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                                                                       Exhibit 4

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                            INITIAL STOCK OPTION PLAN

               (as amended and restated effective April 29, 1999)
<PAGE>   2
                                TABLE OF CONTENTS

<TABLE>
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                                                                                     PAGE
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<S>           <C>                                                                    <C>
SECTION 1     Definitions..............................................................1
SECTION 2     Administration...........................................................4
SECTION 3     Eligibility..............................................................4
SECTION 4     Common Shares............................................................4
SECTION 5     Annual Limit.............................................................5
SECTION 6     Granting of Options to Key Employees and Consultants.....................5
SECTION 7     Terms and Conditions of Options to Key Employees and Consultants ........6
SECTION 8     Options for Non-Employee Directors......................................11
SECTION 9     Option Agreements - Other Provisions....................................14
SECTION 10    Capital Adjustments.....................................................14
SECTION 11    Amendment or Discontinuance of the Plan.................................15
SECTION 12    Termination of Plan.....................................................16
SECTION 13    Shareholder Approval....................................................16
SECTION 14    Miscellaneous...........................................................17
SECTION 15    Change in Control.......................................................18
</TABLE>
<PAGE>   3
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                            INITIAL STOCK OPTION PLAN

                                     PURPOSE

                  This ANNUITY AND LIFE RE (HOLDINGS), LTD. INITIAL STOCK OPTION
PLAN is intended to provide a means whereby Annuity and Life Re (Holdings), Ltd.
may, through the grant of Options to purchase Common Shares of the Company to
Key Employees, Non-Employee Directors, and Consultants attract and retain such
individuals and motivate them to exercise their best efforts on behalf of the
Company and of any Related Corporation.

         SECTION 1 DEFINITIONS

                  As used in the Plan the following words and terms shall have
the meaning hereinafter set forth unless the context clearly indicates
otherwise:

                  (a) BOARD. The term "Board" shall mean the Board of Directors
         of the Company.

                  (b) CODE. The term "Code" shall mean the Internal Revenue Code
         of 1986, as amended.

                  (c) COMMITTEE. The term "Committee" shall mean the Company's
         Compensation Committee which shall consist of not less than two (2)
         directors of the Company and who shall be appointed by, and shall serve
         at the pleasure of, the Board. Each member of such Committee, while
         serving as such, shall be deemed to be acting in his or her capacity as
         a director of the Company. On and after the date the Company first
         registers equity securities under Section 12 of the Exchange Act, it is
         intended that each member of the Committee shall be a Rule 16b-3
         Non-Employee Director. Notwithstanding the foregoing, if the Committee
         does not consist solely of two (2) or more Rule 16b-3 Non-Employee
         Directors, the full Board shall serve as the Committee if it is
         intended that Options satisfy the advance approval requirements of 17
         CFR Section 240.16b-3.

                  (d) COMMON SHARES. The term "Common Shares" shall mean the
         common shares of the Company, par value $1.00 per share.

                  (e) COMPANY. The term "Company" shall mean Annuity and Life Re
         (Holdings), Ltd., a Bermuda corporation.

                  (f) CONSULTANT. The term "Consultant" shall mean a consultant
         or advisor who is not an employee of the Company or a Related
         Corporation and is not a Non-

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<PAGE>   4
         Employee Director, but may include directors, officers, employees and
         partners of Inter-Atlantic Capital Partners, Inc. or its affiliates.

                  (g) ELIGIBLE NON-EMPLOYEE DIRECTORS. The term "Eligible
         Non-Employee Director" shall mean a Non-Employee Director who is not a
         director, officer or employee of Inter-Atlantic Capital Partners, Inc.
         or its affiliates.

                  (h) EXCHANGE ACT. The term "Exchange Act" shall mean the
         Securities Exchange Act of 1934, as amended.

                  (i) FAIR MARKET VALUE. The term "Fair Market Value" shall mean
         the fair market value of the optioned Common Shares arrived at by a
         good faith determination of the Committee and shall be:

                           (1) The quoted closing price, if there is a market
                  for the Common Shares on a registered securities exchange or
                  in an over the counter market, on the date of grant;

                           (2) The weighted average of the quoted closing prices
                  on the nearest date before and the nearest date after the date
                  of grant, if there are no sales on the date of grant but there
                  are sales on dates within a reasonable period both before and
                  after the date of grant;

                           (3) The mean between the bid and asked prices, as
                  reported by the National Quotation Bureau on the date of
                  grant, if actual sales are not available during a reasonable
                  period beginning before and ending after the date of grant; or

                           (4) Such other method of determining fair market
                  value as shall be authorized by the Code, or the rules or
                  regulations thereunder, and adopted by the Committee.

                  Where the fair market value of the optioned Common Shares is
         determined under (2) above, the average of the quoted closing prices on
         the nearest date before and the nearest date after the date of grant is
         to be weighted inversely by the respective numbers of trading days
         between the selling dates and the date of grant (i.e., the valuation
         date), in accordance with Treas. Reg. Section 20.2031-2(b)(1).

                  (j) ISO. The term "ISO" shall mean an Option which, at the
         time such Option is granted, qualifies as an incentive stock option
         within the meaning of Section 422 of the Code.

                  (k) KEY EMPLOYEE. The term "Key Employee" shall mean an
         officer or any other key employee of the Company or of a Related
         Corporation.

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<PAGE>   5
                  (l) NON-EMPLOYEE DIRECTOR. The term "Non-Employee Director"
         shall mean a director of the Company who is not an employee of the
         Company or a Related Corporation.

                  (m) NQSO. The term "NQSO" shall mean an Option which is not an
         ISO, and/or is designated as an NQSO in the Option Agreement.

                  (n) OPTION. The term "Option" shall mean any stock option
         granted to a Key Employee, Non-Employee Director, or Consultant under
         Sections 7 and 8 hereof.

                  (o) OPTION AGREEMENT. The term "Option Agreement" shall mean a
         written document evidencing the grant of an Option, as described in
         Section 9.

                  (p) OPTIONEE. The term "Optionee" shall mean a Key Employee,
         Non-Employee Director, or Consultant to whom an Option has been
         granted.

                  (q) PLAN. The term "Plan" shall mean the Annuity and Life Re
         (Holdings), Ltd. Initial Stock Option Plan, as set forth herein and as
         amended from time to time.

                  (r) RELATED CORPORATION. The term "Related Corporation" shall
         mean either a corporate subsidiary of the Company, as defined in
         section 424(f) of the Code, or the corporate parent of the Company, as
         defined in section 424(e) of the Code.

                  (s) RULE 16B-3 NON-EMPLOYEE DIRECTOR. The term "Rule 16b-3
         Non-Employee Director" shall mean a director who:

                           (1) Is not currently an officer (as defined in 17 CFR
                  Section 240.16a-1(f)) of, or otherwise currently employed by,
                  the Company or a parent or subsidiary of the Company within
                  the meaning of 17 CFR Section 240.16b-3(b)(3);

                           (2) Does not receive compensation, either directly or
                  indirectly, from the Company or a parent or subsidiary of the
                  Company within the meaning of 17 CFR Section 240.16b-3(b)(3)
                  for services rendered as a consultant or in any other capacity
                  other than as a director, except for an amount that does not
                  exceed the dollar amount for which disclosure would be
                  required under 17 CFR Section 229.404(a);

                           (3) Does not possess an interest in any other
                  transaction for which disclosure would be required pursuant to
                  17 CFR Section 229.404(a); and

                           (4) Is not engaged in a business relationship for
                  which disclosure would be required pursuant to 17 CFR Section
                  229.404(b).

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<PAGE>   6
         SECTION 2 ADMINISTRATION

                  The Plan shall be administered by the Committee. The Committee
shall have full authority, subject to the terms of the Plan, to select the Key
Employees and Consultants to be granted ISOs and/or NQSOs under the Plan, to
grant Options on behalf of the Company and to set the date of grant and the
other terms of such Options. Options granted to Non-Employee Directors shall be
granted pursuant to the formula set forth in Section 8(a) hereof.

                  The Committee may correct any defect, supply any omission and
reconcile any inconsistency in this Plan and in any Option granted hereunder in
the manner and to the extent it shall deem desirable. The Committee also shall
have the authority to establish such rules and regulations, not inconsistent
with the provisions of the Plan, for the proper administration of the Plan, and
to amend, modify or rescind any such rules and regulations, and to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations, determinations and
interpretations shall be binding and conclusive upon the Company, its
shareholders and all employees, directors, and consultants, and upon their
respective legal representatives, beneficiaries, successors and assigns and upon
all other persons claiming under or through any of them.

                  No member of the Board or the Committee shall be liable for
any action or determination made in good faith with respect to the Plan or any
Option granted under it.

         SECTION 3 ELIGIBILITY

                  Key Employees, Non-Employee Directors, and Consultants shall
be eligible to receive Options under the Plan. Key Employees shall be eligible
to receive ISOs and/or NQSOs. Non-Employee Directors and Consultants shall be
eligible to receive only NQSOs. More than one Option may be granted to a Key
Employee, Non-Employee Director, or Consultant under the Plan.

         SECTION 4 COMMON SHARES

                  Options may be granted under the Plan to purchase up to a
maximum of 1,552,500 Common Shares. In addition, effective as of April 29, 1999,
Options may be granted each calendar year to purchase up to a number of Common
Shares equal to two percent (2.0%) of the adjusted average of the outstanding
Common Shares of the Company for the preceding fiscal year, as that number is
determined by the Company to calculate fully diluted earnings per share for the
Company's Form 10-K. (For 1999, the additional number of shares available
pursuant to the preceding sentence is 510,416.) However, in no event may more
than 2,062,916 Common Shares be issued under ISOs. The maximum number of Common
Shares available under the Plan shall be subject to further adjustment as
provided in Section 10 hereof. Shares issuable under the Plan may be authorized
but unissued shares or reacquired shares, and the Company may purchase shares
required for this purpose, from time to time, if it deems such purchase to be
advisable.

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                  If any Option granted under the Plan expires or otherwise
terminates for any reason whatever (including, without limitation, the
Optionee's surrender thereof) without having been exercised, the shares subject
to the unexercised portion of such Option shall continue to be available for the
granting of Options under the Plan as fully as if such shares had never been
subject to an Option.

         SECTION 5 ANNUAL LIMIT

                  (a) ISOs. The aggregate Fair Market Value (determined as of
         the date the ISO is granted) of the Common Shares with respect to which
         ISOs are exercisable for the first time by a Key Employee during any
         calendar year (under this Plan and any other ISO plan of the Company or
         a Related Corporation) shall not exceed one hundred thousand dollars
         ($100,000).

                  (b) OPTIONS OVER ANNUAL LIMIT. If an Option intended as an ISO
         is granted to a Key Employee and such Option may not be treated in
         whole or in part as an ISO pursuant to the limitation in subsection (a)
         above, such Option shall be treated as an ISO to the extent it may be
         so treated under such limitation and as an NQSO as to the remainder,
         but shall continue to be subject to the provisions of the Plan that
         apply to ISOs. For purposes of determining whether an ISO would cause
         such limitation to be exceeded, the Key Employee's incentive stock
         options shall be taken into account in the order granted.

                  (c) NQSOs. The annual limit set forth above for ISOs shall not
         apply to NQSOs.

         SECTION 6 GRANTING OF OPTIONS TO KEY EMPLOYEES AND CONSULTANTS

                  From time to time until the expiration or earlier suspension
or discontinuance of the Plan, the Committee may, on behalf of the Company,
grant to Key Employees and Consultants under the Plan such Options as it
determines are warranted; provided, however, that grants of ISOs and NQSOs shall
be separate and not in tandem. The granting of an Option under the Plan shall
not be deemed either to entitle the Key Employee or Consultant to, or to
disqualify the Key Employee or Consultant from, any participation in any other
grant of Options under the Plan. In making any determination as to whether a Key
Employee or Consultant shall be granted an Option and as to the number of shares
to be covered by such Option, the Committee shall take into account the duties
of the Key Employee or Consultant, his or her present and potential
contributions to the success of the Company or a Related Corporation, and such
other factors as the Committee shall deem relevant in accomplishing the purposes
of the Plan. Moreover, the Committee may provide in the Option that said Option
may be exercised only if certain conditions, as determined by the Committee, are
fulfilled.

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         SECTION 7 TERMS AND CONDITIONS OF OPTIONS TO KEY EMPLOYEES AND
                   CONSULTANTS

                  The Options granted pursuant to the Plan to Key Employees and
Consultants shall include expressly or by reference the following terms and
conditions, as well as such other provisions not inconsistent with the
provisions of this Plan and, for ISOs, the provisions of section 422(b) of the
Code, as the Committee shall deem desirable:

                  (a) NUMBER OF SHARES. A statement of the number of Common
         Shares to which the Option pertains.

                  (b) PRICE. A statement of the Option exercise price, which
         shall be determined and fixed by the Committee in its discretion but,
         in the case of an ISO, shall not be less than the higher of one hundred
         percent (100%) (one hundred ten percent (110%) in the case of more than
         ten percent (10%) shareholders as discussed in Subsection (j) below) of
         the Fair Market Value of the optioned Common Shares, or the par value
         thereof, on the date the ISO is granted.

                  (c) TERM.

                           (1) ISOs. Subject to earlier termination as provided
                  in Subsections (e), (f) and (g) below and in Section 10
                  hereof, the term of each ISO shall be not more than ten (10)
                  years (five (5) years in the case of more than ten percent
                  (10%) shareholders as discussed in (j) below) from the date of
                  grant.

                           (2) NQSOs. Subject to earlier termination as provided
                  in Subsections (e), (f) and (g) below and in Section 9 hereof,
                  the term of each NQSO shall be not more than ten (10) years
                  from the date of grant.

                  (d) EXERCISE.

                           (1) GENERAL. Unless otherwise provided in the Option
                  Agreement, Options shall become exercisable in three (3) equal
                  annual installments, commencing with the first anniversary of
                  the grant date; provided that the Committee may accelerate the
                  exercise date of any outstanding Options, in its discretion,
                  if it deems such acceleration to be desirable.

                           Any Common Shares, the right to the purchase of which
                  has accrued under an Option, may be purchased at any time up
                  to the expiration or termination of the Option. Exercisable
                  Options may be exercised, in whole or in part, from time to
                  time by giving written notice of exercise to the Company at
                  its principal office, specifying the number of Common Shares
                  to be purchased and accompanied by payment in full of the
                  aggregate Option exercise price for such shares. Only full
                  shares shall be issued under the Plan, and any fractional
                  share which might otherwise be issuable upon exercise of an
                  Option granted hereunder shall be forfeited.

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<PAGE>   9
                           (2) MANNER OF PAYMENT. The Option exercise price
                  shall be payable:

                                    (A) In cash or its equivalent;

                                    (B) If the Committee, in its discretion, so
                           provides in the Option Agreement (as hereinafter
                           defined) or, in the case of Options which are not
                           ISOs, if the Committee, in its discretion, so
                           determines at or prior to the time of exercise, in
                           whole or in part, in Common Shares previously
                           acquired by the Optionee, provided that the
                           Committee, in its discretion, may require (i) if such
                           Common Shares were acquired through the exercise of
                           an ISO and are used to pay the Option exercise price
                           of an ISO, such shares have been held by the Optionee
                           for a period of not less than the holding period
                           described in section 422(a)(1) of the Code on the
                           date of exercise, or (ii) if such Common Shares were
                           acquired through exercise of an NQSO or of an option
                           under a similar plan or through exercise of an ISO
                           and are used to pay the Option exercise price of an
                           NQSO, such shares have been held by the Optionee for
                           a period of more than six (6) months on the date of
                           exercise;

                                    (C) If the Committee, in its discretion, so
                           provides in the Option Agreement or, in the case of
                           Options which are not ISOs, if the Committee, in its
                           discretion, so determines at or prior to the time of
                           exercise, in whole or in part, in Common Shares newly
                           acquired by the Optionee upon exercise of such Option
                           (which shall constitute a disqualifying disposition
                           in the case of an Option which is an ISO);

                                    (D) If the Committee, in its discretion, so
                           provides in the Option Agreement or, in the case of
                           Options which are not ISOs, if the Committee, in its
                           discretion, so determines at or prior to the time of
                           exercise, in any combination of (A), (B) and/or (C)
                           above; or

                                    (E) If the Committee, in its discretion, so
                           provides in the Option Agreement or, in the case of
                           Options which are not ISOs, if the Committee, in its
                           discretion, so determines at or prior to the time of
                           exercise, by permitting the Optionee to deliver a
                           properly executed notice of exercise of the Option to
                           the Company and a broker, with irrevocable
                           instructions to the broker promptly to deliver to the
                           Company the amount of sale or loan proceeds necessary
                           to pay the exercise price of the Option.

                           In the event such Option exercise price is paid, in
                  whole or in part, with Common Shares, the portion of the
                  Option exercise price so paid shall be equal to the Fair
                  Market Value on the date of exercise of the Option of the
                  Common Shares surrendered in payment of such Option exercise
                  price.

                  (e) TERMINATION OF EMPLOYMENT OR SERVICE.

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<PAGE>   10
                           (1) GENERAL. If an Optionee's employment or service
                  with the Company (and Related Corporations) is terminated by
                  either party prior to the expiration date fixed for his or her
                  Option for any reason other than death, disability, or Cause
                  (as described in paragraph (2) below), such Option may be
                  exercised, to the extent of the number of Common Shares with
                  respect to which the Optionee could have exercised it on the
                  date of such termination, or to any greater extent permitted
                  by the Committee, by the Optionee at any time prior to the
                  earlier of:

                                    (A) The expiration date fixed for such
                           Option; or

                                    (B) An accelerated termination date
                           determined by the Committee, in its discretion,
                           except that, subject to Section 9 hereof, such
                           accelerated termination date shall not be earlier
                           than the date of the Optionee's termination of
                           employment or service and, unless otherwise
                           determined by the Committee, in its discretion, shall
                           not be later than three (3) months after the date of
                           such termination of employment.

                           If an Optionee's employment or service with the
                  Company or a Related Corporation terminates by reason of Cause
                  prior to the expiration date fixed for his or her Option, such
                  Option shall terminate immediately.

                           (2) CAUSE. For purposes of this Plan, unless
                  otherwise defined in an Optionee's employment or service
                  contract with the Company or a Related Corporation, "Cause"
                  shall include insubordination, gross incompetence or
                  misconduct in the performance of, or gross neglect of,
                  Optionee's duties, willful violation of any express direction
                  or of any rule or regulation applicable to such Optionee, any
                  act of fraud or intentional misrepresentation, or
                  embezzlement, misappropriation, or conversion of assets or
                  opportunities of the Company or a Related Corporation.

                  (f) EXERCISE UPON DISABILITY OF OPTIONEE. If an Optionee shall
         become disabled (within the meaning of section 22(e)(3) of the Code)
         during his or her employment or service and, prior to the expiration
         date fixed for his or her Option, his or her employment or service is
         terminated as a consequence of such disability, such Option may be
         exercised, to the extent of the number of Common Shares with respect to
         which the Optionee could have exercised it on the date of such
         termination, or to any greater extent permitted by the Committee, by
         the Optionee at any time prior to the earlier of:

                           (1) The expiration date fixed for the Option; or

                           (2) An accelerated termination date determined by the
                  Committee, in its discretion, except that, subject to Section
                  9 hereof, such accelerated termination date shall not be
                  earlier than the date of termination of employment or service
                  by reason of disability and, unless otherwise determined by
                  the Committee, in its

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<PAGE>   11
                  discretion, shall not be later than one (1) year after the
                  date of such termination of employment.

         In the event of the Optionee's legal disability, such Option may be so
         exercised by the Optionee's legal representative.

                  (g) EXERCISE UPON DEATH OF OPTIONEE. If an Optionee shall die
         during his or her employment or service and prior to the expiration
         date fixed for his or her Option, or if an Optionee whose employment or
         service is terminated for any reason shall die following his or her
         termination of employment or service, but prior to the earlier of:

                           (1) The expiration date fixed for such Option; or

                           (2) The expiration of the period determined under
                  Subsections (e) and (f) above, if applicable;

         such Option may be exercised, to the extent of the number of Common
         Shares with respect to which the Optionee could have exercised it on
         the date of his or her death, or to any greater extent permitted by the
         Committee, by the Optionee's estate, personal representative or
         beneficiary who acquired the right to exercise such Option by bequest
         or inheritance or by reason of the death of the Optionee, at any time
         prior to the earlier of:

                                    (A) The expiration date specified in such
                           Option (which may be the expiration date determined
                           under Subsections (e) and (f) above, if applicable);
                           or

                                    (B) An accelerated termination date
                           determined by the Committee, in its discretion except
                           that, subject to Section 9 hereof, such accelerated
                           termination date shall not be later than one (1) year
                           after the date of death.

                  (h) NON-TRANSFERABILITY.

                           (1) ISOs. No ISO shall be assignable or transferable
                  by a Key Employee otherwise than by will or by the laws of
                  descent and distribution, and during the lifetime of the Key
                  Employee, the ISO shall be exercisable only by him or by his
                  or her guardian or legal representative. If the Key Employee
                  is married at the time of exercise and if the Key Employee so
                  requests at the time of exercise, the certificate or
                  certificates shall be registered in the name of the Key
                  Employee and the Key Employee's spouse, jointly, with right of
                  survivorship.

                           (2) NQSOs. Except as otherwise provided in any Option
                  Agreement, no NQSO shall be assignable or transferable by the
                  Optionee otherwise than by will or by the laws of descent and
                  distribution, and during the lifetime of the Optionee, the
                  NQSO shall be exercisable only by him or by his or her
                  guardian or legal representative. If the Optionee is married
                  at the time of exercise and if the Optionee

                                      -9-
<PAGE>   12
                  so requests at the time of exercise, the certificate or
                  certificates shall be registered in the name of the Optionee
                  and his or her spouse, jointly, with right of survivorship.

                  (i) RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights
         as a shareholder with respect to any shares covered by his or her
         Option until the issuance of a share certificate to him or her for such
         shares.

                  (j) TEN PERCENT SHAREHOLDER. If a Key Employee owns more than
         ten percent (10%) of the total combined voting power of all shares of
         stock of the Company or of a Related Corporation at the time an ISO is
         granted to such Key Employee, the Option exercise price for the ISO
         shall be not less than one hundred ten percent (110%) of the Fair
         Market Value of the optioned Common Shares on the date the ISO is
         granted, and such ISO, by its terms, shall not be exercisable after the
         expiration of five (5) years from the date the ISO is granted. The
         conditions set forth in this Subsection (j) shall not apply to NQSOs.

                  (k) LISTING AND REGISTRATION OF SHARES. Each Option shall be
         subject to the requirement that, if at any time the Committee shall
         determine, in its discretion, that the listing, registration or
         qualification of the shares covered thereby upon any securities
         exchange or under any applicable law, or the consent or approval of any
         governmental regulatory body, is necessary or desirable as a condition
         of, or in connection with, the granting of such Option or the purchase
         of shares thereunder, or that action by the Company or by the Optionee
         should be taken in order to obtain an exemption from any such
         requirement, no such Option may be exercised, in whole or in part,
         unless and until such listing, registration, qualification, consent,
         approval, or action shall have been effected, obtained, or taken under
         conditions acceptable to the Committee. Without limiting the generality
         of the foregoing, each Optionee or his or her legal representative or
         beneficiary may also be required to give satisfactory assurance that
         shares purchased upon exercise of an Option are being purchased for
         investment and not with a view to distribution, and certificates
         representing such shares may be legended accordingly.

                  (l) WITHHOLDING AND USE OF SHARES TO SATISFY TAX OBLIGATIONS.
         The obligation of the Company to deliver Common Shares upon the
         exercise of any Option shall be subject to applicable tax withholding
         requirements.

                  If the exercise of any Option is subject to the withholding
         requirements of applicable tax laws, the Committee, in its discretion
         (and subject to such withholding rules ("Withholding Rules") as shall
         be adopted by the Committee), may permit the Optionee to satisfy the
         minimum required withholding tax, in whole or in part, by electing to
         have the Company withhold (or by returning to the Company) Common
         Shares, which shares shall be valued, for this purpose, at their Fair
         Market Value on the date of exercise of the Option (or if later, the
         date on which the Optionee recognizes ordinary income with respect to
         such exercise). An election to use Common Shares to satisfy tax
         withholding requirements must be made in compliance with and subject to
         the Withholding Rules. The Committee may not

                                      -10-
<PAGE>   13
         withhold shares in excess of the number necessary to satisfy the
         minimum tax withholding requirements.

         SECTION 8 OPTIONS FOR NON-EMPLOYEE DIRECTORS

                  (a) Granting of Options to Outside Directors.

                           (1) Each person who becomes an Eligible Non-Employee
                  Director shall be granted an NQSO to purchase 15,000 Common
                  Shares on the later of (A) the date he or she becomes an
                  Eligible Non-Employee Director and (B) the date of the
                  Company's initial public offering of its Common Shares.

                           (2) In addition, with respect to the Company's first
                  annual shareholder's meeting after December 31, 1998 and each
                  subsequent annual shareholder's meeting of the Company, each
                  Non-Employee Director whose term as a director has not ended
                  as of the date of such annual shareholder's meeting shall be
                  granted an NQSO to purchase 2,000 Common Shares as of the day
                  of such annual shareholder's meeting.

                  (b) TERMS AND CONDITIONS OF OPTIONS. Options granted to
         Non-Employee Directors shall expressly specify that they are NQSOs. In
         addition, such Options shall include expressly or by reference the
         following terms and conditions, as well as such other provisions not
         inconsistent with the provisions of this Plan:

                           (1) NUMBER OF SHARES. A statement of the number of
                  Common Shares to which the Option pertains.

                           (2) PRICE. A statement of the Option exercise price,
                  which shall be one hundred percent (100%) of the Fair Market
                  Value of the optioned Common Shares on the date the Option is
                  granted.

                           (3) TERM. Subject to earlier termination as provided
                  in Subsections (5), (6) and (7) below, the term of each Option
                  granted under this Section 8 shall be 10 years from the date
                  of grant.

                           (4) EXERCISE.

                                    (A) GENERAL. Options granted under Section
                           8(a)(1) shall become exercisable in three (3) equal
                           annual installments, commencing with the first
                           anniversary of the grant date. Options granted under
                           Section 8(a)(2) shall be immediately exercisable as
                           of the grant date, provided that if such date is not
                           at least one year after the date upon which the
                           Company's initial public offering of its Common
                           Shares was consummated, such Options shall become
                           exercisable on the first anniversary of the
                           consummation of such initial public offering. Any
                           Common Shares, the right to the purchase of which has
                           accrued under an Option,

                                      -11-
<PAGE>   14
                           may be purchased at any time up to the expiration or
                           termination of the Option. Exercisable Options may be
                           exercised, in whole or in part, from time to time by
                           giving written notice of exercise to the Company at
                           its principal office, specifying the number of Common
                           Shares to be purchased and accompanied by payment in
                           full of the aggregate Option exercise price for such
                           shares. Only full shares shall be issued under the
                           Plan, and any fractional share which might otherwise
                           be issuable upon the exercise of an Option granted
                           hereunder shall be forfeited.

                                    (B) MANNER OF PAYMENT. The Option exercise
                           price shall be payable:

                           (i) In cash or its equivalent;

                           (ii) Unless in the opinion of counsel to the Company
                  to do so may result in a possible violation of law, in whole
                  or in part through the transfer of Common Shares previously
                  acquired by the Non-Employee Director, provided that if such
                  Common Shares were acquired through exercise of an NQSO or of
                  an option under a similar plan, such Common Shares so
                  transferred shall have been held by the Non-Employee Director
                  for more than six (6) months on the date of exercise;

                           (iii) Unless in the opinion of counsel to the Company
                  to do so may result in a possible violation of law, in whole
                  or in part, in Common Shares newly acquired by the
                  Non-Employee Director upon the exercise of such Option; or

                           (iv) In any combination of (i), (ii), and/or (iii)
                  above.

                                    In the event such Option exercise price is
                  paid, in whole or in part, with Common Shares, the portion of
                  the Option exercise price so paid shall equal the Fair Market
                  Value on the date of exercise of the Option of the Common
                  Shares surrendered in payment of such Option exercise price.

                           (5) EXPIRATION OF TERM OR REMOVAL AS DIRECTOR. If a
                  Non-Employee Director's service as a director of the Company
                  terminates prior to the expiration date fixed for his or her
                  Option for any reason (such as, without limitation, failure to
                  be re-elected by the Company's shareholders) other than by
                  disability, death, or Cause (as described in Section 7(e)(2)
                  above), such Option may be exercised, to the extent of the
                  number of Common Shares with respect to which the Non-Employee
                  Director could have exercised it on the date of such
                  termination, by the Non-Employee Director at any time prior to
                  the earlier of:

                                    (A) The expiration date fixed for such
                           Option; or

                                    (B) Three (3) months after the date of such
                           termination of service as a director.

                                      -12-
<PAGE>   15
                           If a Non-Employee Director's service as a director of
                  the Company terminates by reason of Cause prior to the
                  expiration date fixed for his or her Option, such Option shall
                  terminate immediately.

                           (6) EXERCISE UPON DISABILITY OF NON-EMPLOYEE
DIRECTOR. If a Non-Employee Director shall become disabled (within the meaning
of section 22(e)(3) of the Code) during his or her term as a director of the
Company and, prior to the expiration date fixed for his or her Option, his or
her term as a director is terminated as a consequence of such disability, such
Option may be exercised, to the extent of the number of Common Shares with
respect to which the Non-Employee Director could have exercised it on the date
of such termination, by the Non-Employee Director at any time prior to the
earlier of:

                                    (A) The expiration date fixed for such
                           Option; or

                                    (B) One year after the date of such
                           termination of service as a director.

                           In the event of the Non-Employee Director's legal
                  disability, such Option may be so exercised by his or her
                  legal representative.

                  (7) EXERCISE UPON DEATH OF NON-EMPLOYEE DIRECTOR. If a
         Non-Employee Director shall die during his or her term as a director of
         the Company and prior to the expiration date fixed for his or her
         Option, or if a Non-Employee Director whose term as a director has been
         terminated for any reason shall die following his or her termination as
         a director, but prior to the earlier of:

                           (A) The expiration date fixed for such Option; or

                           (B) The expiration of the period determined under
                  Subsections (5) and (6) above, if applicable;

                  such Option may be exercised, to the extent of the number of
                  Common Shares with respect to which the Non-Employee Director
                  could have exercised it on the date of his or her death, by
                  the Non-Employee Director's estate, personal representative or
                  beneficiary who acquired the right to exercise such Option by
                  bequest or inheritance or by reason of the death of the
                  Non-Employee Director, at any time prior to the earlier of:

                           (i) The expiration date specified in such Option
                  (which may be the expiration date determined under Subsections
                  (5) and (6) above, if applicable); or

                           (ii) One year after the date of death.

                                      -13-
<PAGE>   16
                           (8) RIGHTS AS A SHAREHOLDER. A Non-Employee Director
                  shall have no rights as a shareholder with respect to any
                  shares covered by his or her Option until the issuance of a
                  share certificate to him or her for such shares.

                           (9) LISTING AND REGISTRATION OF SHARES. Each Option
                  shall be subject to the requirement that, if at any time the
                  Committee shall determine, in its discretion, that the
                  listing, registration or qualification of the shares covered
                  thereby upon any securities exchange or under any applicable
                  law, or the consent or approval of any governmental regulatory
                  body, is necessary or desirable as a condition of, or in
                  connection with, the granting of such Option or the purchase
                  of shares thereunder, or that action by the Company or by the
                  Optionee should be taken in order to obtain an exemption from
                  any such requirement, no such Option may be exercised, in
                  whole or in part, unless and until such listing, registration,
                  qualification, consent, approval, or action shall have been
                  effected, obtained, or taken under conditions acceptable to
                  the Committee. Without limiting the generality of the
                  foregoing, each Optionee or his or her legal representative or
                  beneficiary may also be required to give satisfactory
                  assurance that shares purchased upon exercise of an Option are
                  being purchased for investment and not with a view to
                  distribution, and certificates representing such shares may be
                  legended accordingly.


         SECTION 9 OPTION AGREEMENTS - OTHER PROVISIONS

                  Options granted under the Plan shall be evidenced by Option
Agreements in such form as the Committee shall, from time to time, approve,
which Option Agreements shall contain such provisions, not inconsistent with the
provisions of the Plan for NQSOs granted pursuant to the Plan, and such
conditions, not inconsistent with section 422(b) of the Code or the provisions
of the Plan for ISOs granted pursuant to the Plan, as the Committee shall deem
advisable, and which Option Agreements shall specify whether the Option is an
ISO or NQSO; provided, however, if the Option is not designated in the Option
Agreement as an ISO or NQSO, the Option shall constitute an ISO if it complies
with the terms of section 422 of the Code, and otherwise, it shall constitute an
NQSO. Each Optionee shall enter into, and be bound by, such Option Agreement.

         SECTION 10 CAPITAL ADJUSTMENTS

                  The number of shares which may be issued under the Plan, and
the maximum number of shares with respect to which options may be granted during
a specified period to any Key Employee, Non-Employee Director, or Consultant
under the Plan, as stated in Section 4 hereof, and the number of shares issuable
upon exercise of outstanding Options under the Plan (as well as the Option
exercise price per share under such outstanding Options), shall, subject to the
provisions of section 424(a) of the Code, be adjusted to reflect any stock
dividend, stock split, share combination, or similar change in the
capitalization of the Company.

                                      -14-
<PAGE>   17
                  In the event of a corporate transaction (as that term is
described in section 424(a) of the Code and the Treasury Regulations issued
thereunder as, for example, a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation), each outstanding Option
shall be assumed by the surviving or successor corporation or by a parent or
subsidiary of such corporation if such corporation is the employer corporation
(as provided in section 424(a) of the Code and the regulations thereunder);
provided, however, that, in the event of a proposed corporate transaction, the
Committee may terminate all or a portion of the outstanding Options to Key
Employees and Consultants if it determines that such termination is in the best
interests of the Company. If the Committee decides to terminate outstanding
Options, the Committee shall give each Key Employee and Consultant holding an
Option to be terminated not less than seven (7) days' notice prior to any such
termination by reason of such a corporate transaction, and any such Option which
is to be so terminated may be exercised (if and only to the extent that it is
then exercisable) up to, and including the date immediately preceding such
termination. Further, as provided in Section 7 hereof the Committee, in its
discretion, may accelerate, in whole or in part, the date on which any or all
Options granted to Key Employees and Consultants become exercisable.

                  The Committee also may, in its discretion, change the terms of
any outstanding Option to reflect any such corporate transaction, provided that,
in the case of ISOs, such change is excluded from the definition of a
"modification" under section 424(h) of the Code.

         SECTION 11 AMENDMENT OR DISCONTINUANCE OF THE PLAN

                  (a) GENERAL. The Board from time to time may suspend or
discontinue the Plan or amend it in any respect whatsoever, except that the
following amendments shall require shareholder approval (given in the manner set
forth in Section 11(b) below):

                           (1) With respect to ISOs, any amendment which would:

                                    (A) Change the class of employees eligible
                           to participate in the Plan;

                                    (B) Except as permitted under Sections 4 and
                           10 hereof, increase the maximum number of Common
                           Shares with respect to which ISOs may be granted
                           under the Plan; or

                                    (C) Extend the duration of the Plan under
                           Section 12 hereof with respect to any ISOs granted
                           hereunder; and

                  (2) Any amendment which would require shareholder approval
         under 17 CFR Section 240.16b-3 in order for the Plan to continue to
         constitute a "formula plan" with respect to Options granted to
         Non-Employee Directors, unless (i) the Plan is amended in a manner that
         takes advantage of another method of complying with 17 CFR
         Section 240.16b-3 with respect to Options granted to Non-Employee
         Directors, or (ii) compliance with 17 CFR Section 240.16b-3 is not
         intended.

                                      -15-
<PAGE>   18
                  Notwithstanding the foregoing, no such suspension,
         discontinuance or amendment shall materially impair the rights of any
         holder of an outstanding Option without the consent of such holder.

                  (b) SHAREHOLDER APPROVAL REQUIREMENTS. Shareholder approval
         must meet the following requirements:

                           (1) The approval of shareholders must be by a
                  majority of the votes cast at a meeting duly held in
                  accordance with the applicable laws of Bermuda; and

                           (2) The approval of shareholders must comply with all
                  applicable provisions of the corporate charter, bye-laws, and
                  applicable law prescribing the method and degree of
                  shareholder approval required for the issuance of corporate
                  stock or options. If the applicable law does not prescribe a
                  method and degree of shareholder approval in such case, the
                  approval of shareholders must be effected:

                                    (A) By a method and in a degree that would
                           be treated as adequate under applicable law of
                           Bermuda in the case of an action requiring
                           shareholder approval (i.e., an action on which
                           shareholders would be entitled to vote if the action
                           were taken at a duly held shareholders' meeting); or

                                    (B) By a majority of the votes cast at a
                           duly held shareholders' meeting at which a quorum
                           representing a majority of all outstanding voting
                           stock is, either in person or by proxy, present and
                           voting on the Plan.

                  SECTION 12 TERMINATION OF PLAN

                  Unless earlier terminated as provided in the Plan, the Plan
and all authority granted hereunder shall terminate absolutely at 12:00 midnight
on December 2, 2007, which date is within ten (10) years after the date the Plan
was adopted by the Board (or the date the Plan was approved by the shareholders
of the Company, whichever is earlier), and no Options hereunder shall be granted
thereafter. Nothing contained in this Section 12, however, shall terminate or
affect the continued existence of rights created under Options issued hereunder
and outstanding on December 2, 2007, which by their terms extend beyond such
date.

                  SECTION 13 SHAREHOLDER APPROVAL

                  This Plan shall become effective on December 3, 1997 (the date
the Plan was adopted by the Board); provided, however, that if the Plan is not
approved by the shareholders in the manner described in Section 11(b), within
twelve (12) months before or after said date, ISOs granted hereunder shall be
null and void and no additional ISOs shall be granted hereunder.

                                      -16-
<PAGE>   19
                  SECTION 14 MISCELLANEOUS

                  (a) GOVERNING LAW. With respect to any ISOs granted pursuant
         to the Plan and the Option Agreements thereunder, the Plan, such Option
         Agreements and any ISOs granted pursuant thereto shall be governed by
         the applicable Code provisions to the maximum extent possible.
         Otherwise, the operation of, and the rights of Optionees under, the
         Plan, the Option Agreements and any Options granted thereunder shall be
         governed by applicable United States law and otherwise by the laws of
         Bermuda.

                  (b) RIGHTS. Neither the adoption of the Plan nor any action of
         the Board or the Committee shall be deemed to give any individual any
         right to be granted an Option, or any other right hereunder, unless and
         until the Committee shall have granted such individual an Option, and
         then his or her rights shall be only such as are provided by the Option
         Agreement.

                  Any Option under the Plan shall not entitle the holder thereof
         to any rights as a shareholder of the Company prior to the exercise of
         such Option and the issuance of the shares pursuant thereto. Further,
         notwithstanding any provisions of the Plan or the Option Agreement with
         an Optionee, the Company shall have the right, in its discretion, to
         retire a Key Employee at any time pursuant to its retirement rules or
         otherwise to terminate an Optionee's employment or service at any time
         for any reason whatsoever.

                  (c) INDEMNIFICATION OF BOARD AND COMMITTEE. Without limiting
         any other rights of indemnification which they may have from the
         Company and any Related Corporation, the members of the Board and the
         members of the Committee shall be indemnified by the Company against
         all costs and expenses reasonably incurred by them in connection with
         any claim, action, suit, or proceeding to which they or any of them may
         be a party by reason of any action taken or failure to act under, or in
         connection with, the Plan, or any Option granted thereunder, and
         against all amounts paid by them in settlement thereof (provided such
         settlement is approved by legal counsel selected by the Company) or
         paid by them in satisfaction of a judgment in any such action, suit, or
         proceeding, except a judgment based upon a finding of willful
         misconduct or recklessness on their part. Upon the making or
         institution of any such claim, action, suit, or proceeding, the Board
         or Committee member shall notify the Company in writing, giving the
         Company an opportunity, at its own expense, to handle and defend the
         same before such Board or Committee member undertakes to handle it on
         his or her own behalf.

                  (d) APPLICATION OF FUNDS. Any cash received in payment for
         Common Shares upon exercise of an Option shall be added to the general
         funds of the Company and shall be used for its corporate purposes. Any
         Common Shares received in payment for Common Shares upon exercise of an
         Option shall be cancelled.

                  (e) NO OBLIGATION TO EXERCISE OPTION. The granting of an
         Option shall impose no obligation upon an Optionee to exercise such
         Option.

                                      -17-
<PAGE>   20
                  SECTION 15 CHANGE IN CONTROL

                  (a) GENERAL. All outstanding Options shall become fully vested
         and exercisable upon a Change in Control of the Company. In the event
         of a Change in Control in which outstanding Options are not assumed by
         the surviving entity, the Committee shall terminate all outstanding
         Options on at least seven days' notice. Any such Option which is to be
         so terminated may be exercised up to, and including the date
         immediately preceding such termination. In any transaction to which
         both Section 10 and this Section 15 are applicable, only the provisions
         of this Section 15 shall apply.

                  (b) DEFINITION OF CHANGE IN CONTROL. For purposes of this
         Section 15, a "Change in Control" of the Company shall be deemed to
         have occurred if:

                           (1) Any person, including a group of persons acting
                  in concert, becomes the beneficial owner of shares of the
                  Company having 50 percent or more of the total number of votes
                  that may be cast for the election of directors of the Company;

                           (2) There occurs any cash tender or exchange offer
                  for shares of the Company, merger or other business
                  combination, or any combination of the foregoing transactions,
                  and as a result of or in connection with any such event
                  persons who were directors of the Company before the event
                  shall cease to constitute a majority of the board of directors
                  of the Company or any successor to the Company; or

                           (3) The sale, conveyance or other disposition (other
                  than by way of merger or consolidation), in one or a series of
                  related transactions, of all or substantially all of the
                  assets of the Company.

Notwithstanding the foregoing, a Change in Control shall not be deemed to have
occurred by reason of a change in beneficial ownership occurring in connection
with the initial public offering of the Common Shares.

                           (c) In the event of a Change in Control of the
Company in which holders of Common Shares are entitled only to receive money or
other property exclusive of securities, then in lieu of outstanding Options
being terminated or assumed by the Surviving Entity, each Optionee shall have
the right, at its sole option, to require the Company or such surviving entity
to purchase such Optionee's Options (without prior exercise by Optionee) at its
fair value as of the day before such transaction became publicly known, as
determined by an unaffiliated internationally recognized accounting firm or
investment bank selected by the Company or such surviving entity and reasonably
acceptable to all electing Optionees.

                                      -18-
<PAGE>   21
                  IN WITNESS WHEREOF, Annuity and Life Re (Holdings), Ltd. has
caused these presents to be duly executed, under seal, as of this 29th day of
April, 1999.

                                 ANNUITY AND LIFE RE (HOLDINGS), LTD.



                                 By:  /s/ Lawrence S. Doyle
                                      -----------------------------------------
                                      President and Chief Executive Officer

                                      -19-