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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 June 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 August 5,
2002 was 25,841,928.



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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                           
|PART II OTHER INFORMATION                                                                    
|Item 1. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|CERTIFICATION                                                                                



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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
    June 30, 2002 (as restated) and December 31, 2001 (as
    restated)                                                       |    |      | 2  | 
|               |  | Consolidated Statements of Operations
    Three and Six Months ended June 30, 2002 (as restated) and
    June 30, 2001 (as restated)                      |    |      | 3  | 
|               |  | Consolidated Statements of Comprehensive (Loss)
    Income
    Three and Six Months ended June 30, 2002 (as restated) and
    June 30, 2001 (as restated) |    |      | 4  | 
|               |  | Consolidated Statements of Cash Flows
    Six Months ended June 30, 2002 (as restated) and
    June 30, 2001 (as restated)                                |    |      | 5  | 
|               |  | Consolidated Statements of Changes in
    Stockholders Equity
    Six Months ended June 30, 2002 (as restated) and
    June 30, 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                                                                 |    |      | 15 | 
|ITEM 3.        |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                            |    |      | 30 | 
|               |  | PART II  OTHER
    INFORMATION                                                                                                                           |    |      |    | 
|ITEM 1.        |  | Legal Proceedings                                                                                                                                         |    |      | 31 | 
|ITEM 4.        |  | Submission of Matters to a Vote of Security
    Holders                                                                                                   |    |      | 31 | 
|ITEM 6.        |  | Exhibits and Reports on Form 8-K                                                                                                                          |    |      | 31 | 
|Signatures     |  |                                                                                                                                                           | 32 |     
|Certifications |  |                                                                                                                                                           | 33 |     



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EXPLANATORY NOTE

This Amendment No. 1 to our Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30,
2002 is being filed to revise and supplement certain information
provided in response to Item 2: Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and Item 3: Quantitative and Qualitative
Disclosures About Market Risk. In addition, we are revising
Item 1: Unaudited Consolidated Financial Statements to
include restated financial information as of December 31,
2001 and for the three and six month periods ended June 30,
2001 and 2002. We have restated our financial statements for the
fiscal year ended December 31, 2001 and the fiscal quarter
ended March 31, 2002 to reflect the bifurcation and
separate accounting for embedded derivatives contained in
certain of our annuity reinsurance contracts in accordance with
Statement of Financial Accounting Standards
No. 133  Accounting for Derivative Instruments
and Hedging Activities. In addition, in the restatement of our
financial statements for the fiscal year ended December 31,
2001, we reclassified the $19,500,000 reserve component of a
$33,000,000 charge taken in the fourth quarter of 2001 in
connection with minimum interest guarantees on our largest
annuity reinsurance contract as a reduction of our carried
balance for deferred acquisition costs. Further, portions of the
$33,000,000 charge, and a similar $24,700,000 charge taken in
the third quarter of 2001 in connection with the same contract,
were allocated across certain prior quarters in 2001, including
the quarter ended June 30, 2001. We have also restated our
financial statements for the fiscal year ended December 31,
2000 to recognize certain minimum interest guarantee payments
made during that year as an expense rather than as a reduction
in our interest sensitive contracts liability. The impact of the
restatement for the fiscal year ended December 31, 2000 was
to reduce our previously reported net income by approximately
$885,000, or 2.2%. The restatement of our financial statements
for the fiscal year ended December 31, 2000 has resulted in
changes to our previously issued financial statements for
subsequent periods.

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 June 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 the 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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PART I

FINANCIAL INFORMATION


ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED BALANCE SHEETS


(U.S. dollars)


|                                                                                                                                                                |                                            |               |               |               |  |   |               |               | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------- | ------------- | ------------- |  | - | ------------- | ------------- | 
|                                                                                                                                                                |                                            | June 30,      |               | December 31, 
|                                                                                                                                                                |                                            | 2002          |               | 2001         
|                                                                                                                                                                |                                            |               |               |              
|                                                                                                                                                                |                                            | (unaudited)   |               | (as restated)
|                                                                                                                                                                |                                            | (as restated) |               |              
|Assets                                                                                                                                                          |                                            |               |               |               |  |   |               |              
|Cash and cash equivalents                                                                                                                                       |                                            | $             | 61,451,277    |               |  | $ | 104,793,019   |              
|Fixed maturity investments at fair value
    (amortized cost of $387,088,613 and $312,420,719 at
    June 30, 2002 and December 31, 2001)                       |                                            |               | 395,126,786   |               |  |   | 318,987,432   |              
|Funds withheld at interest                                                                                                                                      |                                            |               | 1,447,876,547 |               |  |   | 1,489,689,347 |              
|Accrued investment income                                                                                                                                       |                                            |               | 5,499,599     |               |  |   | 4,897,063     |              
|Receivable for investments sold                                                                                                                                 |                                            |               | 1,265,214     |               |  |   | 23,815        |              
|Receivable for reinsurance ceded                                                                                                                                |                                            |               | 95,610,308    |               |  |   | 97,807,529    |              
|Deposits and other reinsurance receivables                                                                                                                      |                                            |               | 67,040,095    |               |  |   | 76,139,222    |              
|Deferred policy acquisition costs                                                                                                                               |                                            |               | 211,306,270   |               |  |   | 209,074,192   |              
|Other assets                                                                                                                                                    |                                            |               | 11,131,494    |               |  |   | 9,360,971     |              
|                                                                                                                                                                |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                | Total Assets                               |               | $             | 2,296,307,590 |  |   | $             | 2,310,772,590 | 
|                                                                                                                                                                |                                            |               |               |               |  |   |               |              
|Liabilities                                                                                                                                                     |                                            |               |               |               |  |   |               |              
|Reserves for future policy benefits                                                                                                                             |                                            | $             | 254,695,355   |               |  | $ | 221,865,755   |              
|Interest sensitive contracts liability                                                                                                                          |                                            |               | 1,467,194,479 |               |  |   | 1,519,596,075 |              
|Other deposit liabilities                                                                                                                                       |                                            |               | 147,000,000   |               |  |   | 137,000,000   |              
|Other reinsurance liabilities                                                                                                                                   |                                            |               | 17,622,838    |               |  |   | 17,340,304    |              
|Payable for investments purchased                                                                                                                               |                                            |               | 7,657,104     |               |  |   | 2,030,516     |              
|Accounts payable and accrued expenses                                                                                                                           |                                            |               | 10,947,530    |               |  |   | 10,751,098    |              
|                                                                                                                                                                |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                | Total Liabilities                          |               | $             | 1,905,117,306 |  |   | $             | 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; 25,838,828 and
    25,705,328 shares outstanding at June 30, 2002 and
    December 31, 2001) |                                            |               | 25,838,828    |               |  |   | 25,705,328    |              
|Additional paid-in capital                                                                                                                                      |                                            |               | 334,478,932   |               |  |   | 332,447,062   |              
|Notes receivable from stock sales                                                                                                                               |                                            |               | (1,576,973    | )             |  |   | (1,317,259    | )            
|Restricted stock (111,250 shares at June 30,
    2002)                                                                                                          |                                            |               | (1,804,474    | )             |  |   |              |              
|Accumulated other comprehensive income                                                                                                                          |                                            |               | 7,755,685     |               |  |   | 6,418,469     |              
|Retained earnings                                                                                                                                               |                                            |               | 26,498,286    |               |  |   | 38,935,242    |              
|                                                                                                                                                                |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                | Total Stockholders Equity                 |               | $             | 391,190,284   |  |   | $             | 402,188,842   | 
|                                                                                                                                                                |                                            |               |               |               |  |   |               |              
|                                                                                                                                                                | Total Liabilities and Stockholders Equity |               | $             | 2,296,307,590 |  |   | $             | 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 Six Months Ended
|                                                                                                    |         | June 30,                   |             | June 30,                
|                                                                                                    |         |                            |             |                         
|                                                                                                    |         | 2002                       |             | 2001                     |             | 2002 |            | 2001         
|                                                                                                    |         |                            |             |                          |             |      |            |              
|                                                                                                    |         |                            |             | (as restated)            |             |      |            | (as restated)
|Revenues                                                                                            |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Net premiums                                                                                        |         | $                          | 92,065,743  |                          |             | $    | 61,628,943 |               |           | $ | 170,072,634 |       |            | $ | 115,142,096 |      
|Investment income, net of related expenses                                                          |         |                            | 26,366,669  |                          |             |      | 19,605,194 |               |           |   | 50,956,459  |       |            |   | 42,695,004  |      
|Net realized investment gains                                                                       |         |                            | 1,837,672   |                          |             |      | 320,629    |               |           |   | 1,515,964   |       |            |   | 346,250     |      
|Net change in fair value of embedded derivatives                                                    |         |                            | (6,566,805  | )                        |             |      | 1,846,981  |               |           |   | (4,976,707  | )     |            |   | 1,698,054   |      
|Surrender fees and other revenues                                                                   |         |                            | 6,161,207   |                          |             |      | 4,644,690  |               |           |   | 10,057,332  |       |            |   | 7,778,161   |      
|                                                                                                    |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Total Revenues                                                                                      |         | $                          | 119,864,486 |                          |             | $    | 88,046,437 |               |           | $ | 227,625,682 |       |            | $ | 167,659,565 |      
|                                                                                                    |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Benefits and Expenses                                                                               |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Claim and policy benefits                                                                           |         | $                          | 74,443,139  |                          |             | $    | 45,201,447 |               |           | $ | 133,258,745 |       |            | $ | 86,826,115  |      
|Interest credited to interest sensitive products                                                    |         |                            | 20,948,167  |                          |             |      | 7,797,407  |               |           |   | 38,870,513  |       |            |   | 16,088,877  |      
|Policy acquisition costs and other insurance
    expenses                                           |         |                            | 40,571,869  |                          |             |      | 26,889,334 |               |           |   | 56,207,987  |       |            |   | 51,914,484  |      
|Collateral costs                                                                                    |         |                            | 1,053,037   |                          |             |      |           |               |           |   | 2,348,741   |       |            |   |            |      
|Operating expenses                                                                                  |         |                            | 3,142,272   |                          |             |      | 2,689,045  |               |           |   | 6,800,064   |       |            |   | 5,354,115   |      
|                                                                                                    |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Total Benefits and Expenses                                                                         |         | $                          | 140,158,484 |                          |             | $    | 82,577,233 |               |           | $ | 237,486,050 |       |            | $ | 160,183,591 |      
|                                                                                                    |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Net (loss) income before cumulative effect
    of a change in accounting principle                  |         | $                          | (20,293,998 | )                        |             | $    | 5,469,204  |               |           | $ | (9,860,368  | )     |            | $ | 7,475,974   |      
|Cumulative effect of a change in accounting
    principle (Note 2)                                  |         |                            |            |                          |             |      |           |               |           |   |            |       |            |   | (3,665,735  | )    
|                                                                                                    |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|                                                                                                    |         | Net (Loss) Income          |             | $                        | (20,293,998 | )    |            | $             | 5,469,204 |   |             | $     | (9,860,368 | ) |             | $     | 3,810,239 | 
|                                                                                                    |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|Net (loss) income per common share before
    cumulative effect of a change in accounting principle |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|                                                                                                    | Basic   |                            | $           | (0.79                    | )           |      | $          | 0.21          |           |   | $           | (0.38 | )          |   | $           | 0.29  |          
|                                                                                                    | Diluted |                            | $           | (0.79                    | )           |      | $          | 0.19          |           |   | $           | (0.38 | )          |   | $           | 0.27  |          
|Cumulative effect of a change in accounting
    principle per common share                          |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|                                                                                                    | Basic   |                            | $           |                         |             |      | $          |              |           |   | $           |      |            |   | $           | (0.14 | )        
|                                                                                                    | Diluted |                            | $           |                         |             |      | $          |              |           |   | $           |      |            |   | $           | (0.13 | )        
|Net (loss) income per common share                                                                  |         |                            |             |                          |             |      |            |               |           |   |             |       |            |   |             |      
|                                                                                                    | Basic   |                            | $           | (0.79                    | )           |      | $          | 0.21          |           |   | $           | (0.38 | )          |   | $           | 0.15  |          
|                                                                                                    | Diluted |                            | $           | (0.79                    | )           |      | $          | 0.19          |           |   | $           | (0.38 | )          |   | $           | 0.14  |          

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 Six Months Ended
|                                                                                      |  | June 30,                   |             | June 30,                
|                                                                                      |  |                            |             |                         
|                                                                                      |  | 2002                       |             | 2001                     |  | 2002 |            | 2001         
|                                                                                      |  |                            |             |                          |  |      |            |              
|                                                                                      |  |                            |             | (as restated)            |  |      |            | (as restated)
|Net (loss) income for the period                                                      |  | $                          | (20,293,998 | )                        |  | $    | 5,469,204  |               |  | $ | (9,860,368 | ) |  | $ | 3,810,239 | 
|Other comprehensive
    income:                                                       |  |                            |             |                          |  |      |            |               |  |   |            |   |  |   |           | 
|Unrealized holding gains (losses) on securities
    arising during the period         |  |                            | 8,688,887   |                          |  |      | (2,519,160 | )             |  |   | 2,853,180  |   |  |   | 1,912,030 | 
|Less reclassification adjustment for realized
    gains (losses) in net (loss) income |  |                            | 1,837,672   |                          |  |      | 320,629    |               |  |   | 1,515,964  |   |  |   | 346,250   | 
|                                                                                      |  |                            |             |                          |  |      |            |               |  |   |            |   |  |   |           | 
|Other comprehensive income                                                            |  | $                          | 6,851,215   |                          |  | $    | (2,839,789 | )             |  | $ | 1,337,216  |   |  | $ | 1,565,780 | 
|                                                                                      |  |                            |             |                          |  |      |            |               |  |   |            |   |  |   |           | 
|Total Comprehensive (Loss) Income                                                     |  | $                          | (13,442,783 | )                        |  | $    | 2,629,415  |               |  | $ | (8,523,152 | ) |  | $ | 5,376,019 | 
|                                                                                      |  |                            |             |                          |  |      |            |               |  |   |            |   |  |   |           | 

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 Six Months Ended
|                                                                                         |                                           | June 30,                
|                                                                                         |                                           |                         
|                                                                                         |                                           | 2002                     |              | 2001         
|                                                                                         |                                           |                          |              |              
|                                                                                         |                                           |                          |              | (as restated)
|Cash flows from operating activities                                                     |                                           |                          |              |               |   |   |              |            
|Net (loss) income                                                                        |                                           | $                        | (9,860,368   | )             |   | $ | 3,810,239    |            
|Adjustments to reconcile net (loss) income to
    cash provided by operating activities: |                                           |                          |              |               |   |   |              |            
|Cumulative effect of a change in accounting
    principle                                |                                           |                          |             |               |   |   | 3,665,735    |            
|Net realized investment (gains)                                                          |                                           |                          | (1,515,964   | )             |   |   | (346,250     | )          
|Net change in fair value of embedded derivatives                                         |                                           |                          | 4,976,707    |               |   |   | (1,698,054   | )          
|Amortization of restricted stock                                                         |                                           |                          | 360,896      |               |   |   |             |            
|Changes in:                                                                              |                                           |                          |              |               |   |   |              |            
|Accrued investment income                                                                |                                           |                          | (602,536     | )             |   |   | (953,676     | )          
|Deferred policy acquisition costs                                                        |                                           |                          | (2,232,078   | )             |   |   | (3,413,348   | )          
|Deposits and other reinsurance receivables                                               |                                           |                          | 11,296,348   |               |   |   | 7,441,654    |            
|Other assets                                                                             |                                           |                          | (1,770,523   | )             |   |   | (1,226,194   | )          
|Reserves for future policy benefits                                                      |                                           |                          | 32,829,600   |               |   |   | 16,048,410   |            
|Interest sensitive contracts, net of funds
    withheld                                  |                                           |                          | (15,565,503  | )             |   |   | (17,316,259  | )          
|Other reinsurance liabilities                                                            |                                           |                          | 282,534      |               |   |   | 8,102,651    |            
|Accounts payable                                                                         |                                           |                          | 196,432      |               |   |   | 210,907      |            
|                                                                                         |                                           |                          |              |               |   |   |              |            
|                                                                                         | Net cash provided by operating activities |                          | $            | 18,395,545    |   |   | $            | 14,325,815  |  
|                                                                                         |                                           |                          |              |               |   |   |              |            
|Cash flows from investing activities                                                     |                                           |                          |              |               |   |   |              |            
|Proceeds from sales of fixed maturity investments                                        |                                           | $                        | 287,775,849  |               |   | $ | 102,410,728  |            
|Purchase of fixed maturity investments                                                   |                                           |                          | (356,676,834 | )             |   |   | (133,011,744 | )          
|                                                                                         |                                           |                          |              |               |   |   |              |            
|                                                                                         | Net cash (used) by investing activities   |                          | $            | (68,900,985   | ) |   | $            | (30,601,016 | )
|                                                                                         |                                           |                          |              |               |   |   |              |            
|Cash flows from financing activities                                                     |                                           |                          |              |               |   |   |              |            
|Issuance of shares                                                                       |                                           | $                        |             |               |   | $ | 2,734,330    |            
|Interest accrued on notes receivable                                                     |                                           |                          | (48,334      | )             |   |   | (40,250      | )          
|Interest collected on notes receivable                                                   |                                           |                          | 38,620       |               |   |   |             |            
|Issuance of note receivable                                                              |                                           |                          | (250,000     | )             |   |   |             |            
|Dividends paid to stockholders                                                           |                                           |                          | (2,576,588   | )             |   |   | (2,550,266   | )          
|Increase in deposit liability                                                            |                                           |                          | 10,000,000   |               |   |   |             |            
|                                                                                         |                                           |                          |              |               |   |   |              |            
|                                                                                         | Net cash provided by financing activities |                          | $            | 7,163,698     |   |   | $            | 143,814     |  
|                                                                                         |                                           |                          |              |               |   |   |              |            
|Decrease in cash and cash equivalents                                                    |                                           | $                        | (43,341,742  | )             |   | $ | (16,131,387  | )          
|Cash and cash equivalents, beginning of period                                           |                                           |                          | 104,793,019  |               |   |   | 52,691,974   |            
|                                                                                         |                                           |                          |              |               |   |   |              |            
|Cash and cash equivalents, end of period                                                 |                                           | $                        | 61,451,277   |               |   | $ | 36,560,587   |            
|                                                                                         |                                           |                          |              |               |   |   |              |            

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 Six Months Ended
|                                           |  | June 30,                
|                                           |  |                         
|                                           |  | 2002                     |             | 2001         
|                                           |  |                          |             |              
|                                           |  | (as restated)            |             | (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                         |  |                          | 133,500     |               |  |   | 180,829     |  
|                                           |  |                          |             |               |  |   |             |  
|Balance at end of period                   |  | $                        | 25,838,828  |               |  | $ | 25,680,828  |  
|                                           |  |                          |             |               |  |   |             |  
|Additional paid-in capital                 |  |                          |             |               |  |   |             |  
|Balance at beginning of period             |  | $                        | 332,447,062 |               |  | $ | 329,496,091 |  
|Issuance of shares                         |  |                          | 2,031,870   |               |  |   | 2,553,501   |  
|                                           |  |                          |             |               |  |   |             |  
|Balance at end of period                   |  | $                        | 334,478,932 |               |  | $ | 332,049,592 |  
|                                           |  |                          |             |               |  |   |             |  
|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             |  |                          | (48,334     | )             |  |   | (40,250     | )
|                                           |  |                          |             |               |  |   |             |  
|Balance at end of period                   |  | $                        | (1,576,973  | )             |  | $ | (1,407,491  | )
|                                           |  |                          |             |               |  |   |             |  
|Restricted stock                           |  |                          |             |               |  |   |             |  
|Balance at beginning of period             |  | $                        |            |               |  | $ |            |  
|Issuance of shares                         |  |                          | (2,165,370  | )             |  |   |            |  
|Amortization of restricted stock           |  |                          | 360,896     |               |  |   |            |  
|                                           |  |                          |             |               |  |   |             |  
|Balance at end of period                   |  | $                        | (1,804,474  | )             |  | $ |            |  
|                                           |  |                          |             |               |  |   |             |  
|Accumulated other comprehensive
    income |  |                          |             |               |  |   |             |  
|Balance at beginning of period             |  | $                        | 6,418,469   |               |  | $ | 2,064,971   |  
|Net unrealized gains on securities         |  |                          | 1,337,216   |               |  |   | 1,565,780   |  
|                                           |  |                          |             |               |  |   |             |  
|Balance at end of period                   |  | $                        | 7,755,685   |               |  | $ | 3,630,751   |  
|                                           |  |                          |             |               |  |   |             |  
|Retained earnings                          |  |                          |             |               |  |   |             |  
|Balance at beginning of period             |  | $                        | 38,935,242  |               |  | $ | 84,636,496  |  
|Net (loss) income                          |  |                          | (9,860,368  | )             |  |   | 3,810,239   |  
|Stockholder dividends                      |  |                          | (2,576,588  | )             |  |   | (2,550,266  | )
|                                           |  |                          |             |               |  |   |             |  
|Balance at end of period                   |  | $                        | 26,498,286  |               |  | $ | 85,896,469  |  
|                                           |  |                          |             |               |  |   |             |  
|Total Stockholders Equity                 |  | $                        | 391,190,284 |               |  | $ | 445,850,148 |  
|                                           |  |                          |             |               |  |   |             |  

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


(as restated)


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 agreements. 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
reclassification.

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 record 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

7



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 as of
June 30, 2002, as well as certain components of the
Companys Consolidated Statements of Operations for the
fiscal years ended December 31, 2001 and 2000 and the three
and six month periods ended June 30, 2001, 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
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 and the Companys Consolidated
Statements of Operations for the fiscal year ended
December 31, 2001 and for the three and six month periods
ended June 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 June 30,
    2002                                |  |          |               |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |               |  
|Funds withheld at interest                                                     |  | $        | 1,447,876,547 |           |  | $                |           |           |  | $        |            |   |  | $ |           |   |  | $ | 1,447,876,547 |  
|Deferred acquisition costs                                                     |  |          | 211,306,270   |           |  |                  |           |           |  |          |            |   |  |   |           |   |  |   | 211,306,270   |  
|Interest sensitive contracts liability                                         |  |          | 1,464,394,167 |           |  |                  |           |           |  |          |            |   |  |   | 2,800,312  |   |  |   | 1,467,194,479 |  
|Stockholders Equity                                                           |  |          | 393,990,596   |           |  |                  |           |           |  |          |            |   |  |   | (2,800,312 | ) |  |   | 391,190,284   |  
|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   |  
|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   | )

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
    three month period ended June 30, 2001(1) |  |          |            |           |  |                  |            |           |  |          |   |  |  |   |             |   |  |   |            |  
|Net change in fair value of embedded derivatives                                            |  | $        |           |           |  | $                | 1,846,981  |           |  | $        |  |  |  | $ |            |   |  | $ | 1,846,981  |  
|Interest credited to interest sensitive products                                            |  |          | 4,497,407  |           |  |                  |           |           |  |          |  |  |  |   | 3,300,000   |   |  |   | 7,797,407  |  
|Policy acquisition and other insurance expenses                                             |  |          | 20,609,472 |           |  |                  | (257,264   | )         |  |          |  |  |  |   | 6,537,126   |   |  |   | 26,889,334 |  
|Net Income                                                                                  |  |          | 13,202,085 |           |  |                  | 2,104,245  |           |  |          |  |  |  |   | (9,837,126  | ) |  |   | 5,469,204  |  
|Consolidated Statements of Operations for the
    six month period ended June 30, 2001(1)   |  |          |            |           |  |                  |            |           |  |          |   |  |  |   |             |   |  |   |            |  
|Net change in fair value of embedded derivatives                                            |  | $        |           |           |  | $                | 1,698,054  |           |  | $        |  |  |  | $ |            |   |  | $ | 1,698,054  |  
|Interest credited to interest sensitive products                                            |  |          | 11,188,877 |           |  |                  |           |           |  |          |  |  |  |   | 4,900,000   |   |  |   | 16,088,877 |  
|Policy acquisition and other insurance expenses                                             |  |          | 37,675,005 |           |  |                  | (1,141,715 | )         |  |          |  |  |  |   | 15,381,194  |   |  |   | 51,914,484 |  
|Cumulative effect of a change in accounting
    principle                                   |  |          |           |           |  |                  | (3,665,735 | )         |  |          |  |  |  |   |            |   |  |   | (3,665,735 | )
|Net Income (Loss)                                                                           |  |          | 24,917,399 |           |  |                  | (825,966   | )         |  |          |  |  |  |   | (20,281,194 | ) |  |   | 3,810,239  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The information included in the As
    Reported column was originally presented in the
    Companys Consolidated Statements of Operations for the
    three and six month periods ended June 30, 2001 that was
    included in the Companys quarterly report on
    Form 10-Q for the fiscal quarter ended June 30, 2001,
    as filed with the Securities and Exchange Commission on
    August 13, 2001.

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. 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 the opinion of management, all
adjustments considered necessary for a fair presentation have
been included in these financial statements.

9



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     (Loss) Income
Per Share

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

|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ---------------- |  | ---- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                        |  |                    |             |                 
|                                                                                                                        |  | Three Months Ended |             | Six Months Ended
|                                                                                                                        |  | June 30,           |             | June 30,        
|                                                                                                                        |  |                    |             |                 
|                                                                                                                        |  | 2002               |             | 2001             |  | 2002 |            | 2001        
|                                                                                                                        |  |                    |             |                  |  |      |            |             
|                                                                                                                        |  |                    |             | (dollars,        |  |      |            | (dollars,   
|                                                                                                                        |  |                    |             | as restated)     |  |      |            | as restated)
|Net (loss) income available to common
    shareholders before cumulative effect of a change in accounting
    principle |  | $                  | (20,293,998 | )                |  | $    | 5,469,204  |              |  | $ | (9,860,368 | ) |  | $ | 7,475,974  |  
|Cumulative effect of a change in accounting
    principle                                                               |  |                    |            |                  |  |      |           |              |  |   |           |   |  |   | (3,665,735 | )
|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Net (loss) income available to common
    shareholders                                                                  |  | $                  | (20,293,998 | )                |  | $    | 5,469,204  |              |  | $ | (9,860,368 | ) |  | $ | 3,810,239  |  
|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Basic:                                                                                                                  |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Weighted average number of common shares
    outstanding                                                                |  |                    | 25,722,016  |                  |  |      | 25,591,746 |              |  |   | 25,716,453 |   |  |   | 25,590,414 |  
|Net (loss) income per share before cumulative
    effect of a change in accounting principle                            |  | $                  | (0.79       | )                |  | $    | 0.21       |              |  | $ | (0.38      | ) |  | $ | 0.29       |  
|Cumulative effect of a change in accounting
    principle                                                               |  | $                  |            |                  |  | $    |           |              |  | $ |           |   |  | $ | (0.14      | )
|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Net (loss) income per share                                                                                             |  | $                  | (0.79       | )                |  | $    | 0.21       |              |  | $ | (0.38      | ) |  | $ | 0.15       |  
|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Diluted:                                                                                                                |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Weighted average number of common shares
    outstanding                                                                |  |                    | 25,722,016  |                  |  |      | 28,211,313 |              |  |   | 25,716,453 |   |  |   | 28,097,367 |  
|Net (loss) income per share before cumulative
    effect of a change in accounting principle                            |  | $                  | (0.79       | )                |  | $    | 0.19       |              |  | $ | (0.38      | ) |  | $ | 0.27       |  
|Cumulative effect of a change in accounting
    principle                                                               |  | $                  |            |                  |  | $    |           |              |  | $ |           |   |  | $ | (0.13      | )
|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  
|Net (loss) income per share                                                                                             |  | $                  | (0.79       | )                |  | $    | 0.19       |              |  | $ | (0.38      | ) |  | $ | 0.14       |  
|                                                                                                                        |  |                    |             |                  |  |      |            |              |  |   |            |   |  |   |            |  

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. 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 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 included in the
annuity segment. Both the life and annuity segments have
specific assets, liabilities,

10



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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     |  |           |               |             
|June 30, 2002(1)      |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                      |  |             |             |             |  |           |               |             
|Revenues              |  | $           | 94,465,177  |             |  | $         | 21,395,350    |              |  | $ | 4,003,959   |  |  | $ | 119,864,486   |  
|Benefits and Expenses |  |             | 88,013,741  |             |  |           | 51,185,729    |              |  |   | 959,013     |  |  |   | 140,158,484   |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Segment Income (Loss) |  | $           | 6,451,436   |             |  | $         | (29,790,379   | )            |  | $ | 3,044,945   |  |  | $ | (20,293,998   | )
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Total Assets          |  | $           | 605,018,193 |             |  | $         | 1,553,294,479 |              |  | $ | 137,994,918 |  |  | $ | 2,296,307,590 |  
|                      |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  

|                          |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               | 
|------------------------- |  | - | ----------- |  |  | - | ------------- | - |  | - | ----------- |  |  | - | ------------- | 
|Three Months Ended        |  |   |             |  |  |   |               |  
|June 30, 2001             |  |   |             |  |  |   |               |  
|                          |  |   |             |  |  |   |               |  
|(as restated, see Note 2) |  |   |             |  |  |   |               |  
|Revenues                  |  | $ | 61,013,100  |  |  | $ | 22,762,419    |   |  | $ | 4,270,918   |  |  | $ | 88,046,437    | 
|Benefits and Expenses     |  |   | 53,635,950  |  |  |   | 27,428,167    |   |  |   | 1,513,117   |  |  |   | 82,577,233    | 
|                          |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               | 
|Segment Income (Loss)     |  | $ | 7,377,150   |  |  | $ | (4,665,748    | ) |  | $ | 2,757,802   |  |  | $ | 5,469,204     | 
|                          |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               | 
|Total Assets              |  | $ | 333,362,942 |  |  | $ | 1,630,980,947 |   |  | $ | 270,959,673 |  |  | $ | 2,235,303,562 | 
|                          |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               | 

|                      |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  
|--------------------- |  | - | ----------- |  |  | - | ----------- | - |  | - | --------- |  |  | - | ----------- | -
|Six Months Ended      |  |   |             |  |  |   |             |  
|June 30, 2002(1)      |  |   |             |  |  |   |             |  
|                      |  |   |             |  |  |   |             |  
|Revenues              |  | $ | 173,611,221 |  |  | $ | 48,311,104  |   |  | $ | 5,703,357 |  |  | $ | 227,625,682 |  
|Benefits and Expenses |  |   | 159,970,569 |  |  |   | 75,183,152  |   |  |   | 2,332,329 |  |  |   | 237,486,050 |  
|                      |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  
|Segment Income (Loss) |  | $ | 13,640,652  |  |  | $ | (26,872,048 | ) |  | $ | 3,371,028 |  |  | $ | (9,860,368  | )
|                      |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  

|                                                                                     |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  
|------------------------------------------------------------------------------------ |  | - | ----------- |  |  | - | ----------- | - |  | - | --------- |  |  | - | ----------- | -
|Six Months Ended                                                                     |  |   |             |  |  |   |             |  
|June 30, 2001                                                                        |  |   |             |  |  |   |             |  
|                                                                                     |  |   |             |  |  |   |             |  
|(as restated, see Note 2)                                                            |  |   |             |  |  |   |             |  
|Revenues                                                                             |  | $ | 113,416,211 |  |  | $ | 46,300,084  |   |  | $ | 7,943,270 |  |  | $ | 167,659,565 |  
|Benefits and Expenses                                                                |  |   | 101,904,938 |  |  |   | 55,248,278  |   |  |   | 3,030,375 |  |  |   | 160,183,591 |  
|                                                                                     |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  
|Segment Income (Loss) before cumulative effect of
    change in accounting principle |  |   | 11,511,273  |  |  |   | (8,948,194  | ) |  |   | 4,912,895 |  |  |   | 7,475,974   |  
|Cumulative effect of a change in accounting
    principle                            |  |   |            |  |  |   | (3,665,735  | ) |  |   |          |  |  |   | (3,665,735  | )
|                                                                                     |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  
|Net Segment Income                                                                   |  | $ | 11,511,273  |  |  | $ | (12,613,929 | ) |  | $ | 4,912,895 |  |  | $ | 3,810,239   |  
|                                                                                     |  |   |             |  |  |   |             |   |  |   |           |  |  |   |             |  



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain items have been reclassified since they
    were originally reported in the Companys Form 10-Q
    for the period ended June 30, 2002.

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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 June 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. The
subsidiary of XL Capital has the right, up to the amount of any
claims paid under the agreement, to be reimbursed from any
proceeds the Company receives from its arbitration proceeding
with Transamerica. In determining the additional write down of
deferred acquisition costs on this annuity reinsurance contract
of $24,796,000 during the second quarter of 2002, the Company
anticipated $10,000,000 of reinsurance recoveries from the
subsidiary of XL Capital.

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

During the first quarter of 2002, the Company
adopted a restricted stock incentive compensation program and
made one award to employees. Under the award, the Company issued
133,500 shares of restricted stock, which vest on the third
anniversary of the grant date. The fair value of the restricted
stock awards on the date of award and assuming all shares vest
was $2,165,370, which is reflected in the Companys balance
sheet as common stock and paid in capital. The fair value of
this grant is being amortized on a straight line basis over the
three year vesting period. The unamortized balance of the grant
is reflected in the balance sheet as restricted stock.



|   |              
|-- | -------------
|9. | Contingencies

In May 2002, the Company initiated arbitration
proceedings in connection with two of its life reinsurance
agreements. The Company is seeking monetary damages and/or
equitable relief from the ceding companies based upon its
contention that, in the case of the first ceding company, it
failed to disclose material facts, known to it, about the block
of business being reinsured when that business was underwritten,
and in the second case, the ceding company is unable to
segregate from its records business that is properly covered
under the reinsurance agreement. No assurance can be given that
monetary recovery or equitable relief will occur.

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has unsecured letters of credit of
approximately $89 million with Citibank, N.A. that have
been posted as security to allow certain of the Companys
ceding companies to take credit on their statutory financial
statements for reinsurance obtained from the Company. In August
of 2002, Citibank notified the Company that the bank was
reducing its aggregate exposure to unsecured letters of credit.
As a result, Citibank has requested that unsecured letters of
credit it has issued on behalf of the Company be secured by
October 31, 2002. Consequently, the Company is currently
seeking to raise capital that will fund its collateral
requirements for its ceding companies, which would eliminate the
need for unsecured letters of credit from Citibank, but no
assurance can be given that the Company will be able to do so.
If the Company is unable to raise additional capital, it would
be required to retrocede a portion of its business to another
reinsurer in order to effectively relieve itself of the
obligation to post collateral to its ceding companies.

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 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

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ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

14



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

General

Annuity and Life Re (Holdings), Ltd. was
incorporated on December 2, 1997 under the laws of Bermuda.
We provide annuity and life reinsurance to select insurers and
reinsurers through our wholly-owned subsidiaries: Annuity and
Life Reassurance, Ltd., which is licensed under the insurance
laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc., an insurance holding company based in the United
States, and its subsidiary, Annuity and Life Reassurance
America, Inc., a life insurance company authorized to conduct
business in over 40 states of the United States and the
District of Columbia. We acquired Annuity and Life Reassurance
America on June 1, 2000. For more information regarding the
business and operations of our company and its subsidiaries,
please see our amended Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.

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. 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 affects 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 annuity

15



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##### Table of Contents



reinsurance agreement with Transamerica
Occidental Life Insurance Company, 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 June 30, 2002, the
bifurcation and separate accounting for the embedded derivatives
contained in that contract would add significant volatility to
our reported results.


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) Income.For the three months ended June 30, 2002, we had a net loss
of $(20,294,000) or $(0.79) per basic and fully diluted common
share, as compared with net income of $5,469,000 or $0.21 per
basic common share and $0.19 per common share on a fully diluted
basis for the three months ended June 30, 2001. For the six
months ended June 30, 2002, we had a net loss of
$(9,860,000) or $(0.38) per basic and fully diluted common
share, as compared with net income of $3,810,000 or $0.15 per
basic common share and $0.14 per common share on a fully diluted
basis for the six month period ended June 30, 2001. The
decline in net income for the three and six month periods ended
June 30, 2002 was principally the result of a $24,796,000
write down of deferred acquisition costs associated with our
annuity reinsurance contract with Transamerica during the second
quarter of 2002.

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
affects the emergence of expected gross profits under the
contracts for purposes of amortizing deferred acquisition costs.
The cumulative effect of the change in accounting principle as
of January 1, 2001 was a loss of $(3,666,000) or $(0.14)
per basic common share and $(0.13) per fully diluted common
share, which is reflected in our net income for the six month
period ended June 30, 2001.

Our net income is significantly affected by our
annuity reinsurance contract with Transamerica, which is our
largest annuity reinsurance contract and represented
approximately $824 million, or 57%, of our Funds withheld
at interest receivable as of June 30, 2002, as compared
with approximately $962 million, or approximately 65%, of our
Funds withheld at interest receivable as of December 31,
2001. The significant loss associated with the Transamerica
contract during the three and six months ended June 30,
2002 was primarily the result of the 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
approximately $15,381,000 during the six month period ended
June 30, 2001, approximately $6,537,000 of which was
recorded in the three month period ended June 30, 2001. A
significant portion of the write downs recorded in 2001 related
to the high surrender rates on the policies 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 six
month periods ended June 30, 2002 were approximately
$8,129,000 and $13,322,000, respectively, as compared with
minimum interest guarantee payments of $3,300,000 and
$4,900,000, respectively, for the three and six month periods
ended June 30, 2001. For a more detailed discussion of the
assumptions we made when determining the amount of the 2001 and
2002 write downs of deferred acquisition costs, see
 Segment Reporting  Annuity
Segment.

16



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##### Table of Contents



Net Premiums.Net
premium revenue for the three and six month periods ended
June 30, 2002 was $92,066,000 and $170,073,000, an increase
of 49% and 48%, respectively, over the net premium revenue of
$61,629,000 and $115,142,000, respectively, reported for the
three and six month periods ended June 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. At
June 30, 2002, the total face amount of life insurance in
force was $137 billion compared with approximately
$91 billion at June 30, 2001, a 51% 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 can
fluctuate from period to period.

As discussed in  Liquidity and
Capital Resources, the recent downgrade of our financial
strength ratings by three nationally recognized ratings
agencies, together with the request of one of our letter of
credit providers that we secure approximately $89,000,000 of
outstanding unsecured letters of credit and our general need to
satisfy the collateral requirements of our ceding companies,
will require us to raise additional capital. If we are unable to
raise such additional capital, our ability to write new business
will be limited and the historical growth rates we have achieved
since commencing operations in 1998 will likely not be achieved
in future periods. There can be no assurance that we will be
able to raise additional capital on terms acceptable to us that
will allow us to maintain our current book of business or to
grow that business in the future.

Net Investment
Income.Total net investment income
for the three and six month periods ended June 30, 2002 was
$26,367,000 and $50,956,000, as compared with $19,605,000 and
$42,695,000, respectively, for the three and six month periods
ended June 30, 2001. The increases in investment income are
primarily due to investment income on the deposit of
$137,000,000 from a third party reinsurer during the fourth
quarter of 2001 that is used to fund collateral requirements of
our ceding companies. The average yield earned on an annualized
basis our invested assets, including deposits with reinsurers,
but excluding Funds withheld managed by our ceding companies,
for the six month period ended June 30, 2002 was
approximately 6.01%, as compared with 6.36% for the six months
ended June 30, 2001. The decline in yield reflects our
higher than normal commitment to cash during the first six
months of 2002 as a result of receiving the $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
six month periods ended June 30, 2002 was $19,175,000 and
$37,723,000, as compared to $14,564,000 and $32,614,000 for the
three and six month periods ended June 30, 2001. The
increases in investment income on our Funds withheld are
primarily due to an increase in managed assets relating to our
annuity reinsurance contract with Ohio National, which is
performing better than our reinsurance contract with
Transamerica, whose assets are diminishing. The average
annualized yield rate earned on Funds withheld for the six month
period ended June 30, 2002 was 5.38%, as compared with
4.18% for the six month period ended June 30, 2001. For
purposes of calculating the average annualized yield rate on our
Funds withheld, 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 the yield rates
on our Funds withheld was primarily due to the increasing size
of the asset base underlying our contract with Ohio National and
the decreasing size of the asset base underlying our contract
with Transamerica.

Net Realized Investment
Gains.Net realized investment gains
for the three month periods ended June 30, 2002 and 2001
were $1,838,000 and $321,000, respectively. For the six month
periods ended June 30, 2002 and 2001, net realized
investment gains were $1,516,000 and $346,000, respectively.
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.

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 six month periods ended
June 30, 2002, the unrealized loss in fair value of our
embedded derivatives was $(6,567,000) and $(4,977,000),
respectively. For the three and six month periods ended
June 30, 2001, we had unrealized gains of $1,847,000 and
$1,698,000, respectively. The unrealized losses

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during the three and six month periods ended
June 30, 2002 were the result of credit spreads widening in
the sectors in which the underlying investments are held,
particularly in the telecommunications and energy sectors, which
trends have continued into the third quarter of 2002. The
unrealized gains during the three and six month periods ended
June 30, 2001 were related to repositioning of the
underlying assets and decreasing credit spreads.


Surrender Fees and Other
Revenue.Surrender fees and other
revenue for the three and six month periods ended June 30,
2002 was $6,161,000 and $10,057,000, respectively, as compared
with $4,645,000 and $7,778,000, respectively, for the three and
six month periods ended June 30, 2001. This income is
primarily derived from net surrender fees related to our fixed
annuity products. The increase in revenue for the three and six
month periods ended June 30, 2002 is primarily due to
increases in surrender and withdrawal levels during those
periods as compared with the three and six month periods ended
June 30, 2001.

Claims and Policy
Benefits.Claims and policy benefits
for the three month periods ended June 30, 2002 and 2001
were $74,443,000 and $45,201,000, or 81% and 73% of net
premiums, respectively. For the six months ended June 30,
2002 and 2001, claims and policy benefits were $133,259,000 and
$86,826,000, or 78% and 75% of net premiums, respectively.
Aggregate experience for the six months ended June 30,
2002, excluding two underperforming life reinsurance contracts,
was within pricing parameters. We are currently in arbitration
on the two life reinsurance contracts that have generated
mortality experience beyond our pricing parameters. If we are
unable to rescind, recapture, reprice, or otherwise restructure
these agreements, we may incur additional losses on these
contracts in future periods. Although we expect mortality to be
fairly constant over long periods of time, it will fluctuate
from period to period. 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
six month periods ended June 30, 2002 was $20,948,000 and
$38,871,000, respectively, as compared with $7,797,000 and
$16,089,000, for the three and six month periods ended
June 30, 2001. Included in Interest credited to interest
sensitive products for the three and six month periods ended
June 30, 2002 are minimum interest guarantee payments of
approximately $8,129,000 and $13,322,000, respectively, as
compared with minimum interest guarantee payments of $3,300,000
and $4,900,000, respectively, for the three and six month
periods ended June 30, 2001. The increase in Interest
credited to interest sensitive products for the three and six
month period ended June 30, 2002 was primarily caused by
these minimum interest 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 six month periods ended June 30, 2002 were $40,572,000
and $56,208,000, respectively, and $26,889,000 and $51,914,000,
respectively, for the three and six month periods ended June 30,
2001. The increase in the three and six month periods ended
June 30, 2002 was caused by the write down of $24,796,000
of deferred acquisition costs associated with our largest
annuity reinsurance contract in the second quarter of 2002, as
compared with write downs on the same contact during the three
and six months ended June 30, 2001 of $6,537,000 and
$15,381,000, respectively. The increase in these costs also
reflects the growth and development of our life business.
Generally, policy acquisition costs and other insurance expenses
fluctuate with business volume and changes in product mix.

Collateral Costs.Collateral costs comprise fees charged by a third party
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 $2,349,000 in the first six
months of 2002. Because our collateral funding facility was not
in place until the fourth quarter of 2001, no costs were
incurred in the first six months of 2001.

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Operating Expenses.Operating expenses for the three month period ended
June 30, 2002 were $3,142,000 or 2.5% of total revenue
(excluding the net change in fair value of embedded
derivatives), as compared to $2,689,000 or 3.1% of total revenue
(excluding the net change in fair value of embedded derivatives)
for the comparable prior period in 2001. Operating expenses for
the six month period ended June 30, 2002 were $6,800,000 or
2.9% of total revenue (excluding the net change in fair value of
embedded derivatives), as compared to $5,354,000 or 3.2% of
total revenue (excluding the net change in fair value of
embedded derivatives) for the comparable prior period in 2001.
We have incurred a higher than normal level of legal expenses
during the first six months of 2002 related to a shelf
registration statement we filed with the Securities and Exchange
Commission relating to the offering in one or more transactions
on a delayed basis of up to $200,000,000 of senior debt
securities; however, we consider our operating expense level to
be low by industry standards and to be in line with our plan to
be a low cost provider.

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 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 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 life segment is our largest segment as
measured by profitability. For the three months ended
June 30, 2002, segment income fell 13% to $6,451,000 from
$7,377,000 for the three months ended June 30, 2001,
reflecting an increase in life segment benefits and expenses as
a percentage of premiums. Life segment benefits increased to
80.0% of premiums for the three months ended June 30, 2002,
as compared to 74.2% for the three months ended June 30,
2001. The increase in expenses is primarily the result of costs
associated with the arbitrations relating to two of our
contracts, legal expenses associated with our registration
statement and expenses for outside consultants. For the six
months ended June 30, 2002, segment income grew 19% to
$13,641,000 from $11,511,000 for the six months ended
June 30, 2001, reflecting growth in our life operations
offset by increases in expenses.

Segment revenues for the three month period ended
June 30, 2002 grew 55% to $94,465,000 from $61,013,000 in
the three month period ended June 30, 2001, and grew 53% to
$173,611,000 for the six month period ended June 30, 2002
from $113,416,000 for the six month period ended June 30,
2001. Our revenue growth for the three and six month periods
ended June 30, 2002 was primarily driven by over 50% growth
in life premiums. For both the three and six month periods ended
June 30, 2002, the balance of the growth in revenue was
derived from investment income earned on funds deposited with us
by a third party reinsurer that are used to fund collateral
requirements of our clients.

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Premium growth in our life segment benefited
materially from the availability to us of our collateral
financing facility. We believe that this facility, which
provides us with funds to secure a substantial portion of our
obligations to cedents, is unique in the life reinsurance
industry and, if additional funds will be available to us under
this facility, may provide us with a competitive advantage.
However, this reinsurer may in the future provide a similar
facility to one or more of our competitors, which could have an
adverse impact on our new business growth.

Segment policy benefits and expenses for the
three month period ended June 30, 2002 grew 64% to $88,014,000
from $53,636,000 in the second quarter of 2001, and grew 57% to
$159,971,000 for the six month period ended June 30, 2002
from $101,905,000 for the six months ended June 30, 2001.
Both increases reflect the increase in premium volume and face
amount of insurance in force. In addition, mortality experience
deteriorated moderately for the three and six month periods
ended June 30, 2002, as compared to the three and six month
periods ended June 30, 2001. Segment benefits and expenses
for the three and six month periods ended June 30, 2002
include collateral costs of $1,053,000 and $2,349,000,
respectively, associated with our collateral funding facility
that were not present in comparable periods in 2001. Overall
benefits and expenses, excluding the impact of two life
reinsurance contracts currently in arbitration, were in line
with our expectations.

Our life segment continued to perform well with a
return on revenue of 6.8% and a return on equity of 14.2% for
the second quarter of 2002.

Annuity Segment.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. We also reinsure certain guarantees associated
with variable annuity contracts, including guaranteed minimum
death benefits, enhanced earnings benefits and guaranteed
minimum income benefits.

Our annuity segment contains the majority of our
assets. While we would expect it to 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 bifurcate
and separately account for embedded derivatives in certain of
our annuity reinsurance agreements. The unrealized change in the
value of these embedded derivatives is reported in our income
statement each quarter. The change in the value of the embedded
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. In the first quarter of 2002, we purchased
$10,000,000 of reinsurance from a subsidiary of XL Capital Ltd,
a related party, for a premium of $1,500,000 million, to
provide an additional layer of protection against minimum
interest guarantee payments under the Transamerica annuity
reinsurance contract. During the second quarter of 2002, we
wrote down an additional $24,976,000 of deferred acquisition
costs related to this contract, 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 determining the amount of this
additional write down of deferred acquisition costs on this
contract, we anticipated $10,000,000 of reinsurance recoveries
from the subsidiary of XL Capital. Further, in estimating the
$46,115,000 and $24,976,000 in 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, which represented 53% of
our annuity segment assets at June 30, 2002, is not
expected to generate net income going forward.

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In connection with our write down of deferred
acquisition costs for 2001, we assumed that convertible bonds,
which comprised approximately 69% of the portfolio of invested
assets managed by the ceding company under our Transamerica
annuity reinsurance contract at December 31, 2001, would
produce an annual investment return of 10% for calendar year
2002, and 8% thereafter. The remainder of the portfolio of
invested assets consists of traditional income assets, for which
we assumed a 6% return for 2002 and thereafter. We assumed
annual policyholder lapse rates of 26% for 2002, 21% for 2003
and 15% for 2004.

Although management believed that these estimates
were reasonable when made, continuing poor equity market
performance during 2002 required us to revise our estimates of
the impact of future minimum interest guarantee payments on
profits arising from our largest annuity reinsurance contract,
resulting in the additional $24,796,000 write off of deferred
acquisition costs during the second quarter of 2002. In
estimating the amount of this additional write off, we
considered actual investment results achieved by the convertible
bonds in the portfolio of invested assets for the first half of
2002, and assumed an annualized investment return of 0.00% on
convertible bonds for the remainder of 2002, with an 8.00%
return assumed for 2003 and thereafter. Our assumptions for
annual investment return on traditional fixed income securities
included in the invested assets remains 6.25%. We also increased
our assumptions regarding annualized policyholder lapse rates to
28% for the second half of 2002, 25% for 2003 and 16% for 2004.
These assumed lapse rates include assumptions regarding full
surrenders, partial withdrawals, annuitizations and policyholder
deaths. While we believe that these estimates are more
appropriate in light of todays market environment and
current lapse experience than those made in 2001, there can be
no assurance that our estimates will prove to be accurate, and
if they do not, we may be required to write down additional
deferred acquisition costs or to recognize losses.

Our annuity segment loss for the three months
ended June 30, 2002 was $(29,790,000) compared with segment
loss of $(4,666,000) for the three months ended June 30,
2001. For the six months ended June 30, 2002, our annuity
segment loss was $(26,872,000), as compared with segment loss of
$(12,614,000) for the six months ended June 30, 2001.
Segment loss for the six months ending June 30, 2001
includes a loss of $(3,666,000) from the cumulative effect of a
change in accounting principle as of January 1, 2001
relating to the application of FAS 133 to our annuity
reinsurance contracts. The decline in income for the three and
six month periods ended June 30, 2002 was principally the
result of a $24,796,000 write down of deferred acquisition costs
on our annuity reinsurance contract with Transamerica in the
second quarter of 2002, as compared with write downs of
$6,537,000 and $15,381,000 on the same contract during the three
and six month periods ended June 30, 2001. Segment income
was also affected by minimum interest guarantee payments of
$8,129,000 and $13,322,000 made under the same contract during
the three and six month periods ended June 30, 2002, as
compared with payments of $3,300,000 and $4,900,000,
respectively, for the three and six month periods ended
June 30, 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. For the three and six month
periods ended June 30, 2002, the change in fair value of
our embedded derivatives (net of their related changes in
deferred acquisition cost amortization) was an unrealized loss
of $(5,663,000) and $(3,474,000), respectively. For the three
and six month periods ended June 30, 2001, we had
unrealized gains of $2,104,000 and $2,330,000, respectively, in
the fair value of our embedded derivatives (net of their related
changes in deferred acquisition cost amortization). The
unrealized loss during the three and six month periods ended
June 30, 2002 was the result of credit spreads widening in
the sectors in which the underlying investments are held,
particularly in the telecommunications and energy sectors, which
trends have continued into the third quarter of 2002. The
unrealized gain during the three and six month periods ended
June 30, 2001 were related to repositioning of assets and
decreasing credit spreads.

Total revenue for our annuity segment declined 6%
for the three months ended June 30, 2002 to $21,395,000, as
compared with $22,762,000 in the three months ended
June 30, 2001. Segment revenue for the six months ended
June 30, 2002 grew 4% to $48,311,000 from $46,300,000 for
the six months ended June 30, 2001. These changes are
primarily related to an increase in premiums collected and to a
lesser extent

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from an increase in investment income and are
reduced by the unrealized loss during the first and second
quarters of 2002 on the embedded derivatives hosted by our
annuity reinsurance contracts discussed above.


Policy benefits and expenses for the annuity
segment includes interest credited to policyholders, minimum
interest guarantee payments, segment specific expenses and
allocated expenses. These expenses grew 87% to $51,186,000 for
the three months ended June 30, 2002, as compared with
$27,428,000 for the three months ended June 30, 2001, and
grew 36% to $75,183,000 for the six months ended June 30,
2002, as compared with $55,248,000 for the six months ended
June 30, 2001. The primary components of these expenses are
interest credited to policyholders and amortization of deferred
acquisition costs. As discussed above, in the second quarter of
2002, we wrote down $24,796,000 of deferred acquisition costs
associated with our annuity reinsurance contract with
Transamerica as compared to write downs of $8,844,000 and
$6,537,000 in the first and second quarters of 2001 on the same
contract. In addition, interest credited increased as a result
of our annuity reinsurance contract with Ohio National, which we
wrote in late 2001, as well as an increase in minimum interest
guarantee payments on our annuity reinsurance contract with
Transamerica.

Our annuity line is not performing well due to
our annuity reinsurance contract with Transamerica and the
unrealized losses arising from embedded derivatives. Return on
equity for the second quarter of 2002 was significantly negative.

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 company as a whole, will likely have
volatile results. Segment income grew 10% to $3,045,000 for the
three months ended June 30, 2002, as compared with
$2,758,000 for the three months ended June 30, 2001. For
the six months ended June 30, 2002, segment income declined
31% to $3,371,000 from $4,913,000 for the six months ended
June 30, 2001. Revenues declined by 6% to $4,004,000 for
the three months ended June 30, 2002, as compared with
$4,271,000 for the three months ended June 30, 2001. For
the six months ended June 30, 2002, revenues declined 28%
to $5,703,000 from $7,943,000 for the six months ended
June 30, 2001. Both declines were primarily driven by the
movement of stockholders equity to the life segment in
support of its growth. Realized capital gains of $1,838,000 and
$1,516,000 for the three and six month periods ending
June 30, 2002 compared to $321,000 and $346,000,
respectively, for the comparable prior periods, slowed the rate
of decline in corporate revenues for both periods.

Segment benefits and expenses declined 37% to
$959,000 for the three months ended June 30, 2002, as
compared with $1,513,000 for the three months ended
June 30, 2001. For the six months ended June 30, 2002,
benefits and expenses declined 23% to $2,332,000, as compared
with $3,030,000 for the six months ended June 30, 2001.
Both declines were driven by the deployment of
stockholders equity to the life segment.

Financial Condition



| |            
| | -----------
| | Investments

At June 30, 2002, our invested assets,
including cash and cash equivalents, had an aggregate fair value
of $456,578,000, including unrealized gains of approximately
$7,756,000, compared with an aggregate fair value of
$423,780,000, including unrealized gains of $6,418,000 at
December 31, 2001. The increase in the fair value of our
invested assets generally reflect the changes in interest rates
during the first six months of 2002. At June 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 3.6 years, compared with a
weighted average credit quality rating of AA+ and a
weighted average duration of 3.7 years at December 31,
2001.

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 by Standard & Poors to be somewhat
susceptible to the adverse

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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. Our investment guidelines allow us to invest in fixed
income securities that are rated below investment grade but
limit these investments to 10% of our invested assets. We will
not invest in any fixed income securities in emerging markets or
securities which are not rated by a major rating agency.


At June 30, 2002, $651,000 at fair value, or
0.16% of our fixed income securities (0.17% of
Stockholders Equity), consisted of below investment grade
securities, as compared with $3,749,000 at fair value, or 1.17%
of our fixed income securities (0.93% of Stockholder
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 limit 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 June 30, 2002, there was one impaired security in
our portfolio, which was written down by $600,000.

At June 30, 2002, mortgage backed securities
represented approximately 14.2% of our invested assets,
including cash and cash equivalents, compared to 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. 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 June 30, 2002 and December 31, 2001.

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,
|                                                             |  | Six Months Ended |         |                                 
|                                                             |  | June 30, 2002    |         | 2001                             |  | 2000 |         | 1999
|                                                             |  |                  |         |                                  |  |      |         |     
|                                                             |  |                  |         |                                  |  |     
|                                                             |  |                  |         | (dollars in thousands)           |  |     
|Total invested assets, including cash and
    equivalents(1) |  | $                | 456,578 |                                  |  | $    | 423,780 |      |  | $ | 321,819 |   |  | $ | 304,060 |  
|Investment income, net of related expenses                   |  |                  | 13,235  |                                  |  |      | 20,165  |      |  |   | 20,126  |   |  |   | 20,483  |  
|Effective yield rate(2)                                      |  |                  | 5.57    | %                                |  |      | 5.74    | %    |  |   | 6.85    | % |  |   | 6.29    | %
|Realized investment gains (losses)                           |  | $                | 1,516   |                                  |  | $    | 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 June 30, 2002, our Funds withheld
receivable was $1,447,877,000, 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.

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Our arrangements are generally on a quota share
basis, so the portion that is ceded to us is a fixed percentage
of the liabilities arising from the underlying policies. Our
share of the ceding companys liability is included on our
Balance Sheet as Interest sensitive contracts
liabilities. However, unlike other reinsurance
arrangements in which we receive cash or investments as
consideration for assuming a portion of the ceding
companys liability, under these types of arrangements, we
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 June 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 June 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 the assets were invested in below investment grade
securities on that date.

The average annualized yield rate earned on our
Funds withheld receivable was approximately 5.38% for the six
months ended June 30, 2002, compared to 4.59% for the year
ended December 31, 2001. At June 30, 2002,
approximately 57% and 22% of our Funds withheld at interest
asset represented receivables from Transamerica and The Ohio
National Life Insurance Company, respectively, compared with 65%
and 15%, respectively, at December 31, 2001. The decrease
in the proportion of our Funds withheld asset related to the
Transamerica contract reflects the continued high surrender rate
on the policies underlying that contract, as well as the growth
of the Funds withheld asset related to our contract with Ohio
National. The average annualized yield rates earned on the
assets funding our annuity obligations to Transamerica and Ohio
National were approximately 4.47% and 7.69%, respectively, for
the six months ended June 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 June 30, 2002, the assets
funding the policyholder obligations under the contract had an
average credit quality of A- and an average duration
of 4.2 years, compared to an average credit quality of
A and an average duration of 4.2 years at
December 31, 2001. At June 30, 2002, approximately 67%
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. 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.

24



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##### Table of Contents



According to data provided to us by Transamerica,
at June 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                                           |  | $          | 599,103,146 |              |  | $          | 547,752,020 |  |  |  | 66.7  | 
|Investment grade U.S. corporate bonds                       |  |            | 159,658,635 |              |  |            | 162,165,153 |  |  |  | 19.7  | 
|Below investment grade U.S. corporate bonds                 |  |            | 48,681,115  |              |  |            | 45,246,851  |  |  |  | 5.5   | 
|Short term securities                                       |  |            | 64,773,743  |              |  |            | 66,000,408  |  |  |  | 8.1   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 872,216,639 |              |  | $          | 821,164,432 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 6,473,818   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 827,638,251 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 

According to data provided to us by Transamerica,
at June 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                                                         |  | $          | 121,332,524 |              |  | $          | 121,717,985 |  |  |  | 14.8  | 
|AA                                                          |  |            | 92,239,228  |              |  |            | 87,767,984  |  |  |  | 10.7  | 
|A                                                           |  |            | 201,143,965 |              |  |            | 197,222,840 |  |  |  | 24.0  | 
|BBB                                                         |  |            | 412,957,197 |              |  |            | 373,466,400 |  |  |  | 45.5  | 
|BB and below                                                |  |            | 44,543,725  |              |  |            | 40,989,223  |  |  |  | 5.0   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 872,216,639 |              |  | $          | 821,164,432 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 6,473,818   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 827,638,251 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 June 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        |  | $          | 43,113,435  |              |  | $          | 42,686,259  |  |  |  | 5.2   | 
|From one to five years |  |            | 232,745,660 |              |  |            | 230,877,923 |  |  |  | 28.1  | 
|From six to ten years  |  |            | 251,039,312 |              |  |            | 239,965,410 |  |  |  | 29.2  | 
|More than ten years    |  |            | 345,318,232 |              |  |            | 307,634,840 |  |  |  | 37.5  | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 
|Total all years        |  | $          | 872,216,639 |              |  | $          | 821,164,432 |  |  |  | 100.0 | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 

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

25



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##### Table of Contents



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

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Corporate bonds                                             |  | $          | 209,862,010 |              |  | $          | 215,903,045 |  |  |  | 68.8  | 
|Asset backed securities                                     |  |            | 72,781,164  |              |  |            | 75,295,680  |  |  |  | 24.0  | 
|Mortgage backed securities                                  |  |            | 18,616,406  |              |  |            | 19,815,892  |  |  |  | 6.3   | 
|Government bonds                                            |  |            | 2,644,990   |              |  |            | 2,739,458   |  |  |  | 0.9   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 303,904,570 |              |  | $          | 313,754,075 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 5,680,625   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 319,434,700 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 

At June 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                                                         |  | $          | 38,785,767  |              |  | $          | 40,077,411  |  |  |  | 12.8  | 
|AA                                                          |  |            | 21,631,588  |              |  |            | 22,184,805  |  |  |  | 7.1   | 
|A                                                           |  |            | 108,203,012 |              |  |            | 113,855,249 |  |  |  | 36.3  | 
|BBB                                                         |  |            | 128,676,496 |              |  |            | 131,599,077 |  |  |  | 41.9  | 
|Below BBB                                                   |  |            | 6,607,707   |              |  |            | 6,037,533   |  |  |  | 1.9   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 303,904,570 |              |  | $          | 313,754,075 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 5,680,625   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 319,434,700 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 June 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        |  | $          | 16,974,691  |              |  | $          | 15,938,442  |  |  |  | 5.1   | 
|From one to five years |  |            | 133,878,311 |              |  |            | 137,410,460 |  |  |  | 43.8  | 
|From six to ten years  |  |            | 1,598,323   |              |  |            | 1,598,323   |  |  |  | 0.5   | 
|More than ten years    |  |            | 151,453,245 |              |  |            | 158,806,851 |  |  |  | 50.6  | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 
|Total all years        |  | $          | 303,904,570 |              |  | $          | 313,754,075 |  |  |  | 100.0 | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 

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

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##### Table of Contents



According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
June 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                                   |  | $          | 92,510,856  |              |  | $          | 94,312,978  |  |  |  | 29.6  | 
|Investment grade US corporate bonds                         |  |            | 98,577,520  |              |  |            | 99,597,882  |  |  |  | 31.3  | 
|Investment grade UK corporate bonds                         |  |            | 84,523,030  |              |  |            | 84,523,030  |  |  |  | 26.6  | 
|Investment grade Canadian corporate bonds                   |  |            | 20,712,973  |              |  |            | 20,886,315  |  |  |  | 6.6   | 
|All other securities                                        |  |            | 19,813,189  |              |  |            | 18,828,964  |  |  |  | 5.9   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 316,137,568 |              |  | $          | 318,149,169 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 6,315,009   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 324,464,178 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
June 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                                                         |  | $          | 36,626,701  |              |  | $          | 36,977,467   |  |  |  | 11.6  | 
|AA                                                          |  |            | 31,551,527  |              |  |            | 31,861,119   |  |  |  | 10.0  | 
|A                                                           |  |            | 180,664,129 |              |  |            | 184,339,164  |  |  |  | 57.9  | 
|BBB                                                         |  |            | 60,433,116  |              |  |            | 59,773,790   |  |  |  | 18.8  | 
|BB and below                                                |  |            | 6,862,095   |              |  |            | 5,197,629    |  |  |  | 1.7   | 
|                                                            |  |            |             |              |  |            |              |  |  |  |       | 
|Total invested assets                                       |  | $          | 316,137,568 |              |  | $          | 318,149,169  |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |              |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 6,315,009    |  |  |  |       | 
|                                                            |  |            |             |              |  |            |              |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | $324,464,178 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |              |  |  |  |       | 



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
June 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        |  | $          | 77,768,369  |              |  | $          | 79,244,158  |  |  |  | 24.9  | 
|From one to five years |  |            | 71,890,150  |              |  |            | 70,493,457  |  |  |  | 22.2  | 
|From six to ten years  |  |            | 11,704,445  |              |  |            | 11,791,460  |  |  |  | 3.7   | 
|More than ten years    |  |            | 154,774,604 |              |  |            | 156,620,094 |  |  |  | 49.2  | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 
|Total all years        |  | $          | 316,137,568 |              |  | $          | 318,149,169 |  |  |  | 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 operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold, funds drawn from our collateral funding facility, and cash
and short term investments. The principal obligations and

27



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##### Table of Contents



uses of the funds are the payment of policy
benefits, the posting of collateral so that our ceding companies
can take credit on their statutory financial statements for
reinsurance obtained from us, acquisition and operating expenses
and the purchase of investments.


For the six month period ended June 30, 2002
we generated $18,396,000 from our operating activities as
compared with $14,326,000 from our operating activities for the
six months ended June 30, 2001. This change is primarily
related to the development of our life reinsurance segment. At
June 30, 2002 our total capitalization was $391,190,000.

As a Bermuda reinsurer we are required to post
collateral for the statutory reserves ceded to us by
U.S. based insurers and reinsurers. During 2001, we entered
into a reinsurance agreement with a third party 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. Because this agreement does not qualify for
reinsurance accounting under U.S. GAAP, amounts received by
us under the agreement are classified on our balance sheet as a
deposit liability due to a third party reinsurer. As of
June 30, 2002, we had received deposits of $147,000,000
from the reinsurer. The reinsurer has the right to terminate the
agreement with 180 days notice, which would require us to
return all deposits. Absent a termination by the reinsurer or by
us, the agreement will terminate and all deposits received by us
will be returned on the fifth anniversary of the agreement
unless it is extended by the parties. As part of this contract
we deposited $41,000,000 with the reinsurer, which is included
in Deposits and other reinsurance receivables. We receive the
benefit of investment income from the investment of the funds
received by us and our deposit with the reinsurer and 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. For the first six months of 2002 these fees were
$2,349,000 and are recorded as Collateral costs in our Statement
of Operations.

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 may issue some
or all of this debt in the future, although the registration
statement is currently not effective and, therefore, we may not
issue debt under it at this time. This debt, if and when issued,
would be used for general corporate purposes, including capital
contributions to our operating subsidiaries, and to fund
collateral requirements of our cedents. In the future, we may
issue additional debt or other forms of capital to assist in
meeting our liquidity and capital needs, including funding the
collateralization needs of our cedents. During 2001, our Board
of Directors approved a share repurchase program of up to
$25,000,000 of our common shares. While our Board has given us
the flexibility to repurchase our common shares in the future if
market conditions so dictate, at the present time we anticipate
utilizing this capital to support our business growth.

At June 30, 2002 and December 31, 2001,
letters of credit totaling $189,000,000 and $197,000,000,
respectively, issued in the ordinary course of our business had
been issued by our bankers in favor of certain ceding insurance
companies to provide security and meet regulatory requirements.
At June 30, 2002 and December 31, 2001 letters of
credit totaling $96,000,000 and $101,000,000, respectively, were
fully collateralized by our investments. We also have unsecured
letters of credit of approximately $89,000,000 with Citibank,
N.A. that have been posted as security to allow certain of our
ceding companies to take credit on their statutory financial
statements for reinsurance obtained from us. In August of 2002,
Citibank notified us that the bank was reducing its aggregate
exposure to unsecured letters of credit. As a result, Citibank
has requested that unsecured letters of credit it has issued on
our behalf be secured by October 31, 2002. Consequently, we
are currently seeking to raise capital that will fund our
collateral requirements for our ceding companies, which would
eliminate the need for unsecured letters of credit from
Citibank, but no assurance can be given that we will be able to
do so. If we are unable to raise additional capital, we would be
required to retrocede a portion of our business to another
reinsurer in order to effectively relieve us of our obligation
to post collateral to our ceding companies.

28



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##### Table of Contents



At June 30, 2002 and December 31, 2001
investments of $294,000,000 and $272,000,000, respectively, were
held in trust for the benefit of certain ceding insurance
companies to provide security and to meet regulatory
requirements.

On April 25, 2002 our Board of Directors
declared a quarterly dividend of $.05 per share payable to
shareholders of record on May 17, 2002. The Board of
Directors intends to continue to declare and payout of earnings
a quarterly dividend. The continued payment of dividends is
dependent on the ability of our operating subsidiaries to
achieve satisfactory underwriting and investment results and
other factors determined to be relevant by our Board of
Directors.

During July 2002, following our announcement of
our intention to write down deferred acquisition costs on our
largest annuity reinsurance contract, three rating agencies
reduced the financial strength ratings of each of our operating
subsidiaries. A.M. Best reduced the financial strength
ratings of each of our operating subsidiaries from A
to A- and has announced that it is reviewing these
ratings and may change them downward. Standard & Poors
has also reduced the financial strength ratings of each of our
operating subsidiaries from A to A- and
has announced that the outlook on these ratings is negative.
Each of our operating subsidiaries financial strength
ratings has also been reduced from A to
A- by Fitch Ratings. Fitch Ratings has also
announced that these ratings are under review and may change
downward. These downgrades in our ratings, together with
Citibanks request that we secure our outstanding unsecured
letters of credit and our general need to satisfy the collateral
requirements of our ceding companies, will require us to raise
additional capital. If we are unable to raise such additional
capital, our ability to write new business will be limited and
the historical growth rates we have achieved since commencing
operations in 1998 will likely not be achieved in future
periods. There can be no assurance that we will be able to raise
additional capital on terms that are acceptable to us that will
allow us to maintain our current book of business or grow that
business in the future.

We have no material commitments for capital
expenditures as of June 30, 2002.

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 competitive environment; the
Companys ability to underwrite business; changes in
mortality, morbidity and claims experience; the Companys
success in managing its investments; 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; 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); and a prolonged economic downturn. Further
information about these and other factors may be found in our
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.

29



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##### Table of Contents








|        |                                                               
|------- | --------------------------------------------------------------
|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.

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##### Table of Contents






PART II

OTHER INFORMATION






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

In May 2002, we served written notice of
arbitration in connection with two life reinsurance agreements.
We are seeking monetary damages and/or equitable relief from the
ceding companies based upon our contention that, in the case of
the first ceding company, they failed to disclose material
facts, known to them, about the block of business being
reinsured when it was underwritten, and in the second case, the
ceding company is unable to segregate from its records business
that is properly covered under the reinsurance agreement. No
assurance can be given that monetary recovery or equitable
relief will occur.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

The Annual Meeting of Shareholders of the Company
was held on April 25, 2002. The following matters were
voted upon at the Annual Meeting, and received the votes set
forth below:



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All of the following persons were
    elected to serve as directors and received the number of votes
    set forth opposite their respective name:

|                    |  |     |            |          |  |  |       | 
|------------------- |  | --- | ---------- | -------- |  |  | ----- | 
|                    |  | FOR |            | WITHHELD
|                    |  |     |            |         
|Lee M. Gammill Jr.  |  |     | 14,462,415 |          |  |  | 3,875 | 
|Frederick S. Hammer |  |     | 14,462,415 |          |  |  | 3,875 | 
|Jon W. Yoskin II    |  |     | 14,462,415 |          |  |  | 3,875 | 



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) A proposal to amend the Companys
    Bye-Laws to include an exception to certain transfer
    restrictions included in the Bye-Laws for trades executed on the
    New York Stock Exchange was approved and received
    14,462,215 votes FOR and 1,950 votes AGAINST, with
    2,125 abstentions and broker non-votes.
|
| | (c) A proposal to appoint KPMG as
    independent accountants for the Company for the 2002 fiscal year
    was approved and received 14,463,680 votes FOR and
    435 votes AGAINST, with 2,175 abstentions and broker
    non-votes.                                                                                       






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

(a) Exhibits  None

(b) Reports on Form 8-K  None

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






SIGNATURES


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



| |                                     
| | ------------------------------------
| | Annuity and Life Re (Holdings), Ltd.
|
| | /s/ JOHN F. 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/A 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; and
|
| | 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.                           



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | /s/ JOHN F. BURKE                                                                                           
| |                                                                                                             
| | Name: JOHN F. BURKE 
     Title:   Chief Executive Officer and 
                 Chief
    Financial Officer

March 20, 2003

33