing our financial statements, we make
assumptions about our proportionate share of future investment
income that will be earned from the investment of premiums
received from underlying policyholders by our ceding companies
and about future rates of lapse of policies underlying our
annuity reinsurance contracts when estimating expected gross
profits arising from such contracts. These assumptions have a
direct impact on the amount of estimated expected gross profits
arising from these annuity reinsurance contracts and, therefore,
on the recoverability of the deferred acquisition costs carried
on our balance sheet for these contracts. While these estimates
are based upon historical results and information provided to us
by our cedents, actual results could differ (and, in the past,
have differed) materially from our estimates for a variety of
reasons, including the failure of our ceding companies to report
timely information regarding material developments under our
reinsurance agreements. Such differences could be material to
our future results. If our assumptions for investment returns
prove to be inaccurate, or if lapse rates exceed our
assumptions, we may be required to record additional charges,
which would adversely impact our earnings.

We have concluded that there are embedded
derivatives within the Funds withheld at interest receivable
related to certain of our annuity reinsurance contracts written
on a modified coinsurance or coinsurance funds withheld basis
that require bifurcation and separate accounting under Statement
of Financial Accounting Standards No. 133 
Accounting for Derivative Instruments and Hedging Activities.
These embedded derivatives are similar to a total return swap
arrangement on the underlying assets held by our ceding
companies. The net fair value of these embedded derivatives is
classified as part of our Funds withheld asset on our Balance
Sheet. We have developed a cash flow model with the assistance
of outside advisors to arrive at an estimate of the fair value
of this total return swap that uses various assumptions
regarding future cash flows under the affected annuity
reinsurance contracts. The change in fair value of these
embedded derivatives is recorded in our statement of operations
as Net change in fair value of embedded derivatives, which is a
non cash item. The change in fair value of these embedded
derivatives also impacts the emergence of expected gross profits
for purposes of amortizing deferred acquisition costs associated
with these contracts. The application of this accounting policy
has increased the volatility of our reported earnings. While we
have made an estimate of the fair value of these embedded
derivatives using a model that we believe to be appropriate and
based upon reasonable assumptions, the assumptions used are
subjective and may require adjustment in the future. In
addition, as industry standards for estimating the fair value of
embedded derivatives develop, it is possible that we may modify
our methodology. Changes in our assumptions and industry
standards could have a significant impact on the fair value of
the embedded derivatives and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives
contained in certain of our contracts, including our
Transamerica annuity reinsurance agreement, because we acquired
those agreements prior to the transition date elected by us
under FAS 133, as amended by FAS 137. Because of the
nature of the assets underlying our Transamerica contract, which
were roughly 67% convertible bonds at September 30, 2002,
the bifurcation and separate accounting for the embedded
derivatives contained in that contract would add significant
volatility to our reported results.

We reinsure certain minimum guarantees associated
with variable annuity contracts. These include guaranteed
minimum death benefits, guaranteed minimum income benefits, and
enhanced earnings benefits. Our accounting policy is to
establish reserves for expected future claims based upon the
long term view of expected losses over the life of the
underlying policies, based upon the original pricing
assumptions. Our reserving policy allows us to strengthen
reserves if reported claim amounts or volume exceed what was

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anticipated in pricing. During the third quarter
of 2002, we increased our reserves for minimum guarantees
associated with variable annuities by approximately $7,760,000
as a result of increasing claim activity in recent quarters. We
may be required to increase these reserves in future periods if
claim activity continues at the current level or higher.


The Accounting Standards Executive Committee (a
committee of the American Institute of Certified Public
Accountants) has issued a proposed Statement of Position that
could set a new standard for accounting for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
that, if adopted, could require us to establish additional
reserves for certain guarantees associated with variable annuity
contracts. These reserve adjustments will likely be volatile
because they are influenced by the performance of the financial
markets. Had we followed this proposed standard, on
December 31, 2001, no reserves would have been necessary,
while on June 30, 2002, approximately $2 million in
reserves would have been required. Given recent fluctuations in
the financial markets, the reserve required under the proposed
standard would have risen to approximately $22 million by
September 30, 2002, and then fallen to approximately
$9 million by October 31, 2002. For all of the periods
mentioned, the assumptions underlying the reserve calculations
are the same. We anticipate that this volatility will continue
in future periods and, if the proposed standard is adopted, this
volatility will affect our reported results of operations.

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

Operating Results

Net (Loss).For the
three month period ended September 30, 2002, we had a net
loss of $(19,147,000) or $(0.74) per basic and fully diluted
common share, as compared to a net loss of $(42,680,000) or
$(1.66) per basic and fully diluted common share for the three
month period ended September 30, 2001. For the nine month
period ended September 30, 2002, we had a net loss of
$(29,007,000) or $(1.13) per basic and fully diluted common
share, as compared to a net loss of $(38,870,000) or $(1.52) per
basic and fully diluted common share for the nine month period
ended September 30, 2001. The following table summarizes
some of the more significant items affecting net income:

|                                                                                            |  |                      |             |                     |  |      |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------- |  | -------------------- | ----------- | ------------------- |  | ---- | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                            |  |                      |             |                    
|                                                                                            |  | For the Three Months |             | For the Nine Months
|                                                                                            |  | Ended September 30,  |             | Ended September 30,
|                                                                                            |  |                      |             |                    
|                                                                                            |  | 2002                 |             | 2001                |  | 2002 |             | 2001
|                                                                                            |  |                      |             |                     |  |      |             |     
|Cumulative effect of a change in accounting
    principle(1)                                |  | $                    |            |                     |  | $    |            |      |  | $ |            |   |  | $ | (3,665,735  | )
|Net change in fair value of embedded derivative(1)                                          |  |                      | (13,277,823 | )                   |  |      | (5,265,396  | )    |  |   | (18,254,530 | ) |  |   | (3,567,342  | )
|Change in amortization of deferred acquisition
    costs related to embedded derivatives(1) |  |                      | 5,790,244   |                     |  |      | 269,009     |      |  |   | 7,292,964   |   |  |   | 1,410,724   |  
|Transamerica contract deferred acquisition cost
    write downs(1)                          |  |                      |            |                     |  |      | (19,157,798 | )    |  |   | (24,796,000 | ) |  |   | (34,538,991 | )
|Variable annuity minimum guarantee reserve
    strengthening                                |  |                      | (7,760,000  | )                   |  |      |            |      |  |   | (7,760,000  | ) |  |   |            |  
|Variable annuity minimum guarantee payments in
    excess of premiums                       |  |                      | (3,117,100  | )                   |  |      | 1,364,121   |      |  |   | (2,171,700  | ) |  |   | 3,735,923   |  
|World Trade Center                                                                          |  |                      |            |                     |  |      | (12,000,000 | )    |  |   |            |   |  |   | (12,000,000 | )
|Net realized investment gains                                                               |  |                      | 9,297,351   |                     |  |      | 1,078,933   |      |  |   | 10,813,315  |   |  |   | 1,425,183   |  
|Unrealized loss on interest rate swap                                                       |  |                      | (2,005,000  | )                   |  |      |            |      |  |   | (2,005,000  | ) |  |   |            |  
|                                                                                            |  |                      |             |                     |  |      |             |      |  |   |             |   |  |   |             |  
|Total of significant items                                                                  |  | $                    | (11,072,328 | )                   |  | $    | (33,711,131 | )    |  | $ | (36,880,950 | ) |  | $ | (47,200,238 | )
|                                                                                            |  |                      |             |                     |  |      |             |      |  |   |             |   |  |   |             |  



|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(1) | Certain of these numbers have been restated. See
    Note 2 to our Unaudited Consolidated Financial Statements.

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The cumulative effect of a change in accounting
principle reflected in the nine month period ended
September 30, 2001 is the result of our implementation of
FAS 133  Accounting for Derivative Instruments
and Hedging Activities as of the first quarter of 2001. Under
FAS 133, we are required to carry the fair value of the
embedded derivatives contained in certain of our annuity
reinsurance contracts on our balance sheet, and unrealized
changes in the fair value of those embedded derivatives are
reflected in our net income. The change in fair value of the
embedded derivatives is influenced by changes in credit risk,
yield curve shifts, changes in expected future cash flows under
the annuity reinsurance contracts and, to a lesser extent,
interest rate changes. The change in fair value also impacts the
emergence of expected gross profits under the contracts for
purposes of amortizing deferred acquisition costs. During the
three and nine month periods ended September 30, 2002, the
fair value of the embedded derivatives declined significantly
because of credit spreads widening in the sectors in which the
underlying investments are held, particularly in the
telecommunications and energy sectors. The unrealized losses on
the fair value of the embedded derivatives in each of the three
and nine month periods ended September 30, 2001 and 2002
resulted in lower amortization of deferred acquisition costs in
those periods.

Our net income is significantly affected by our
annuity reinsurance contract with Transamerica, which is our
largest annuity reinsurance contract and represents
approximately $769 million, or 54%, of our Funds withheld
at interest receivable as of September 30, 2002. The
significant losses associated with the Transamerica contract
during the nine months ended September 30, 2002 were the
result of a write down of deferred acquisition costs associated
with the contract, as well as minimum interest guarantee
payments made under the contract. The $24,796,000 write down of
deferred acquisition costs associated with the Transamerica
Contract in the second quarter of 2002 was the result of the
continued poor performance of the financial markets during the
first half of 2002, which caused us to reassess the assumptions
we used in estimating the impact expected future minimum
interest guarantee payments would have on the profits arising
from this contract. We recorded similar write downs of our
deferred acquisition cost asset of $34,500,000 during the nine
month period ended September 30, 2001, $19,158,000 of which
was recorded in the three month period ended September 30,
2001. A significant portion of the charges recorded in 2001
related to the high surrender rates on the polices underlying
the contract, which caused us to review the recoverability of
the deferred acquisition costs associated with this contract,
and to expected minimum interest guarantee payments. Minimum
interest guarantee payments under the contract for the three and
nine month periods ended September 30, 2002 were
approximately $9,070,000 and $22,422,000, respectively, as
compared with minimum interest guarantee payments of $4,400,000
and $9,300,000, respectively, for the three and nine month
periods ended September 30, 2001.

We also recorded losses associated with our
contracts that reinsure guarantees associated with variable
annuity contracts, including guaranteed minimum death benefits,
of $10,877,000 and $9,932,000 during the three and nine month
periods ended September 30, 2002. These losses were the
result of the protracted decline in the financial markets, which
has caused the guaranteed minimum death benefits payable to the
beneficiaries of certain policyholders to exceed the account
values for such policyholders upon their death. These losses
also include a $7,760,000 increase during the third quarter of
2002 in reserves for these guarantees, which we recorded in
light of increasing claims activity in recent quarters.

The Accounting Standards Executive Committee (a
committee of the American Institute of Certified Public
Accountants) has issued a proposed Statement of Position that
could set a new standard for accounting for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
that, if adopted, could require us to establish additional
reserves for our variable annuity death benefit guarantee
contracts. These reserve adjustments will likely be volatile
because they are influenced by the performance of the financial
markets. Had we followed this proposed standard, on
December 31, 2001, no reserves would have been necessary,
while on June 30, 2002, approximately $2 million in
reserves would have been required. Given recent fluctuations in
the financial markets, the reserves required under the proposed
standard would have risen to approximately $22 million by
September 30, 2002, and then fallen to approximately
$9 million by October 31, 2002. For all of the periods
mentioned, the assumptions underlying the reserve calculations
are the same. We anticipate that this volatility will continue
in future periods and, if the proposed standard is adopted, this
volatility will affect our reported results of operations.

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Our net income for the three and nine month
periods ended September 30, 2001 was significantly affected
by the World Trade Center tragedy. We recorded an expense of
$12,000,000 in the third quarter of 2001 in connection with
claims we received as a result of that event.

Net realized investment gains for the three and
nine month periods ended September 30, 2002 were $9,297,000
and $10,813,000, respectively, as compared with $1,079,000 and
$1,425,000 for the comparable periods of 2001. These gains
resulted from normal management of our investment portfolio
intended to improve performance and increase future operating
income. We do not consider realized gains and losses resulting
from sales of our invested assets to be recurring components of
earnings. We make decisions concerning the sales of our invested
assets based on a variety of market, business and other factors.

We also recorded an expense of $2,005,000 in the
third quarter of 2002 in connection with the change in fair
value of two interest rate swaps entered into during that
quarter.

In addition to each of the items discussed above,
our Net loss for the three month period ended September 30,
2002 also increased relative to the comparable prior period of
2001 as a result of higher than anticipated mortality experience
under certain of our life reinsurance contracts and variability
in the timing of the receipt of premiums. The three and nine
month periods ended September 30, 2001 and 2002 were both
negatively affected by adverse mortality experience on certain
of our life reinsurance contracts, including significant losses
on our life reinsurance contract with Lincoln National, which
was recaptured in the third quarter of 2002.

Net Premiums.Net
premium revenue for the three and nine month periods ended
September 30, 2002 was $84,934,000 and $255,007,000,
respectively, as compared to $66,814,000 and $181,956,000 for
the three and nine month periods ended September 30, 2001.
Substantially all the premium revenue was derived from
traditional ordinary life reinsurance. The growth in premium
revenue reflects the level of new business written and the
increase in the face amount of insurance in force. We expect
premium growth to slow following the ratings downgrade by A.M.
Best, Standard & Poors, and Fitch Ratings. At
September 30, 2002, the total face amount of life insurance
in force was $151 billion compared with approximately
$104 billion at September 30, 2001, a 45% increase.
New business writings and premium levels are significantly
influenced by the seasonal nature of the life reinsurance
marketplace and by large transactions and therefore may
fluctuate from period to period.

Net Investment
Income.Net investment income for the
three and nine month periods ended September 30, 2002 was
$31,127,000 and $82,084,000, respectively, as compared with
$24,240,000 and $66,935,000, respectively, for the comparable
prior periods of 2001. The increases in investment income are
primarily due to investment income on the reinvestment of a
deposit of $147,000,000 received from a reinsurer that is used
to fund collateral requirements of our ceding companies. The
average annualized yield rate earned on our invested assets,
excluding Funds withheld, for the nine months ended
September 30, 2002 was approximately 5.28%, as compared
with 6.34% for the nine months ended September 30, 2001.
The decline in yield reflects our higher than normal commitment
to cash during the nine months ended September 30, 2002 as
a result of receiving a $137,000,000 deposit late in the fourth
quarter of 2001 and a generally lower interest rate environment.

Income earned on Funds Withheld for the three and
nine month periods ended September 30, 2002 was $25,282,000
and $63,004,000, respectively, as compared to $19,440,000 and
$52,054,000, respectively, for the comparable prior periods of
2001. The increases in investment income on our Funds withheld
are primarily due to the growth of our Ohio National reinsurance
contract. The average annualized yield rate earned on Funds
withheld was approximately 5.90% for the nine months ended
September 30, 2002, compared with 4.34% for the nine months
ended September 30, 2001. For purposes of calculating the
average annualized yield rate earned on our Funds withheld,
which are held and managed by our ceding companies, we include
net realized capital gains and losses as reported to us by our
ceding companies in accordance with statutory accounting
principles. The increase in yield on our Funds withheld is
primarily due to the increasing size of the asset base
underlying our contract with Ohio National relative to the
shrinking size of the asset base underlying our contract with
Transamerica.

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Net Change in Fair Value of Embedded
Derivatives.Embedded derivative gains
and losses represent changes in the value of embedded
derivatives hosted by certain of our fixed annuity reinsurance
contracts. For the three and nine month periods ended
September 30, 2002, the change in fair value of our
embedded derivatives was an unrealized loss of $(13,278,000) and
$(18,255,000), respectively. For the three and nine month
periods ended September 30, 2001, the change in fair value
of our embedded derivatives was an unrealized loss of
$(5,265,000) and $(3,567,000), respectively. The unrealized loss
in the embedded derivatives during the three and nine month
periods ended September 30, 2002 was primarily the result
of credit spreads widening in the sectors in which the
underlying investments are held, particularly in the
telecommunications and energy sectors. The unrealized losses in
the embedded derivatives during the three and nine month periods
ending September 30, 2001 were related to repositioning of
the portfolio to increase spreads.

Surrender Fees and Other
Revenue.Surrender fees and other
revenue for the three and nine month periods ended
September 30, 2002 were $3,549,000 and $13,607,000,
respectively, as compared with $5,513,000 and $13,291,000,
respectively, for the three and nine month periods ended
September 30, 2001. This income is primarily derived from
surrender fees related to our fixed annuity products. The
decline in revenue for the three months ended September 30,
2002, as compared to the three months ended September 30,
2001, is primarily due to a lower volume of surrenders of
policies underlying our Transamerica contract. Similarly, the
volume of surrenders during the nine month periods ended
September 30, 2002 and September 30, 2001 remained
relatively constant, so there was little change in the amount of
surrender fees received by us over those comparable periods.

Claims and Policy
Benefits.Claims and policy benefits
for the three month periods ended September 30, 2002 and
2001 were $91,382,000 and $74,874,000, or 108% and 112%,
respectively, of net premium. For the nine month periods ended
September 30, 2002 and 2001, claims and policy benefits
were $224,641,000 and $161,700,000, or 88% and 89% of net
premium, respectively. During the three months ended
September 30, 2002, we experienced an increase in the level
of claims reported to us relative to the level of premiums
reported to us and strengthened our reserves for guaranteed
minimum death benefits by $7,760,000. In addition, we incurred
additional costs in connection with Lincoln Nationals
recapture of business it had previously ceded to us, effective
August 1, 2002. We are currently in arbitration on another
life reinsurance contract that has generated mortality
experience beyond our pricing parameters, and is producing
losses. If we are unable to rescind, recapture, reprice, or
otherwise restructure this agreement, we may incur additional
losses in future periods. Although we expect mortality to be
fairly constant over long periods of time, it will fluctuate
from period to period. For example, the three and nine months
ended September 30, 2001 were adversely impacted by the
World Trade Center tragedy. Reserves for future policy benefits
are determined by claims reported from ceding companies, our
aggregate experience, seasonal claim patterns and overall
mortality trends.

Interest Credited to Interest Sensitive
Products.Interest credited to
Interest sensitive products, which are liabilities we assume
under certain annuity reinsurance agreements, for the three and
nine month periods ended September 30, 2002 was $18,345,000
and $57,216,000, respectively, as compared with $14,401,000 and
$30,490,000 for the comparable prior periods in 2001. Also
included in Interest credited to interest sensitive products for
the three and nine month periods ended September 30, 2002
are minimum interest guarantee payments of approximately
$9,070,000 and $22,422,000, respectively, as compared to minimum
interest guarantee payments of $4,400,000 and $9,300,000 for the
comparable prior periods in 2001. The increases in the three and
nine month periods ended September 30, 2002 were primarily
caused by the aforementioned minimum guarantee payments and by
growth in the policyholder liability arising in connection with
our reinsurance agreement with Ohio National, partially offset
by a decrease in the size of our liability under our reinsurance
agreement with Transamerica due to surrenders.

Policy Acquisition and Other Insurance
Expenses.Policy acquisition and other
insurance expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, for the three
and nine month periods ended September 30, 2002 were
$17,492,000 and $73,700,000, respectively, and $43,306,000 and
$95,221,000 for the comparable prior periods in 2001. The nine
months ended September 30, 2002 included the write down of
$24,796,000 of deferred acquisition costs associated with our
annuity reinsurance

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contract with Transamerica in the second quarter
of 2002 due to the impact of expected minimum interest guarantee
payments on our expected gross profits on the contract.
Similarly, the nine month period ended September 30, 2001
included a write down of $34,500,000 of deferred acquisition
costs associated with the same contract due to exposure to
minimum interest guarantee payments and higher than expected
surrender rates on the underlying policies.


Collateral Costs.Collateral costs comprise fees charged by a reinsurer to provide
cash deposits to us. These deposits are used to fund excess
statutory reserve requirements of our clients and are recorded
on our consolidated balance sheet as a deposit liability. These
costs were $3,732,000 and $6,080,000 for the three and nine
month periods ended September 30, 2002, respectively. The
fees in connection with the facility are determined, in part, by
the amount of the deposits received by us. The fees also have a
variable component tied to LIBOR rates. In the third quarter of
2002, we entered into two interest rate swaps pursuant to which
we effectively transferred a portion of the risk that these
variable fees will increase to a third party. The cost of these
swaps to us during the third quarter of 2002 was approximately
$2,155,000, and is included in our collateral costs. That amount
includes $2,005,000 related to the change in the fair value of
the swap, which we record as an expense. Because the collateral
funding facility was not in place until the fourth quarter of
2001, no costs were incurred for the nine months ended
September 30, 2001.

Operating Expenses.Operating expenses for the three months ended September 30,
2002 were $3,827,000 or 3.0% of total revenue (excluding the net
change in fair value of embedded derivatives) compared with
$2,479,000 or 2.5% of total revenue (excluding the net change in
fair value of embedded derivatives) for three months ended
September 30, 2001. Operating expenses for the nine months
ended September 30, 2002 were $10,627,000 or 2.9% of total
revenue (excluding the net change in fair value of embedded
derivatives) compared with $7,833,000 or 3.0% of total revenue
(excluding the net change in fair value of embedded derivatives)
for the nine months ended September 30, 2001. We have
incurred a higher than normal level of legal, consulting, audit,
and other expenses during the three and nine month periods ended
September 30, 2002 related to our efforts to raise capital
and the review of our prior public filings by the Securities and
Exchange Commission.

Segment Results

During the first quarter of 2002, we began to
separately track financial results of our 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. In addition, as discussed in Note 2 to the
financial statements included in this report, certain of our
modified coinsurance and coinsurance funds withheld annuity
reinsurance agreements have features that constitute embedded
derivatives that require bifurcation and separate accounting
under FAS 133  Accounting for Derivative
Instruments and Hedging Activities. The cumulative effect of the
application of FAS 133 through January 1, 2001 and the
change in the fair value of these embedded derivatives since
that date 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 our
portfolio and investment income on undeployed invested assets.
Operating expenses are allocated to the segments proportionately
based upon the amount of stockholders equity deployed to
the segment. We believe that investors will better understand
our profitability, risk profile and capital deployment through
this change.

Life Segment.Our
life segment is our largest segment as measured by
profitability. Our life segment income (loss) for the three and
nine month periods ended September 30, 2002 was
$(10,150,000) and

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$3,490,000, compared with a loss of $(20,425,000)
and $(8,913,000) for the comparable prior periods of 2001. The
following table summarizes some of the significant items
affecting life segment income:


|                           |                                       |                            |            |                           |   |      |             |             |   |   |            |            |   |   |             |             |  
|-------------------------- | ------------------------------------- | -------------------------- | ---------- | ------------------------- | - | ---- | ----------- | ----------- | - | - | ---------- | ---------- | - | - | ----------- | ----------- | -
|                           |                                       |                            |            |                          
|                           |                                       | For the Three Months Ended |            | For the Nine Months Ended
|                           |                                       | September 30,              |            | September 30,            
|                           |                                       |                            |            |                          
|                           |                                       | 2002                       |            | 2001                      |   | 2002 |             | 2001       
|                           |                                       |                            |            |                           |   |      |             |            
|                           | World Trade Center                    |                            | $          |                          |   |      | $           | (12,000,000 | ) |   | $          |           |   |   | $           | (12,000,000 | )
|                           | Unrealized loss on interest rate swap |                            |            | (2,005,000                | ) |      |             |            |   |   |            | (2,005,000 | ) |   |             |            |  
|                           |                                       |                            |            |                           |   |      |             |             |   |   |            |            |   |   |             |            
|Total of significant items |                                       | $                          | (2,005,000 | )                         |   | $    | (12,000,000 | )           |   | $ | (2,005,000 | )          |   | $ | (12,000,000 | )          
|                           |                                       |                            |            |                           |   |      |             |             |   |   |            |            |   |   |             |            

The three and nine month periods ended
September 30, 2001 were significantly affected by the World
Trade Center tragedy. We recorded an expense of $12,000,000 in
the third quarter of 2001 in connection with claims we received
as a result of that event. The three and nine month periods
ended September 2002 were affected by an unrealized loss of
$2,005,000 related to the change in fair value of two interest
rate swaps entered into during the third quarter of 2002.

In the third quarter of 2002, Lincoln National
recaptured its life reinsurance contract with us. We incurred
losses under this contract of $6,189,000 and $6,988,000 during
the three and nine month periods ended September 30, 2002
as a result of mortality experience that was higher than we
anticipated when we priced the contract and certain costs we
incurred in connection with the recapture of the contract. We
had also incurred losses under this contract of $7,883,000
during the three and nine month periods ended September 30,
2001 as a result of higher than anticipated mortality
experience. Because the contract has been recaptured by Lincoln
National, the contract will not have a negative effect on our
net income in future periods.

Segment Net loss also increased in the three
month period ended September 30, 2002 relative to the
comparable prior period in 2001 as a result of higher than
anticipated mortality experience under certain of our life
reinsurance contracts and variability in the timing of the
receipt of premiums. We believe that some of the adverse
mortality experience may be the result of the late reporting of
claims by our cedents. Segment Net income (loss) for the nine
month periods ended September 30, 2001 and 2002 were both
negatively affected by adverse mortality experience on certain
of our life reinsurance contracts, including our life
reinsurance contract with Lincoln National.

Segment revenues grew 31% to $86,708,000 from
$65,951,000 in the three months ended September 30, 2002
compared to the comparable period of 2001, and 45% to
$260,319,000 from $179,367,000 for the nine months ended
September 30, 2002 compared to the comparable period of
2001. Our revenue growth was primarily related to a 42% growth
in life premium to $246,899,000 during the nine months ended
September 30, 2002, as compared to $174,236,000 during the
nine months ended September 30, 2001, reflecting an
increase of life reinsurance in force from $117 billion at
December 31, 2001 to $151 billion at
September 30, 2002. For both the three and nine month
periods ended September 30, 2002, the balance of the growth
in revenue was derived from investment income earned on the
reinvestment of funds deposited with us by a third party
reinsurer that we use to fund collateral requirements of our
clients. However, diminishing investment returns due to the
recent poor performance of the financial markets and our
inability to access additional funds under our collateral
funding facility due to, among other things, the uncompleted
restatement of our financial statements, have caused life
segment revenue growth to slow during the quarter ended
September 30, 2002, and may adversely affect life segment
revenue in the future. In addition, we have significant
obligations coming due in the next several weeks and months that
will require us to use most or all of any capital raised to
satisfy these existing obligations rather than to collateralize
new business.

Segment policy benefits and expenses for the
three months ended September 30, 2002 increased 12% to
$96,858,000 from $86,376,000 in the comparable prior period of
2001, and 36% for the nine months ended September 30, 2002
to $256,829,000 from $188,281,000 for the comparable prior
period of 2001. Both increases reflect the increase in premium
volume and face amount of insurance in force. Segment benefits
and expenses for the three and nine month periods ended
September 30, 2002 include collateral costs of

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$3,732,000 and $6,080,000 associated with our
collateral funding facility that were not present for the
comparable periods in 2001. Overall expenses and benefits for
the three and nine month periods ending September 30, 2002,
excluding the impact of Lincoln National and the other life
reinsurance contract that is currently in arbitration, were
slightly higher than our expectations. A greater frequency or
average higher size of death claims than we expected can cause
us to pay greater death benefits, adversely affecting the
profitability of our life reinsurance contracts. Even if total
death benefits paid over the life of our life reinsurance
contracts do not exceed the expected amount, unexpected timing
of deaths can cause us to pay more death benefits in a given
time period than expected, adversely impacting profitability in
that period, as happened this quarter.


For the nine months ended September 30, 2002
the life segment return on equity was 2.5% with a return on
revenue of 1.3%.

Annuity Segment.Our
annuity segment contains the majority of our assets. While we
would expect it be a small contributor to our net income, it
contains significant volatility from two sources. First, under
FAS 133  Accounting for Derivative Instruments
and Hedging Activities we must value embedded derivatives in
certain of our annuity reinsurance agreements. This unrealized
change in the value of the derivative is reported in our income
statement each quarter. The change in the value of the
derivative can be large, and is driven by financial market
conditions, most notably credit risk related changes. Second,
our Transamerica annuity reinsurance contract has exhibited
volatility due to write downs of our deferred acquisition cost
balance which are based upon managements estimates of
future investment performance and lapse experience. In 2001, we
determined that our Transamerica annuity contract was in a loss
position, and wrote down approximately $46,115,000 of deferred
acquisition costs. We also purchased $10.0 million of
reinsurance from a subsidiary of XL Capital, a related party,
for a premium of $1.5 million, to provide an additional
layer of protection against minimum interest guarantee payments
under the Transamerica contract. During the second quarter of
2002, we wrote down an additional $24,796,000 of deferred
acquisition costs based on revised estimates of expected gross
profits on this contract. Our expected gross profits were
reduced due to poor investment performance which triggered
minimum interest guarantee payments for surrendered policies
under the contract. In estimating the $46,115,000 and
$24,796,000 write downs, we were required to make estimates,
including estimates of future lapse rates on the underlying
business and future investment income on the assets supporting
this business, each of which impact our estimates of future
minimum interest guarantee payments. Our annuity reinsurance
contract with Transamerica is not expected to generate net
income going forward. There can be no assurance that our
estimates will prove to be accurate, and if they do not, we may
be required to recognize additional losses.

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Our annuity segment loss for the three and nine
month periods ended September 30, 2002 was $(18,346,000)
and $(45,218,000), respectively, compared with a loss of
$(25,386,000) and $(38,000,000) for the comparable prior periods
of 2001. The following table summarizes the significant items
affecting annuity segment income:

|                           |                                                                                             |                            |             |                           |   |      |             |             |   |   |             |             |   |   |             |             |  
|-------------------------- | ------------------------------------------------------------------------------------------- | -------------------------- | ----------- | ------------------------- | - | ---- | ----------- | ----------- | - | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                           |                                                                                             |                            |             |                          
|                           |                                                                                             | For the Three Months Ended |             | For the Nine Months Ended
|                           |                                                                                             | September 30,              |             | September 30,            
|                           |                                                                                             |                            |             |                          
|                           |                                                                                             | 2002                       |             | 2001                      |   | 2002 |             | 2001       
|                           |                                                                                             |                            |             |                           |   |      |             |            
|                           | Cumulative effect of a change in accounting
    principle(1)                                |                            | $           |                          |   |      | $           |            |   |   | $           |            |   |   | $           | (3,665,735  | )
|                           | Net change in fair value of embedded
    derivatives(1)                                     |                            |             | (13,277,823               | ) |      |             | (5,265,396  | ) |   |             | (18,254,530 | ) |   |             | (3,567,342  | )
|                           | Change in amortization of deferred acquisition
    costs related to embedded derivatives(1) |                            |             | 5,790,244                 |   |      |             | 269,009     |   |   |             | 7,292,964   |   |   |             | 1,410,724   |  
|                           | Transamerica contract deferred acquisition cost
    write downs(1)                          |                            |             |                          |   |      |             | (19,157,798 | ) |   |             | (24,796,000 | ) |   |             | (34,538,991 | )
|                           | Variable annuity minimum guarantee reserve
    strengthening                                |                            |             | (7,760,000                | ) |      |             |            |   |   |             | (7,760,000  | ) |   |             |            |  
|                           | Variable annuity minimum guarantee payments in
    excess of premiums                       |                            |             | (3,117,100                | ) |      |             | 1,364,121   |   |   |             | (2,171,700  | ) |   |             | 3,735,923   |  
|                           |                                                                                             |                            |             |                           |   |      |             |             |   |   |             |             |   |   |             |            
|Total of significant items |                                                                                             | $                          | (18,364,679 | )                         |   | $    | (22,790,064 | )           |   | $ | (45,689,266 | )           |   | $ | (36,625,421 | )          
|                           |                                                                                             |                            |             |                           |   |      |             |             |   |   |             |             |   |   |             |            



---



|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(1) | Certain of these numbers have been restated. See
    Note 2 to our Unaudited Consolidated Financial Statements.

The cumulative effect of a change in accounting
principle reflected in the nine month period ended
September 30, 2001 is the result of our implementation of
FAS 133  Accounting for Derivative Instruments
and Hedging Activities as of the first quarter of 2001. Under
FAS 133, we are required to carry the fair value of the
embedded derivatives contained in certain of our annuity
reinsurance contracts on our Balance Sheet, and unrealized
changes in the fair value of those embedded derivatives are
reflected in our net income. The change in fair value of the
embedded derivatives is influenced by changes in credit risk,
yield curve shifts, changes in expected future cash flows under
the annuity reinsurance contracts and, to a lesser extent,
interest rate changes. The change in fair value also impacts the
emergence of expected gross profits under the contracts for
purposes of amortizing deferred acquisition costs. During the
three and nine month periods ended September 30, 2002, the
fair value of the embedded derivatives declined significantly
because of credit spreads widening in the sectors in which the
underlying investments are held, particularly in the
telecommunications and energy sectors. The unrealized losses on
the fair value of the embedded derivatives in each of the three
and nine month periods ended September 30, 2001 and 2002
resulted in lower amortization of deferred acquisition costs in
those periods.

The significant losses associated with the
Transamerica contract during the nine months ended
September 30, 2002 were the result of a write down of
deferred acquisition costs of $24,796,000 in the second quarter
of 2002. The write down was the result of the continued poor
performance of the financial markets during the first half of
2002, which caused us to reassess the assumptions we used in
estimating the impact expected future minimum interest guarantee
payments would have on the profits arising from this contract.
We recorded similar charges against our deferred acquisition
cost asset of $34,500,000 during the nine month period ended
September 30, 2001, $19,200,000 of which was recorded in
the three month period ended September 30, 2001. A
significant portion of the charges recorded in 2001 related to
the high surrender rates on the polices underlying the contract,
which caused us to review the recoverability of the deferred
acquisition costs associated with this contract, and to expected
minimum interest guarantee payments.

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We also recorded losses associated with our
contracts that reinsure guarantees associated with variable
annuity contracts, including guaranteed minimum death benefits,
of $10,877,000 and $9,932,000 during the three and nine month
periods ended September 30, 2002. These losses were the
result of the protracted decline in the financial markets, which
has caused the guaranteed minimum death benefits payable to the
beneficiaries of certain policyholders to exceed the account
values for such policyholders upon their death. These losses
also include a $7,760,000 increase during the third quarter of
2002 in reserves for these guarantees, which we recorded in
light of increasing claims activity in recent quarters.

Total segment revenue for the three months ended
September 30, 2002 declined 16% to $18,536,000, as compared
to $22,025,000 for the three months ended September 30,
2001. Revenue for the nine months ended September 30, 2002
declined 2% to $66,847,000 from $68,325,000 for the nine months
ended September 30, 2001. These declines are primarily
related to the previously mentioned increases in embedded
derivative losses, offset by increased investment income on our
annuity reinsurance contract with Ohio National.

Policy benefits and expenses for the annuity
segment includes interest credited to policyholders, minimum
interest guarantee charges, guaranteed minimum death benefit
payments, segment specific expenses, and other allocated
expenses. These expenses declined 22% to $36,882,000 for the
three months ended September 30, 2002 compared to
$47,411,000 for the three months ended September 30, 2001.
For the nine months ended September 30, 2002 these expenses
grew 9% to $112,065,000 from $102,659,000 for the nine months
ended September 30, 2001. The primary components of these
expenses are interest credited to policyholders and amortization
of deferred acquisition costs. The nine month period ended
September 30, 2001 includes write downs of deferred
acquisition costs of approximately $34,500,000, including
approximately $19,200,000 incurred in the three month period
ended September 30, 2001, related to our Transamerica
reinsurance contract because we determined that the deferred
acquisition costs were not recoverable. The nine months ended
September 30, 2002 includes the $7,760,000 increase in
guaranteed minimum death benefit reserves recorded in the third
quarter of 2002 and a $24,796,000 write down of deferred
acquisition costs associated with our annuity reinsurance
agreement with Transamerica recorded in the second quarter of
2002. The increase in policy benefits and expenses in the three
and nine months ended September 30, 2002, as compared to
the comparable prior period after the aforementioned
adjustments, reflects an increase in minimum interest guarantee
payments related to our Transamerica contract and interest
credited to policyholders on our annuity contract with Ohio
National.

Our annuity segment is not performing well due to
losses from embedded derivatives, guaranteed minimum death
benefits and the Transamerica fixed annuity contract. Return on
equity for the three and nine month periods ended
September 30, 2002 was (71)% and (72)%, respectively.

Corporate Segment.The corporate segment includes all capital gains and losses from
our own portfolio, investment income on undeployed invested
assets, and a proportionate share of operating expenses based
upon how stockholders equity is deployed to the life and
annuity segments. As a result, the corporate segment, while
small relative to our total company, will likely have volatile
results. Segment income grew 199% to $9,350,000 for the three
months ended September 30, 2002 compared to $3,130,000 for
the three months ended September 30, 2001. For the nine
months ended September 30, 2002 segment income grew 58% to
$12,721,000 from $8,043,000 for the nine months ended
September 30, 2001. The growth in corporate segment income
was the result of net realized investment gains of $9,297,000
and $10,813,000 for the three and nine month periods ended
September 30, 2002, as compared to $1,079,000 and
$1,425,000, respectively, for the comparable prior periods of
2001.

Expenses declined 19% to $1,037,000 for the three
months ended September 30, 2002 compared to $1,273,000 for
the three months ended September 30, 2001. For the nine
months ended September 30, 2002 expenses declined 22% to
$3,370,000 from $4,304,000 for the nine months ended
September 30, 2001. Both declines were driven by the
deployment of stockholders equity to the life segment and,
consequently, a greater allocation of overhead expenses to that
segment.

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Financial Condition

Investments

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, and match the cash flows of our investments to our
related insurance liabilities. Our investment guidelines require
our overall fixed income portfolio to maintain a minimum
weighted average credit quality of A. A fixed income
security rated A by Standard & Poors
is considered to be somewhat susceptible to the adverse effects
of changes in circumstances and economic conditions, however,
the issuers capacity to meet its financial commitment on
the security is still considered to be strong. As of
July 2002, our investment guidelines do not allow us to
invest in fixed income securities that are rated below
investment grade. We will not invest in any fixed income
securities in emerging markets or securities which are not rated
by a major rating agency.

Our investment securities are managed by two
professional investment advisors, Alliance Capital Management
Corporation and Prudential Investment Corporation, each of which
manages a segment of the portfolio. Our agreement with Alliance
may be terminated by either party with 30 days notice and
our agreement with Prudential may be terminated by either party
with 45 days notice. The performance of Alliance and
Prudential and the fees associated with the arrangements are
periodically reviewed by our board of directors.

At September 30, 2002, our invested assets,
including cash and cash equivalents, had an aggregate fair value
of $475,213,000, including unrealized gains of approximately
$16,092,000, as compared with an aggregate fair value of
$423,780,000, including unrealized gains of $6,418,000 at
December 31, 2001. A significant portion of our invested
assets are posted as collateral to secure our obligations under
reinsurance agreements and letter of credit facilities and are
invested predominately in high quality U.S. government and
U.S. corporate fixed income securities with low to moderate
durations. At September 30, 2002, our portfolio was
comprised of fixed income securities with a weighted average
credit quality rating of AA and a weighted average
duration of 3.7 years, as compared with a weighted average
credit quality rating of AA+ and a weighted average
duration of 4.2 years at December 31, 2001.

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 a result, our securities are classified
as available for sale and are carried at fair value
on our balance sheet.

At September 30, 2002, $1,437,000 at fair
value, or 0.40%, of our fixed income securities (0.38% of
Stockholders Equity), consisted of below investment grade
securities, as compared with $3,749,000 at fair value, or 1.2%
of our fixed income securities (0.9% of Stockholders
Equity) at December 31, 2001. The fair value of such
investments may vary depending on economic and market
conditions, the level of interest rates and the perceived
creditworthiness of the issuer. As noted above, our investment
guidelines prohibit the purchase of below investment grade
securities, as these investments are subject to a higher degree
of credit risk than investment grade securities. We monitor the
creditworthiness of the portfolio as a whole and when the fair
market value of a security declines for reasons other than
changes in interest rates or other perceived temporary
conditions, the security is written down to its net realizable
value. At September 30, 2002, there was one impaired
security in our portfolio, which was written down by $900,000 to
a fair value of approximately $270,000.

At September 30, 2002, mortgage backed
securities represented approximately 12.4% of our invested
assets, including cash and cash equivalents, as compared with
approximately 11% of our invested assets, including cash and
cash equivalents, at December 31, 2001. 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.

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Mortgage backed securities generally are
collateralized by mortgages issued by the Government National
Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home
Loan Mortgage Corporation (FHLMC). Of these, only
GNMA mortgages are backed by the full faith and credit of the
U.S. government. Credit risk generally is not a
consideration when investing in agency mortgage backed
securities. Our mortgage backed securities portfolio had a
weighted average investment quality rating of AAA at
both September 30, 2002 and December 31, 2001.


Our results of operations and our financial
condition are significantly affected by the performance of our
investments and by changes in interest rates. During a period of
declining interest rates, if our investments are prematurely
sold, called, prepaid or redeemed, we may be unable to reinvest
the proceeds in securities of equivalent risk with comparable
rates of return. During a period of rising interest rates, the
fair value of our invested assets could decline. In addition,
rising interest rates could also cause disintermediation, which
in turn could cause us to sell investments at prices and times
when the fair values of such investments are less than their
amortized cost. We believe that our traditional life insurance
liabilities are not highly interest rate sensitive and,
therefore, the effects of fluctuating interest rates on these
liabilities are not significant. For interest sensitive
liabilities, we are primarily dependent upon asset/liability
matching or other strategies to minimize the impact of changes
in interest rates. If we do not appropriately match our asset
management strategy to our obligations, we could sustain losses.
We have engaged in hedging activities to mitigate the effects of
asset/liability mismatches or interest rate changes on our
balance sheet, and expect to do so in the future. Our results of
operations and our financial condition are also significantly
affected by the performance of assets held and managed by our
ceding companies or others under modified coinsurance and
coinsurance funds withheld arrangements, which are discussed
below under Funds Withheld at Interest.

The following table summarizes our investment
results (excluding investment income on assets held and managed
by our ceding companies or others) for the periods indicated.

Investment Results

|                                                             |  |                    |         |                                  |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------ | ------- | -------------------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                             |  |                    |         |                                 
|                                                             |  |                    |         | Twelve Months Ended December 31,
|                                                             |  | Nine Months Ended  |         |                                 
|                                                             |  | September 30, 2002 |         | 2001                             |  | 2000 |         | 1999
|                                                             |  |                    |         |                                  |  |      |         |     
|                                                             |  |                    |         |                                  |  |     
|                                                             |  |                    |         | (dollars in thousands)           |  |     
|Total invested assets, including cash and
    equivalents(1) |  | $                  | 475,213 |                                  |  | $    | 423,780 |      |  | $ | 321,819 |   |  | $ | 304,060 |  
|Investment income, net of related expenses                   |  | $                  | 19,080  |                                  |  | $    | 20,165  |      |  | $ | 20,126  |   |  | $ | 20,483  |  
|Effective yield rate(2)                                      |  |                    | 5.28    | %                                |  |      | 5.74    | %    |  |   | 6.85    | % |  |   | 6.29    | %
|Realized investment gains (losses)                           |  | $                  | 10,813  |                                  |  | $    | 1,230   |      |  | $ | (4,817  | ) |  | $ | (1,285  | )



---



|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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

At September 30, 2002, our Funds withheld
receivable was $1,415,120,000, compared to $1,489,689,000 at
December 31, 2001. When a ceding company enters into an
annuity reinsurance contract structured as a modified
coinsurance or coinsurance funds withheld arrangement with us, a
portion of the ceding companys liability to the
policyholders or, in the case of a retrocessional arrangement,
the primary insurer, is ceded to us. Our arrangements are
generally on a quota share basis, so the portion that is ceded
to us in 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

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##### Table of Contents



liability, under these types of arrangements, we
establish 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 then
allocated our share of the investment income and realized
capital gains and losses that arise from the securities in the
investment portfolio underlying the statutory reserve.


We currently have annuity reinsurance contracts
with six ceding companies. At September 30, 2002, the
premiums held and managed by our ceding companies were invested
in convertible bonds and fixed income securities having a
weighted average credit quality of A and a weighted
average duration of 5.0 years. Also at September 30,
2002, approximately 4.0% of the premiums held and managed by our
ceding companies were invested in below investment grade
securities. At December 31, 2001, these assets had a
weighted average credit quality of A and a weighted
average duration of 5.0 years. In addition, approximately 4.0%
of these assets were invested in below investment grade
securities on that date.

The average annualized yield rate earned on our
Funds withheld receivable was approximately 5.90% for the nine
months ended September 30, 2002, compared to 4.59% for the
year ended December 31, 2001. At September 30, 2002,
approximately 54% and 25% of our Funds withheld at interest
asset represented receivables from Transamerica and Ohio
National, respectively, compared with 65% and 15%, respectively,
at December 31, 2001. The average annualized yield rates
earned on the assets funding our annuity obligations to
Transamerica and Ohio National were approximately 5.30% and
7.36%, respectively, for the nine months ended
September 30, 2002, compared with 3.94% and 7.91%,
respectively, for the year ended December 31, 2001. For
purposes of calculating the average annualized yield rate earned
on assets held and managed by our ceding companies, including
Transamerica and Ohio National, we include net realized capital
gains and losses as reported to us by our ceding companies in
accordance with statutory accounting principles.

The assets underlying the Transamerica contract
are managed by AmerUS Capital Management, the investment manager
appointed by IL Annuity and Insurance Company, the issuer
of the annuity policies. At September 30, 2002, the assets
funding the policyholder obligations under the contract had an
average credit quality of A- and an average duration
of 4.1 years, compared to an average credit quality of
A and an average duration of 4.2 years at
December 31, 2001. At September 30, 2002,
approximately 67% of the assets underlying the contract were
invested in convertible bonds, with the remaining 33% in fixed
income securities. At December 31, 2001, approximately 69%
of the assets underlying the contract were invested in
convertible bonds, with the remainder invested in investment
grade bonds, high yield bonds and mortgage backed securities.
The value of convertible bonds is a function of their investment
value (determined by yield in comparison with the yields of
other securities of comparable maturity and quality that do not
have a conversion privilege) and their conversion value (at
market value, if converted into the underlying common stock). To
the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the
convertible bonds will be increasingly influenced by their
conversion value. Consequently, the value of convertible bonds
may be influenced by changes in the equity markets.

According to data provided to us by Transamerica,
at September 30, 2002 the assets held by IL Annuity
and managed by AmerUS Capital were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Convertible bonds                                           |  | $          | 558,874,974 |              |  | $          | 512,621,786 |  |  |  | 67.2  | %
|Investment grade U.S. corporate bonds                       |  |            | 190,248,157 |              |  |            | 200,218,580 |  |  |  | 26.2  | %
|Below investment grade U.S. corporate bonds                 |  |            | 41,097,061  |              |  |            | 36,312,346  |  |  |  | 4.8   | %
|Short term securities                                       |  |            | 13,897,670  |              |  |            | 13,897,670  |  |  |  | 1.8   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 804,117,862 |              |  | $          | 763,050,382 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 6,473,818   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 769,524,200 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  

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According to data provided to us by Transamerica,
at September 30, 2002 the credit ratings of the assets
(excluding accrued investment income) held by IL Annuity
and managed by AmerUS Capital were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 101,531,499 |              |  | $          | 105,221,951 |  |  |  | 13.8  | %
|AA                                                          |  |            | 86,022,763  |              |  |            | 84,112,943  |  |  |  | 11.0  | %
|A                                                           |  |            | 189,407,112 |              |  |            | 186,251,135 |  |  |  | 24.4  | %
|BBB                                                         |  |            | 386,009,827 |              |  |            | 351,142,087 |  |  |  | 46.0  | %
|BB and below                                                |  |            | 41,146,661  |              |  |            | 36,322,266  |  |  |  | 4.8   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 804,117,862 |              |  | $          | 763,050,382 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 6,473,818   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 769,524,200 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors,
    or, if unrated by Standard & Poors, based on
    equivalent rating assigned by the National Association of
    Insurance Commissioners.

According to data provided to us by Transamerica,
at September 30, 2002 the maturity distribution of the
assets (excluding accrued investment income) held by IL Annuity
and managed by AmerUS Capital was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       |  
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 39,271,587  |              |  | $          | 39,342,099  |  |  |  | 5.2   | %
|From one to five years |  |            | 232,002,606 |              |  |            | 230,785,613 |  |  |  | 30.2  | %
|From six to ten years  |  |            | 195,625,045 |              |  |            | 190,359,956 |  |  |  | 24.9  | %
|More than ten years    |  |            | 337,218,624 |              |  |            | 302,562,714 |  |  |  | 39.7  | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  
|Total all years        |  | $          | 804,117,862 |              |  | $          | 763,050,382 |  |  |  | 100.0 | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  

At September 30, 2002, the assets underlying
the Ohio National contract had an average credit quality of
A- and an average duration of approximately
6.0 years, compared with an average credit quality of
A- and an average duration of approximately
5.8 years at December 31, 2001.

According to data provided to us by Ohio
National, at September 30, 2002, the assets held and
managed by Ohio National were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Corporate bonds                                             |  | $          | 232,050,898 |              |  | $          | 245,665,319 |  |  |  | 67.5  | %
|Asset backed securities                                     |  |            | 75,618,810  |              |  |            | 80,973,838  |  |  |  | 22.2  | %
|Mortgage backed securities                                  |  |            | 27,130,548  |              |  |            | 29,415,851  |  |  |  | 8.1   | %
|Government bonds                                            |  |            | 7,243,849   |              |  |            | 7,951,062   |  |  |  | 2.2   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 342,044,105 |              |  | $          | 366,006,070 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 4,674,586   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 368,680,656 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  

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##### Table of Contents



At September 30, 2002 the credit ratings of
the assets (excluding accrued investment income) held and
managed by Ohio National were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 45,062,847  |              |  | $          | 47,418,937  |  |  |  | 13.0  | %
|AA                                                          |  |            | 26,470,559  |              |  |            | 28,768,680  |  |  |  | 7.9   | %
|A                                                           |  |            | 122,424,148 |              |  |            | 135,247,823 |  |  |  | 37.2  | %
|BBB                                                         |  |            | 133,900,776 |              |  |            | 141,691,439 |  |  |  | 38.9  | %
|Below BBB                                                   |  |            | 14,185,775  |              |  |            | 10,879,191  |  |  |  | 3.0   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 342,044,105 |              |  | $          | 364,006,070 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 4,674,586   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 368,680,656 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors,
    or, if unrated by Standard & Poors, based on
    equivalent rating assigned by the National Association of
    Insurance Commissioners.

According to data provided to us by Ohio
National, at September 30, 2002 the maturity distribution
of the assets (excluding accrued investment income) held and
managed by Ohio National was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       |  
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 2,930,515   |              |  | $          | 2,930,515   |  |  |  | 0.8   | %
|From one to five years |  |            | 14,916,040  |              |  |            | 12,147,255  |  |  |  | 3.3   | %
|From six to ten years  |  |            | 162,185,526 |              |  |            | 172,431,596 |  |  |  | 47.4  | %
|More than ten years    |  |            | 162,012,024 |              |  |            | 176,496,704 |  |  |  | 48.5  | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  
|Total all years        |  | $          | 342,044,105 |              |  | $          | 364,006,070 |  |  |  | 100.0 | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  

Our remaining four annuity reinsurance contracts
guarantee crediting rates that vary in amount and duration. At
September 30, 2002, the assets funding the policyholder
obligations under these contracts had an average credit quality
of A- and an average duration of approximately
7.1 years compared to an average credit quality of
A and an average duration of approximately
6.9 years at December 31, 2001.

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
September 30, 2002 the assets held and managed by those
ceding companies were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Canadian provincial bonds                                   |  | $          | 90,364,234  |              |  | $          | 95,318,003  |  |  |  | 30.0  | %
|Investment grade US corporate bonds                         |  |            | 85,237,284  |              |  |            | 88,990,403  |  |  |  | 28.0  | %
|Investment grade UK corporate bonds                         |  |            | 82,713,018  |              |  |            | 82,713,018  |  |  |  | 26.1  | %
|Investment grade Canadian corporate bonds                   |  |            | 24,034,560  |              |  |            | 24,767,271  |  |  |  | 7.8   | %
|All other securities                                        |  |            | 26,529,494  |              |  |            | 25,651,668  |  |  |  | 8.1   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 308,878,590 |              |  | $          | 317,440,363 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 6,806,127   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 324,246,490 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  

36



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##### Table of Contents



According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
September 30, 2002 the credit ratings of the assets
(excluding accrued investment income) held and managed by those
ceding companies were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 47,725,488  |              |  | $          | 48,285,677  |  |  |  | 15.2  | %
|AA                                                          |  |            | 29,971,717  |              |  |            | 30,760,155  |  |  |  | 9.7   | %
|A                                                           |  |            | 166,986,792 |              |  |            | 174,887,133 |  |  |  | 55.1  | %
|BBB                                                         |  |            | 56,514,218  |              |  |            | 57,947,273  |  |  |  | 18.3  | %
|BB and below                                                |  |            | 7,680,375   |              |  |            | 5,560,125   |  |  |  | 1.7   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 308,878,590 |              |  | $          | 317,440,363 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 6,806,127   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 324,246,490 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors,
    or, if unrated by Standard & Poors, based on
    equivalent rating assigned by the National Association of
    Insurance Commissioners.

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
September 30, 2002 the maturity distribution of the assets
(excluding accrued investment income) held and managed by those
ceding companies was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       |  
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 16,101,151  |              |  | $          | 16,337,330  |  |  |  | 5.1   | %
|From one to five years |  |            | 71,589,567  |              |  |            | 74,101,141  |  |  |  | 23.3  | %
|From six to ten years  |  |            | 71,928,287  |              |  |            | 72,720,906  |  |  |  | 22.9  | %
|More than ten years    |  |            | 149,259,585 |              |  |            | 154,280,686 |  |  |  | 48.7  | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  
|Total all years        |  | $          | 308,878,590 |              |  | $          | 317,440,363 |  |  |  | 100.0 | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  

Liquidity and
Capital Resources

Our liquidity and capital resources are a measure
of our overall financial strength and our ability to generate
cash flows from our operations to meet our operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold and cash and short term investments. The principal
obligations and uses of the funds are the payment of policy
benefits, acquisition and operating expenses and the purchase of
investments. In addition, as a Bermuda reinsurer we are required
to post collateral for the statutory reserves ceded to us by
U.S. based insurers and reinsurers. Under the terms of our
reinsurance agreements we are required to provide letters of
credit or fund trust accounts with liquid assets to satisfy
these collateral requirements. At both September 30, 2002
and December 31, 2001, letters of credit totaling
$197 million had been issued by our bankers in favor of
certain ceding insurance companies to provide security and meet
regulatory requirements. At September 30, 2002 and
December 31, 2001 letters of credit totaling
$107 million and $101 million, respectively, were
fully collateralized by our investments. At September 30,
2002 and December 31, 2001, investments of
$310 million and $272 million, respectively, were held
in trust for the benefit of certain ceding insurance companies
to provide security and to meet regulatory requirements. For the
nine months ended September 30, 2002, we generated
$27,726,000 from our operating activities, substantially all of
which has been posted as collateral to our cedents.

Based on our projections of our ceding
companies statutory reserve cessions, in order to satisfy
our obligations under our existing reinsurance agreements, we
will need to post up to approximately $210.0 million of
additional collateral by December 31, 2002. We will seek to
meet or reduce these additional security

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requirements by negotiating the recapture,
retrocession or sale of certain of our reinsurance agreements,
accessing our collateral funding facility and/or by raising
capital. We have not been able to successfully raise capital or
access our collateral funding facility in recent months given,
among other things, the uncompleted restatement of our financial
statements for 2000 and 2001. If we are unable to meet the
security requirements of our cedents, we may be required to
cease writing new business and we may be in violation of our
existing reinsurance contracts and become subject to the
remedies set forth therein. Our cedents may also ask that the
agreements be recaptured. These recaptures could result in
losses, but could also improve our liquidity and our ability to
meet the collateral requirements of our remaining cedents.


We currently have unsecured letters of credit of
approximately $49,000,000 outstanding under a letter of credit
facility with Citibank. In October 2002, Citibank agreed to
extend this unsecured letter of credit facility into next year
in exchange for our agreement to secure, or otherwise eliminate,
the letter of credit facility by June 30, 2003.

As of September 30, 2002, we had $45,000,000
of unsecured letters of credit outstanding under a letter of
credit facility with Manulife Financial that had been posted as
security to allow our United States operating subsidiary to take
credit on its statutory financial statements for reinsurance
ceded to our Bermuda operating company. During October 2002,
Manulife requested that the unsecured letters of credit it had
issued on our behalf be secured. Consequently, in November 2002,
our Bermuda operating subsidiary deposited $15,000,000 with our
United States operating subsidiary as funds withheld. Further,
one of our United States operating subsidiarys ceding
companies has recaptured its contracts, reducing our
subsidiarys collateral needs by an additional $15,000,000.
We have committed to securing or eliminating the remaining
$15,000,000 in letters of credit issued by Manulife under our
letter of credit facility by December 31, 2002. Due to
Manulifes request to secure its letter of credit facility
and our inability thus far to post sufficient security for our
United States operating subsidiary, the Connecticut Insurance
Department has requested that all financial transactions, except
those related to the normal course of business, between us and
our United States operating subsidiary be preapproved by the
insurance department.

During 2001, we entered into a reinsurance
agreement with a reinsurer to cede excess U.S. Statutory
reserves (the amount by which our cedents
U.S. Statutory reserves exceed our U.S. GAAP reserves
for certain life insurance contracts subject to certain state
statutory regulations known as Triple-X) to the reinsurer. Under
the agreement, the reinsurer is obligated to fund the collateral
requirements associated with these excess U.S. Statutory
reserves by making cash deposits with us. As of
September 30, 2002, we had received deposits of
$147 million from the reinsurer. The reinsurer has the
right to terminate the agreement with 180 days notice,
which would require us to return all deposits. As part of this
contract we deposited $41 million with the reinsurer, which
is included in Deposits and other reinsurance receivables on our
Balance Sheet. We receive the benefit of investment income from
the investment of the funds received and our deposit with the
reinsurer and we pay the third party reinsurer certain fees
associated with the contract. These fees, in part, are
determined by the amount of deposits received by us. The fees
also have a variable component tied to LIBOR rates. In the third
quarter of 2002, we entered into two interest rate swaps
pursuant to which we effectively transferred a portion of the
risk that these variable fees will increase to a third party. We
are not currently able to access additional funds under this
collateral funding facility.

On March 1, 2002 we filed a shelf
registration statement on Form S-3 to register under the
Securities Act of 1933 $200,000,000 of senior debt to be sold in
one or more transactions on a delayed basis. We do not currently
expect to issue any of this debt in the near future, as the
registration statement is not effective, and therefore, we may
not issue any debt under it.

We have no material commitments for capital
expenditures as of September 30, 2002, but as noted above,
we have significant obligations coming due in the next several
weeks and months that we will not be able to satisfy unless we
are able to establish a new collateral funding facility,
negotiate the recapture of, sell off or otherwise transfer
certain of our reinsurance contracts that have significant
collateral requirements or raise additional capital.

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In September 2002, we engaged Morgan Stanley to
assist us in seeking to raise capital, and we have been in
discussions with several parties regarding this and other
strategic alternatives. There can be no assurances that our
efforts to raise capital or pursue other strategic alternatives
will be successful.

On October 30, 2002, our Board of Directors
declared a quarterly dividend of $.05 per share payable on
November 28, 2002 to shareholders of record on
November 15, 2002. The continued payment of dividends is
dependent on the ability of our operating subsidiaries to
achieve satisfactory underwriting and investment results,
generate free cash flow and other factors determined to be
relevant by our Board of Directors.

Forward-Looking and Cautionary
Statements

The Company and its representatives may from time
to time make written or oral forward-looking statements,
including those contained in the foregoing Managements
Discussion and Analysis. In order to take advantage of the
safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying
certain important factors which could cause the Companys
actual results, performance or achievement to differ materially
from those that may be contained in or implied by any
forward-looking statement made by or on behalf of the Company.
The factors that could cause the actual results of operations or
financial condition of the Company to differ include, but are
not necessarily limited to, the Companys ability to
attract and retain clients; a decline in the Companys
financial ratings; the Companys ability to underwrite
business; the Companys ability to raise sufficient capital
to meet the collateral requirements associated with its current
business and to fund the Companys continuing operations;
changes in market conditions, including changes in interest rate
levels; the ability of the Companys cedents to manage
successfully assets they hold on the Companys behalf;
unanticipated withdrawal or surrender activity; changes in
mortality, morbidity and claims experience; the Companys
success in managing its investments; the competitive
environment; the impact of recent and possible future terrorist
attacks and the U.S. governments response thereto; the
loss of a key executive; regulatory changes (such as changes in
U.S. tax law and insurance regulation which directly affect
the competitive environment for the Companys products);
and a prolonged economic downturn. Further information about
these and other factors may be found in our Current Report on
Form 8-K filed on November 19, 2002, as well as our
other filings with the Securities and Exchange Commission. The
Company cautions that the foregoing list of important factors is
not intended to be, and is not, exhaustive. The Company does not
undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.

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Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

There have been no material changes since
December 31, 2001 with respect to our market risk exposure
described in our amended Annual Report on Form 10-K for the
year ended December 31, 2001, as supplemented by our
Current Report on Form 8-K, filed November 19, 2002.
Please refer to Item 7A: Quantitative and Qualitative
Disclosures About Market Risk in our amended Annual Report
on Form 10-K for the year ended December 31, 2001 and
to Item 5: Other Events and Required FD
Disclosure  Business  Quantitative and
Qualitative Disclosures About Market Risk in our Current
Report on Form 8-K filed November 19, 2002.




Item 4.     Controls
and Procedures

In September 2002, following the resignation of
the Companys Chief Executive Officer, the Company
established a Transition Committee to oversee, on an interim
basis, the management and operations of the Company pending his
permanent replacement. The Transition Committee and the
Companys Chief Financial Officer have conducted a review
of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based on that
review, the Transition Committee and Chief Financial Officer
concluded that the Companys disclosure controls and
procedures were adequate. In addition, there have been no
significant changes in the Companys internal controls or
in other factors that could significantly affect those controls
subsequent to the date of their evaluation.

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##### Table of Contents






PART II

OTHER INFORMATION




Item 1.     Legal
Proceedings

On January 21, 2002, we served written
notice of arbitration in connection with our annuity reinsurance
contract with Transamerica Occidental Life Insurance Company. In
the arbitration, we were seeking monetary damages and/or
equitable relief from Transamerica based on our claim that
certain actions and/or omissions by Transamerica deprived us of
the benefit of the reinsurance transaction. On November 8,
2002, we announced that our claim against Transamerica had been
denied by the arbitration panel assigned to the matter. The
arbitration panel upheld Transamericas position that our
annuity reinsurance contract was a valid and enforceable
contract and that Transamerica had acted in a commercially
reasonable manner.

In May 2002, we served written notice of
arbitration in connection with two life reinsurance agreements.
During the third quarter of 2002, we settled our arbitration
with Lincoln National, which recaptured the contract that had
been the subject of the arbitration. The other arbitration is
continuing.




Item 2.     Changes
in Securities and Use of Proceeds

On February 25, 2002 and September 30,
2002, we granted 133,500 and 267,500 common shares,
respectively, to certain key employees pursuant to the terms of
a restricted stock incentive compensation program. Issuance of
the restricted stock required no investment decision on the part
of the recipients. All award decisions were made by our
Compensation Committee, which consists entirely of non-employee
directors. If the grants were deemed to be a sale of securities
under the Securities Act of 1933 (the Act), we
believe such sales would be exempt from the Act pursuant to
Section 4(2) thereof or Regulation S thereunder.




Item 5.     Other
Information

On September 12, 2002, we announced that
Lawrence S. Doyle had retired from his position as our
President and Chief Executive Officer and had resigned from his
seat on our board of directors. We have engaged an executive
search firm to help us identify an appropriate replacement for
Mr. Doyle. Until an appropriate replacement is identified,
a transition committee consisting of Frederick S. Hammer
and Robert M. Lichten, each of whom is a director of our
Company, will oversee our management and operations. Half of the
supplemental directors fees payable to Messrs. Hammer
and Lichten for their services on the Transition Committee will
be paid instead to their regular employer in consideration of
the substantial amount of time that each will dedicate to our
Company until we secure an appropriate replacement for
Mr. Doyle.

In the third quarter of 2002, A.M. Best
downgraded the financial strength ratings of Annuity and Life
Reassurance and Annuity and Life Reassurance America from
A- to B++. The financial strength
ratings of Annuity and Life Reassurance and Annuity and Life
Reassurance America were also downgraded in the third quarter of
2002 by Standard & Poors from A- to
BBB+ and from A to BBB+ by
Fitch Ratings. In addition, on November 22, 2002, Fitch
Ratings further reduced our financial strength rating to
CCC. These downgrades in our ratings have adversely
affected our ability to enter into new reinsurance treaties and
raise capital. Further downgrades may adversely affect our
ability to retain existing business, effectively preclude us
from writing new business, and permit some of our ceding
companies to terminate certain reinsurance agreements.

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|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits 



| |      |                                                                                                                                                                                                                                                                   
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 | Letter Agreement dated September 9, 2002 by
    and between Annuity and Life Re (Holdings), Ltd. and Frederick
    S. Hammer, incorporated herein by reference to Exhibit 10.1
    to the Companys Quarterly Report on Form 10-Q, filed
    on November 27, 2002.
|
| | 10.2 | Letter Agreement dated September 9, 2002 by
    and between Annuity and Life Re (Holdings), Ltd. and Robert M.
    Lichten, incorporated herein by reference to Exhibit 10.2
    to the Companys Quarterly Report on Form 10-Q, filed
    on November 27, 2002.  

(b) Reports on Form 8-K  None

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ANNUITY AND LIFE RE (HOLDINGS), LTD.






SIGNATURES


Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                                     
| | ------------------------------------
| | Annuity and Life Re (Holdings), Ltd.
|
| | /s/ JOHN F. BURKE                   
| |                                     
| | Name:     JOHN F. BURKE             

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

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

Date:     March 20,
2003

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##### Table of Contents



CERTIFICATION

I, John F. Burke, certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Annuity and Life Re
    (Holdings), Ltd.                                                                                                                                                                                                                                                    
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report;                       
|
| | 4.     I am responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and I have:                                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to me by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report my
    conclusions about the effectiveness of the disclosure controls
    and procedures based on my evaluation as of the Evaluation Date;                                                                                                                                  



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     I have disclosed,
    based on my most recent evaluation, to the registrants
    auditors and the audit committee of registrants board of
    directors (or persons performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     I have indicated
    in this quarterly report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    my most recent evaluation, including any corrective actions with
    regard to significant deficiencies and material weaknesses.



| |                    
| | -------------------
| | /s/ JOHN F. BURKE  
| |                    
| | Name: JOHN F. BURKE

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

March 20, 2003

44