##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




---

Form 10-Q



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|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934       
|          
|           |  | For the quarterly period ended March 31,
    2003                                           
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 1-16561

ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Bermuda                                                            |  | Not applicable                       
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (IRS Employer
    Identification No.)
|                                                                  
|Cumberland House,
    1 Victoria Street,
    Hamilton, Bermuda     |  | HM11                                 
|(Address of Principal Executive
    Offices)                       |  | (Zip Code)                           

441-296-7667

(Registrants Telephone Number, Including
Area Code)


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days. Yes þ No
o

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

The number of the registrants Common Shares
(par value $1.00 per share) outstanding as of May 5, 2003
was 26,106,328.



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TABLE OF CONTENTS



|                                                |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                   
|                                                | Item 1. Unaudited Consolidated Financial Statements                                          
|CONSOLIDATED BALANCE SHEETS                    
|CONSOLIDATED STATEMENTS OF OPERATIONS          
|                                                | CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME                                       
|                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                        
|                                                | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                         
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                | Item 4. Controls and Procedures                                                              
|PART II                                        
|OTHER INFORMATION                              
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                | Item 5. Other Information                                                                    
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                     
|CERTIFICATION                                  
|EXHIBIT INDEX                                  
|EMPLOYMENT AGREEMENT, DATED AS OF APRIL 3, 2003
|SECTION 1350 CERTIFICATION OF C.E.O. & C.F.O.  



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##### Table of Contents



INDEX TO FORM 10-Q

|              |  |                                                                                                                         |    |      |    | 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                                                         |    | Page
|              |  |                                                                                                                         |    |     
|              |  | PART I
    FINANCIAL INFORMATION                                                                                        |    |      |    | 
|             
|Item 1.       |  | Unaudited Consolidated Financial Statements                                                                             |    |      | 1  | 
|              |  | Consolidated Balance Sheets March 31, 2003
    and December 31, 2002                                                    |    |      | 1  | 
|              |  | Consolidated Statements of Operations Three
    Months ended March 31, 2003 and March 31, 2002                          |    |      | 2  | 
|              |  | Consolidated Statements of Comprehensive (Loss)
    Income Three Months ended March 31, 2003 and March 31,
    2002     |    |      | 3  | 
|              |  | Consolidated Statements of Cash Flows Three
    Months ended March 31, 2003 and March 31, 2002                          |    |      | 4  | 
|              |  | Consolidated Statements of Changes in
    Stockholders Equity Three Months ended March 31, 2003
    and March 31, 2002 |    |      | 5  | 
|              |  | Notes to Unaudited Consolidated Financial
    Statements                                                                |    |      | 6  | 
|             
|Item 2.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                               |    |      | 14 | 
|             
|Item 3.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                          |    |      | 30 | 
|             
|Item 4.       |  | Controls and Procedures                                                                                                 |    |      | 30 | 
|              |  | PART II
    OTHER INFORMATION                                                                                           |    |      |    | 
|Item 1.       |  | Legal Proceedings                                                                                                       |    |      | 30 | 
|Item 2.       |  | Changes in Securities and Use of Proceeds                                                                               |    |      | 31 | 
|Item 5.       |  | Other Information                                                                                                       |    |      | 31 | 
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                        |    |      | 31 | 
|Signatures    |  |                                                                                                                         | 33 |     
|Certification |  |                                                                                                                         | 34 |     



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##### Table of Contents






PART I

FINANCIAL INFORMATION






|        |                                                
|------- | -----------------------------------------------
|Item 1. | Unaudited Consolidated Financial
    Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                 |                                            |                |               |               |  |   |               |               | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------- | ------------- | ------------- |  | - | ------------- | ------------- | 
|                                                                                                                                                                 |                                            | March 31,      |               | December 31, 
|                                                                                                                                                                 |                                            | 2003           |               | 2002         
|                                                                                                                                                                 |                                            |                |               |              
|                                                                                                                                                                 |                                            | (Unaudited)    |               |              
|                                                                                                                                                                 |                                            |               
|                                                                                                                                                                 |                                            | (U.S. dollars)
|Assets                                                                                                                                                           |                                            |                |               |               |  |   |               |              
|Cash and cash equivalents                                                                                                                                        |                                            | $              | 146,503,623   |               |  | $ | 152,930,908   |              
|Fixed maturity investments at fair value
    (amortized cost of $147,315,720 and $146,487,903 at
    March 31, 2003 and December 31, 2002)                       |                                            |                | 153,360,710   |               |  |   | 153,415,429   |              
|Funds withheld at interest                                                                                                                                       |                                            |                | 1,018,528,844 |               |  |   | 1,427,093,380 |              
|Accrued investment income                                                                                                                                        |                                            |                | 1,711,831     |               |  |   | 2,141,338     |              
|Receivable for reinsurance ceded                                                                                                                                 |                                            |                | 92,249,886    |               |  |   | 93,669,173    |              
|Deposits and other reinsurance receivables                                                                                                                       |                                            |                | 12,828,459    |               |  |   | 25,025,453    |              
|Deferred policy acquisition costs                                                                                                                                |                                            |                | 143,691,268   |               |  |   | 187,913,648   |              
|Other assets                                                                                                                                                     |                                            |                | 3,752,274     |               |  |   | 2,508,858     |              
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              
|                                                                                                                                                                 | Total Assets                               |                | $             | 1,572,626,895 |  |   | $             | 2,044,698,187 | 
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              
|Liabilities                                                                                                                                                      |                                            |                |               |               |  |   |               |              
|Reserves for future policy benefits                                                                                                                              |                                            | $              | 256,908,708   |               |  | $ | 269,619,809   |              
|Interest sensitive contracts liability                                                                                                                           |                                            |                | 998,608,700   |               |  |   | 1,443,143,080 |              
|Other reinsurance liabilities                                                                                                                                    |                                            |                | 89,304,437    |               |  |   | 51,139,164    |              
|Payable for investments purchased                                                                                                                                |                                            |                | 118,152       |               |  |   |              |              
|Accounts payable and accrued expenses                                                                                                                            |                                            |                | 11,469,694    |               |  |   | 12,459,423    |              
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              
|                                                                                                                                                                 | Total Liabilities                          |                | $             | 1,356,409,691 |  |   | $             | 1,776,361,476 | 
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              
|Stockholders Equity                                                                                                                                             |                                            |                |               |               |  |   |               |              
|Preferred shares (par value $1.00;
    50,000,000 shares authorized; no shares outstanding)                                                                      |                                            | $              |              |               |  | $ |              |              
|Common shares (par value $1.00;
    100,000,000 shares authorized; 26,283,128 and
    26,106,328 shares outstanding at March 31, 2003 and
    December 31, 2002) |                                            |                | 26,283,128    |               |  |   | 26,106,328    |              
|Additional paid-in capital                                                                                                                                       |                                            |                | 335,186,168   |               |  |   | 335,334,932   |              
|Notes receivable from stock sales                                                                                                                                |                                            |                | (699,458      | )             |  |   | (1,626,493    | )            
|Restricted stock (577,800 shares at
    March 31, 2003)                                                                                                          |                                            |                | (2,358,457    | )             |  |   | (2,514,693    | )            
|Accumulated other comprehensive income                                                                                                                           |                                            |                | 5,406,527     |               |  |   | 6,162,525     |              
|(Deficit)                                                                                                                                                        |                                            |                | (147,600,704  | )             |  |   | (95,125,888   | )            
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              
|                                                                                                                                                                 | Total Stockholders Equity                 |                | $             | 216,217,204   |  |   | $             | 268,336,711   | 
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              
|                                                                                                                                                                 | Total Liabilities and Stockholders Equity |                | $             | 1,572,626,895 |  |   | $             | 2,044,698,187 | 
|                                                                                                                                                                 |                                            |                |               |               |  |   |               |              

See accompanying Notes to Unaudited Consolidated
Financial Statements

1



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                          |         |                                 |             |       |   |   |             |      | 
|--------------------------------------------------------- | ------- | ------------------------------- | ----------- | ----- | - | - | ----------- | ---- | 
|                                                          |         |                                
|                                                          |         | For the Three Months Ended     
|                                                          |         | March 31,                      
|                                                          |         |                                
|                                                          |         | 2003                            |             | 2002 
|                                                          |         |                                 |             |      
|                                                          |         |                                
|                                                          |         | (Unaudited and in U.S. dollars)
|Revenues                                                 
|Net premiums                                              |         | $                               | 61,365,914  |       |   | $ | 78,006,891  |     
|Investment income, net of related expenses                |         |                                 | 8,158,689   |       |   |   | 24,589,790  |     
|Net realized investment gains (losses)                    |         |                                 | 1,663,868   |       |   |   | (321,708    | )   
|Net change in fair value of embedded derivatives          |         |                                 | 13,754,859  |       |   |   | 1,590,098   |     
|Surrender fees and other revenues                         |         |                                 | 1,390,247   |       |   |   | 3,896,125   |     
|                                                          |         |                                 |             |       |   |   |             |     
|Total Revenues                                            |         | $                               | 86,333,577  |       |   | $ | 107,761,196 |     
|                                                          |         |                                 |             |       |   |   |             |     
|Benefits and Expenses                                    
|Claim and policy benefits                                 |         | $                               | 75,089,440  |       |   | $ | 58,815,606  |     
|Interest credited to interest sensitive products          |         |                                 | 4,871,759   |       |   |   | 17,922,346  |     
|Policy acquisition costs and other insurance
    expenses |         |                                 | 52,501,064  |       |   |   | 15,636,118  |     
|Collateral costs                                          |         |                                 |            |       |   |   | 1,295,704   |     
|Operating expenses                                        |         |                                 | 6,346,130   |       |   |   | 3,657,792   |     
|                                                          |         |                                 |             |       |   |   |             |     
|Total Benefits and Expenses                               |         | $                               | 138,808,393 |       |   | $ | 97,327,566  |     
|                                                          |         |                                 |             |       |   |   |             |     
|Net (Loss) Income                                         |         | $                               | (52,474,816 | )     |   | $ | 10,433,630  |     
|                                                          |         |                                 |             |       |   |   |             |     
|Net (Loss) Income Per Common Share                       
|                                                          | Basic   |                                 | $           | (2.03 | ) |   | $           | 0.41 | 
|                                                          | Diluted |                                 | $           | (2.03 | ) |   | $           | 0.39 | 

See accompanying Notes to Unaudited Consolidated
Financial Statements

2



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME


|                                                                                          |  |                                 |             |      |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ---- |  | - | ---------- | -
|                                                                                          |  |                                
|                                                                                          |  | For the Three Months Ended     
|                                                                                          |  | March 31,                      
|                                                                                          |  |                                
|                                                                                          |  | 2003                            |             | 2002
|                                                                                          |  |                                 |             |     
|                                                                                          |  |                                
|                                                                                          |  | (Unaudited and in U.S. dollars)
|Net (loss) income for the period                                                          |  | $                               | (52,474,816 | )    |  | $ | 10,433,630 |  
|Other comprehensive (loss) income:                                                        |  |                                 |             |      |  |   |            |  
|Unrealized holding gains (losses) on
    securities arising during the period             |  |                                 | 907,870     |      |  |   | (5,835,707 | )
|Less reclassification adjustment for realized
    gains and (losses) in net (loss) income |  |                                 | 1,663,868   |      |  |   | (321,708   | )
|                                                                                          |  |                                 |             |      |  |   |            |  
|Other comprehensive (loss)                                                                |  | $                               | (755,998    | )    |  | $ | (5,513,999 | )
|                                                                                          |  |                                 |             |      |  |   |            |  
|Total Comprehensive (Loss) Income                                                         |  | $                               | (53,230,814 | )    |  | $ | 4,919,631  |  
|                                                                                          |  |                                 |             |      |  |   |            |  

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 CASH
FLOWS


|                                                                                                |                                                      |                                 |              |            |   |   |              |             |  
|----------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------- | ------------ | ---------- | - | - | ------------ | ----------- | -
|                                                                                                |                                                      |                                
|                                                                                                |                                                      | For the Three Months Ended     
|                                                                                                |                                                      | March 31,                      
|                                                                                                |                                                      |                                
|                                                                                                |                                                      | 2003                            |              | 2002      
|                                                                                                |                                                      |                                 |              |           
|                                                                                                |                                                      |                                
|                                                                                                |                                                      | (Unaudited and in U.S. dollars)
|Cash flows from operating activities                                                            |                                                      |                                 |              |            |   |   |              |            
|Net (loss) income                                                                               |                                                      | $                               | (52,474,816  | )          |   | $ | 10,433,630   |            
|Adjustments to reconcile net (loss) income to
    cash (used) provided by operating activities: |                                                      |                                 |              |            |   |   |              |            
|Net realized investment (gains) losses                                                          |                                                      |                                 | (1,663,868   | )          |   |   | 321,708      |            
|Net change in fair value of embedded derivatives                                                |                                                      |                                 | (13,754,859  | )          |   |   | (1,590,098   | )          
|Amortization of restricted stock                                                                |                                                      |                                 | 184,272      |            |   |   | 163,687      |            
|Changes in:                                                                                     |                                                      |                                 |              |            |   |   |              |            
|Accrued investment income                                                                       |                                                      |                                 | 429,507      |            |   |   | (233,792     | )          
|Deferred policy acquisition costs                                                               |                                                      |                                 | 44,222,380   |            |   |   | (10,338,350  | )          
|Deposits and other reinsurance receivables                                                      |                                                      |                                 | 13,616,282   |            |   |   | 7,723,217    |            
|Other assets                                                                                    |                                                      |                                 | (1,243,416   | )          |   |   | (496,093     | )          
|Reserves for future policy benefits                                                             |                                                      |                                 | (12,711,101  | )          |   |   | 12,267,466   |            
|Interest sensitive contracts, net of funds
    withheld                                         |                                                      |                                 | (22,214,985  | )          |   |   | (3,111,538   | )          
|Other reinsurance liabilities                                                                   |                                                      |                                 | 38,165,273   |            |   |   | 186,955      |            
|Accounts payable                                                                                |                                                      |                                 | (989,729     | )          |   |   | (999,163     | )          
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|                                                                                                | Net cash (used) provided by operating activities     |                                 | $            | (8,435,060 | ) |   | $            | 14,327,629  |  
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|Cash flows from investing activities                                                            |                                                      |                                 |              |            |   |   |              |            
|Proceeds from sales of fixed maturity investments                                               |                                                      | $                               | 176,481,085  |            |   | $ | 175,541,454  |            
|Purchase of fixed maturity investments                                                          |                                                      |                                 | (175,400,345 | )          |   |   | (238,878,784 | )          
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|                                                                                                | Net cash provided (used) by investing activities     |                                 | $            | 1,080,740  |   |   | $            | (63,337,330 | )
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|Cash flows from financing activities                                                            |                                                      |                                 |              |            |   |   |              |            
|Interest accrued on notes receivable                                                            |                                                      | $                               | (32,099      | )          |   | $ | (23,522      | )          
|Interest collected on notes receivable                                                          |                                                      |                                 | 209,134      |            |   |   | 38,620       |            
|Reduction (increase) of notes receivable                                                        |                                                      |                                 | 750,000      |            |   |   | (250,000     | )          
|Dividends paid to stockholders                                                                  |                                                      |                                 |             |            |   |   | (1,285,266   | )          
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|                                                                                                | Net cash provided (used) by financing
    activities |                                 | $            | 927,035    |   |   | $            | (1,520,168  | )
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|Decrease in cash and cash equivalents                                                           |                                                      | $                               | (6,427,285   | )          |   | $ | (50,529,869  | )          
|Cash and cash equivalents, beginning of period                                                  |                                                      |                                 | 152,930,908  |            |   |   | 104,793,019  |            
|                                                                                                |                                                      |                                 |              |            |   |   |              |            
|Cash and cash equivalents, end of period                                                        |                                                      | $                               | 146,503,623  |            |   | $ | 54,263,150   |            
|                                                                                                |                                                      |                                 |              |            |   |   |              |            

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 CHANGES IN
STOCKHOLDERS EQUITY

|                                           |  |                                 |              |      |  |   |             |  
|------------------------------------------ |  | ------------------------------- | ------------ | ---- |  | - | ----------- | -
|                                           |  |                                
|                                           |  | For the Three Months Ended     
|                                           |  | March 31,                      
|                                           |  |                                
|                                           |  | 2003                            |              | 2002
|                                           |  |                                 |              |     
|                                           |  |                                
|                                           |  | (Unaudited and in U.S. dollars)
|Preferred shares par value $1.00           |  |                                 |              |      |  |   |             |  
|Balance at beginning and end of period     |  | $                               |             |      |  | $ |            |  
|                                           |  |                                 |              |      |  |   |             |  
|Common shares par value $1.00              |  |                                 |              |      |  |   |             |  
|Balance at beginning of period             |  | $                               | 26,106,328   |      |  | $ | 25,705,328  |  
|Issuance of shares                         |  |                                 | 200,000      |      |  |   | 133,500     |  
|(Cancellation) of shares                   |  |                                 | (23,200      | )    |  |   |            |  
|                                           |  |                                 |              |      |  |   |             |  
|Balance at end of period                   |  | $                               | 26,283,128   |      |  | $ | 25,838,828  |  
|                                           |  |                                 |              |      |  |   |             |  
|Additional paid-in capital                 |  |                                 |              |      |  |   |             |  
|Balance at beginning of period             |  | $                               | 335,334,932  |      |  | $ | 332,447,062 |  
|(Cancellation) issuance of shares          |  |                                 | (148,764     | )    |  |   | 2,031,870   |  
|                                           |  |                                 |              |      |  |   |             |  
|Balance at end of period                   |  | $                               | 335,186,168  |      |  | $ | 334,478,932 |  
|                                           |  |                                 |              |      |  |   |             |  
|Notes receivable from stock sales          |  |                                 |              |      |  |   |             |  
|Balance at beginning of period             |  | $                               | (1,626,493   | )    |  | $ | (1,317,259  | )
|Repayments (issuances)                     |  |                                 | 750,000      |      |  |   | (250,000    | )
|Interest collected on notes receivable     |  |                                 | 209,134      |      |  |   | 38,620      |  
|Accrued interest during period             |  |                                 | (32,099      | )    |  |   | (23,522     | )
|                                           |  |                                 |              |      |  |   |             |  
|Balance at end of period                   |  | $                               | (699,458     | )    |  | $ | (1,552,161  | )
|                                           |  |                                 |              |      |  |   |             |  
|Restricted stock                           |  |                                 |              |      |  |   |             |  
|Balance at beginning of period             |  | $                               | (2,514,693   | )    |  | $ |            |  
|(Issuance) of shares                       |  |                                 | (200,000     | )    |  |   | (2,165,370  | )
|Cancellation of shares                     |  |                                 | 171,964      |      |  |   |            |  
|Amortization of restricted stock           |  |                                 | 184,272      |      |  |   | 163,687     |  
|                                           |  |                                 |              |      |  |   |             |  
|Balance at end of period                   |  | $                               | (2,358,457   | )    |  | $ | (2,001,683  | )
|                                           |  |                                 |              |      |  |   |             |  
|Accumulated other comprehensive
    income |  |                                 |              |      |  |   |             |  
|Balance at beginning of period             |  | $                               | 6,162,525    |      |  | $ | 6,418,469   |  
|Net unrealized (losses) on securities      |  |                                 | (755,998     | )    |  |   | (5,513,999  | )
|                                           |  |                                 |              |      |  |   |             |  
|Balance at end of period                   |  | $                               | 5,406,527    |      |  | $ | 904,470     |  
|                                           |  |                                 |              |      |  |   |             |  
|(Deficit) Retained earnings                |  |                                 |              |      |  |   |             |  
|Balance at beginning of period             |  | $                               | (95,125,888  | )    |  | $ | 38,935,242  |  
|Net (loss) income                          |  |                                 | (52,474,816  | )    |  |   | 10,433,630  |  
|Stockholder dividends                      |  |                                 |             |      |  |   | (1,285,266  | )
|                                           |  |                                 |              |      |  |   |             |  
|Balance at end of period                   |  | $                               | (147,600,704 | )    |  | $ | 48,083,605  |  
|                                           |  |                                 |              |      |  |   |             |  
|Total Stockholders Equity                 |  | $                               | 216,217,204  |      |  | $ | 405,751,991 |  
|                                           |  |                                 |              |      |  |   |             |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

5



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


1.     Organization

Annuity and Life Re (Holdings), Ltd.
(Holdings) was incorporated on December 2, 1997
under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned
subsidiaries: Annuity and Life Reassurance, Ltd., which is
licensed under the laws of Bermuda as a long term insurer; and
Annuity and Life Re America, Inc., an insurance holding
company based in the United States, and Annuity and Life
Reassurance America, Inc., a life insurance company domiciled in
the United States. Holdings, Annuity and Life Reassurance,
Annuity and Life Re America and Annuity and Life
Reassurance America are collectively referred to herein as the
Company. The Company completed an initial public
offering of its equity securities and commercial operations on
April 17, 1998.

2.     Going Concern
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
Form 10-K for the fiscal year ended December 31, 2002.
In the opinion of management, all adjustments considered
necessary for a fair presentation have been included in these
financial statements.

The accompanying unaudited consolidated financial
statements of the Company 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.
The Company incurred a significant operating loss in 2002 and
the first quarter of 2003. Further, the financial strength
ratings of the Companys operating subsidiaries were
downgraded several times in 2002 and most recently in March 2003
by A.M. Best, Standard & Poors, and Fitch Ratings
to B-, BB-, and C, respectively.

In addition, 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 at March 31,
2003 to satisfy the collateral requirements asserted by its
cedents under certain of its reinsurance treaties. The
Companys cedents have asserted that the Company must
satisfy additional collateral requirements of approximately
$172 million in excess of amounts the Company currently has
posted. 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. 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, such 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. If the
Company does not prevail in any such arbitration or litigation
proceeding, it would have a material adverse effect on the
Companys financial condition and the Company may be
required to liquidate its operations.

The Company also currently has approximately
$40,605,000 of outstanding unsecured letters of credit issued on
its behalf by Citibank. In October 2002, Citibank agreed to
extend the Companys unsecured letter of credit facility
into 2003 in exchange for the Companys agreement to secure
or eliminate the letter of credit facility by June 30,
2003. If the Company is unable to secure or eliminate the letter
of credit facility by that date, Citibank will not renew the
outstanding letters of credit at December 31, 2003. In
addition, as the result of a draw on certain letters of credit
issued by Citibank for the benefit of one of the Companys
cedents, approximately $4,395,000 related to the Companys
letter of credit facility is due and payable by the Company upon
Citibanks demand.

6



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under Bermuda law, a single creditor could make a
statutory demand upon the Company for satisfaction of
obligations owed to that creditor. If the statutory demand is
held to be valid, and the Company is unable to satisfy its
obligations to that creditor, the creditor may institute
proceedings seeking the liquidation of the Company. As of the
date of this report, the Company has been served with two
statutory demands under Bermuda law and has satisfied or
otherwise eliminated its obligations to the parties making those
demands. If a creditor of the Company successfully pursues this
statutory process and the Company is unable to discharge its
obligations, liquidation proceedings could be commenced against
the Company.

On November 20, 2002, the State of
Connecticut Insurance Department and the Companys United
States domiciled operating subsidiary, entered into a letter
agreement acknowledging that the Connecticut Insurance
Department is monitoring the financial condition of the
Companys United States domiciled operating subsidiary and
such letter agreement requires 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. In
addition, the Connecticut Insurance Department has requested
weekly updates from senior management of the U.S. operating
subsidiary on the status of the Company and any changes in the
status of the U.S. operating subsidiary. The letter
agreement continues to be effective until March 1, 2004.

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 reinsurance agreements
and has notified its existing clients that it will not be
accepting any new business under existing treaties on their
current terms. The Company does not anticipate resuming to write
new reinsurance agreements in the foreseeable future. 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. During the first quarter of 2003, these types of
transactions resulted in losses for the Company, and the Company
expects to incur additional losses in connection with similar
transactions in the second quarter of 2003. 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.

7



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     (Loss) Income
Per Share

The following table sets forth the computation of
basic and diluted (loss) income per share for the three month
periods ended March 31:

|                                                         |  |                    |             |      |  |   |            | 
|-------------------------------------------------------- |  | ------------------ | ----------- | ---- |  | - | ---------- | 
|                                                         |  |                   
|                                                         |  | Three Months Ended
|                                                         |  | March 31,         
|                                                         |  |                   
|                                                         |  | 2003               |             | 2002
|                                                         |  |                    |             |     
|Net (loss) income available to common
    shareholders   |  | $                  | (52,474,816 | )    |  | $ | 10,433,630 | 
|                                                         |  |                    |             |      |  |   |            | 
|Basic:                                                   |  |                    |             |      |  |   |            | 
|Weighted average number of common shares
    outstanding |  |                    | 25,796,195  |      |  |   | 25,710,374 | 
|Net (loss) income per share                              |  | $                  | (2.03       | )    |  | $ | 0.41       | 
|                                                         |  |                    |             |      |  |   |            | 
|Diluted:                                                 |  |                    |             |      |  |   |            | 
|Weighted average number of common shares
    outstanding |  |                    | 25,796,195  |      |  |   | 26,973,881 | 
|Net (loss) income per share                              |  | $                  | (2.03       | )    |  | $ | 0.39       | 
|                                                         |  |                    |             |      |  |   |            | 

4.     Business
Segments

The Company separately tracks financial results
of the Companys life and annuity operations in segments.
Each segment is defined by a dominant risk characteristic
inherent in all products in that segment. The life segment
consists of all products where the dominant risk characteristic
is mortality risk. The annuity segment comprises all products
where the dominant risk characteristic is investment risk,
including those products that provide minimum guarantees on
variable annuity products. In addition, 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 change in
the fair value of these embedded derivatives is included in the
annuity segment. Both the life and annuity segments have
specific assets, liabilities, stockholders equity,
revenue, benefits and expenses that apply only to them. The
corporate segment contains all stockholders equity not
otherwise deployed to the life or annuity segment. In addition,
the corporate segment includes all capital gains and losses from
sales of securities in the Companys portfolio and
investment income on undeployed invested assets. Operating
expenses are allocated to the segments proportionately based
upon the amount of stockholders equity deployed to the
segment, except for capital raising costs, which are currently
charged directly to the corporate segment. Capital raising costs
for the first quarter of 2002 have been reallocated to the
corporate segment to maintain comparability with the
presentation for the first quarter of 2003. The Company believes
that investors will better understand the Companys
profitability, risk profile, and capital deployment through this
segment reporting method. There are no intersegment
transactions. The following table displays several key
measurements for each of the Companys business segments:

|                                  |  |             |             |             |  |           |               |              |  |   |            |  |  |   |               |  
|--------------------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ---------- |  |  | - | ------------- | -
|                                  |  | Life        |             | Annuity     |  |           |               |             
|Three Months Ended March 31, 2003 |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                                  |  |             |             |             |  |           |               |             
|Revenues                          |  | $           | 60,169,987  |             |  | $         | 24,103,131    |              |  | $ | 2,060,459  |  |  | $ | 86,333,577    |  
|Benefits and Expenses             |  |             | 105,316,155 |             |  |           | 31,973,607    |              |  |   | 1,518,631  |  |  |   | 138,808,393   |  
|                                  |  |             |             |             |  |           |               |              |  |   |            |  |  |   |               |  
|Segment (Loss) Income             |  | $           | (45,146,168 | )           |  | $         | (7,870,476    | )            |  | $ | 541,828    |  |  | $ | (52,474,816   | )
|                                  |  |             |             |             |  |           |               |              |  |   |            |  |  |   |               |  
|Total Assets                      |  | $           | 446,513,145 |             |  | $         | 1,043,908,700 |              |  | $ | 82,205,050 |  |  | $ | 1,572,626,895 |  
|                                  |  |             |             |             |  |           |               |              |  |   |            |  |  |   |               |  

8



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                  |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 
|--------------------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | 
|                                  |  | Life        |             | Annuity     |  |           |               |             
|Three Months Ended March 31, 2002 |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                                  |  |             |             |             |  |           |               |             
|Revenues                          |  | $           | 79,146,044  |             |  | $         | 26,915,754    |              |  | $ | 1,699,398   |  |  | $ | 107,761,196   | 
|Benefits and Expenses             |  |             | 71,919,346  |             |  |           | 23,979,353    |              |  |   | 1,428,867   |  |  |   | 97,327,566    | 
|                                  |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 
|Segment Income                    |  | $           | 7,226,698   |             |  | $         | 2,936,401     |              |  | $ | 270,532     |  |  | $ | 10,433,630    | 
|                                  |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 
|Total Assets                      |  | $           | 566,428,888 |             |  | $         | 1,588,375,551 |              |  | $ | 161,250,407 |  |  | $ | 2,316,054,846 | 
|                                  |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 

5.     Accounting
Standards

In December 2002, the FASB issued Statement
Number 148  Accounting for Stock-based
Compensation  Transition and Disclosure, an amendment
of FASB Statement Number 123. This statement provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. On January 1, 2003, the Company voluntarily
adopted the fair value based method of accounting for
stock-based employee compensation under the prospective method
described in FASB Statement Number 148. Under this method,
the Company will apply fair value accounting to all new grants
of employee stock options subsequent to January 1, 2003.
Previously, the Company had applied the intrinsic value method
when accounting for its stock-based compensation. The Company
continues to apply the intrinsic value method to stock-based
compensation issued prior to January 1, 2003. FASB
Statement Number 148 also amends the disclosure requirements of
FASB Statement Number 123 to require more prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has
provided the required disclosure for grants made prior to the
Companys adoption of the prospective method described in
FASB Statement Number 148 below.

|                                                        |  |                              |             |      |  |   |            |  
|------------------------------------------------------- |  | ---------------------------- | ----------- | ---- |  | - | ---------- | -
|                                                        |  |                             
|                                                        |  | Three Months Ended March 31,
|                                                        |  |                             
|                                                        |  | 2003                         |             | 2002
|                                                        |  |                              |             |     
|Net (loss) income  as reported                         |  | $                            | (52,474,816 | )    |  | $ | 10,433,630 |  
|Pro forma effect on net (loss) income(1)                |  |                              | (547,800    | )    |  |   | (849,451   | )
|                                                        |  |                              |             |      |  |   |            |  
|Net (loss) income  pro forma                           |  | $                            | (53,022,616 | )    |  | $ | 9,584,179  |  
|                                                        |  |                              |             |      |  |   |            |  
|(Loss) income per share as reported:                    |  |                              |             |      |  |   |            |  
|Basic                                                   |  | $                            | (2.03       | )    |  | $ | 0.41       |  
|Diluted                                                 |  | $                            | (2.03       | )    |  | $ | 0.39       |  
|Pro forma effect on net (loss) income per
    share(1): |  |                              |             |      |  |   |            |  
|Basic                                                   |  | $                            | (0.03       | )    |  | $ | (0.04      | )
|Diluted                                                 |  | $                            | (0.03       | )    |  | $ | (0.03      | )
|Pro forma (loss) income per
    share:                  |  |                              |             |      |  |   |            |  
|Basic                                                   |  | $                            | (2.06       | )    |  | $ | 0.37       |  
|Diluted                                                 |  | $                            | (2.06       | )    |  | $ | 0.36       |  



---



|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects the pro forma effects of the application
    of fair value accounting to stock option grants made by the
    Company prior to January 1, 2003.

9



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Related Party
Transactions



| |            
| | -----------
| | XL Life Ltd

On December 31, 2002, the Company entered
into a transaction with XL Life Ltd (XL Life), a
subsidiary of XL Capital, pursuant to which the Company
transferred certain blocks of life reinsurance business to XL
Life. Under the agreement with XL Life, the Company novated five
blocks of life reinsurance business to XL Life, which in turn
entered into a 50% quota share reinsurance contract with the
Company with respect to four of those blocks of business. As a
result of the transaction, the Company incurred a loss of
approximately $26.5 million, primarily as a result of write
down of deferred acquisition costs of $38.7 million (which
was partially offset by a net ceding commission to the Company
of $18.0 million), a write down of prepaid expenses of
$2.4 million and transaction costs of approximately
$3.2 million. The agreement also provides that XL Life will
receive an additional payment of $5 million if, during the
18 months following the agreement, the Company receives new
capital funding of at least $35 million and the
Companys stock trades at a price at or above $5.00 per
share for a period of 20 out of any 30 consecutive trading
days. The Company is in discussions with XL Life regarding
certain post closing adjustments called for by the master
novation agreement entered into in connection with the
transaction. If the Company cannot reach a satisfactory
resolution with XL Life regarding these adjustments, it may be
required to enter into arbitration proceedings with XL Life
under the agreement. If the Company is unable to prevail in such
arbitration proceedings, it may be required to make substantial
cash adjustment payments to XL Life under the agreement.



| |                             
| | ----------------------------
| | Transactions with management

During 1998, certain of the Companys
officers purchased 163,121 shares in the Company, and the
Company made loans to the officers to partially finance such
purchases. The loans accrued interest at 7% per annum and became
due and payable in April 2003. In connection with the
renegotiation or termination of certain officers
employment agreements, the Company has deemed the outstanding
loans of those officers to have been repaid in exchange for the
officers agreeing to forego certain bonus, severance or other
payments that are or may become payable to them. At
March 31, 2003, such loans of $500,000 with accrued
interest of $199,364 had been deemed repaid. The Company intends
to pursue repayment in full of all amounts due from its former
Chief Executive Officer, Lawrence S. Doyle. At March 31,
2003, Mr. Doyles outstanding loan was $500,000, with
accrued interest of $199,458.

7.     Restricted
Stock

In 2002, the Board of Directors adopted a
Restricted Stock Plan under which it may grant common shares to
key employees. The aggregate number of common shares that may be
granted under the Restricted Stock Plan is 1,200,000. The
Compensation Committee of the Board of Directors administers the
Restricted Stock Plan. During 2002, the Company made two awards
to employees. Under the first award to employees, the Company
issued 133,500 shares of restricted stock that vest on the
third anniversary of the grant date. Under the second award,
certain employees of the Company were irrevocably offered shares
of restricted stock, conditioned upon the execution of a
retention agreement with the Company. The Company issued an
aggregate 267,500 shares to those employees who chose to
execute retention agreements and such shares vest in three equal
annual installments commencing on the first anniversary of the
grant date. In addition, during the first quarter of 2003, the
Company authorized the issuance of 200,000 shares of restricted
stock to John F. Burke in connection with his assumption of the
responsibility of the Companys President and Chief
Executive Officer. These shares also vest in three equal annual
installments commencing on the first anniversary of the grant
date. During the first quarter of 2003, 23,200 shares of
restricted stock were cancelled as a result of certain employees
terminating their employment with the Company. The fair value of
the restricted stock awards that remain outstanding on the
respective dates of award and assuming all shares vest was
$2,358,457, and this is reflected in the Companys balance
sheet as common stock and paid in capital. The fair value of the
outstanding restricted stock is being amortized on a straight
line basis over the three year vesting period. The unamortized
balance of the outstanding restricted stock is reflected in the
balance sheet as restricted stock.

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Vulnerability
Due to Concentrations

The Company has entered into a significant
deferred annuity reinsurance contract with Transamerica
Occidental Life Insurance Company (Transamerica) and
significant life reinsurance contracts with The Metropolitan
Life Insurance Companies (MetLife) and XL Life. Due
to the size of these contracts, there is a material
concentration of net premiums, funds withheld at interest,
deferred policy acquisition costs and balances related to
interest-sensitive contract liabilities with one or more of the
underlying parties to these contracts. Transamerica and MetLife
are large insurance companies based in North America, while XL
Life is based in Bermuda.

The Companys largest annuity reinsurance
contract is a retrocessional contract whereby the Company
reinsures Transamerica. At March 31, 2003 and
December 31, 2002, approximately $695 million and
$734 million, respectively, of the Companys funds
withheld at interest receivable and $710 million and
$756 million, respectively of the Companys interest
sensitive contracts liability related to its reinsurance
contract with Transamerica, which is a retrocessional
reinsurance arrangement covering policies issued by IL Annuity
and Insurance Company. Transamericas agreement with IL
Annuity is also structured on a modified coinsurance basis, so
IL Annuity maintains ownership and control of the assets
supporting the Companys obligations to Transamerica. At
March 31, 2003, IL Annuity had financial strength or claims
paying ratings of A and BB+ and from A.M. Best and Standard
& Poors, respectively. At March 31, 2003,
Transamerica had financial strength or claims paying ratings of
A+, AA, Aa3 and AA+ from A.M. Best, Standard & Poors,
Moodys Ratings and Fitch Ratings, respectively. During the
first quarter of 2003, The Ohio National Life Insurance Company
terminated its annuity reinsurance agreement with the Company,
resulting in a loss of approximately $(4,875,000) (net of the
reversal of cumulative unrealized losses in the embedded
derivative). At December 31, 2002, this reinsurance
agreement was the Companys second largest annuity
reinsurance agreement representing approximately
$366 million of the Companys funds withheld at
interest (net of the fair value of the embedded derivatives
associated with that contract, which was an unrealized loss of
approximately $10 million) and $376 million of the
Companys interest sensitive contracts liability.

During the three months ended March 31,
2003, the Company recorded $5,107,000 of minimum interest
guarantee payments in connection with the Transamerica annuity
reinsurance contract, as compared to payments of $5,192,000 for
the three months ended March 31, 2002. A subsidiary of XL
Capital, has agreed to provide protection for up to $10,000,000
against minimum interest guarantee payments on this contract
paid after January 31, 2002 in excess of a $33,000,000
deductible.

During the second quarter of 2002, the Company
recorded a write down of deferred acquisition costs in
connection with the Transamerica contract of $27,474,000. This
charge was the result of a high level of surrenders by
policyholders coupled with poor investment performance on the
premiums paid by the holders of policies underlying the
reinsurance contract. In writing down the deferred acquisition
costs to their estimated recoverable amount, management has
estimated the future levels of surrenders of the underlying
policies together with the estimated future level of investment
return on the invested premiums. While management has written
down deferred acquisition costs to what it believes to be an
appropriate level based upon reasonable assumptions about future
investment performance and surrenders, the write down is an
estimate. Although no additional write downs of deferred
acquisition costs were required in the three months ended
March 31, 2003, actual amounts of income earned and amounts
payable upon future surrenders may be significantly higher or
lower than the amounts currently estimated. If actual experience
varies significantly from the Companys assumptions,
additional write downs may be needed in the future.

For the three months ended March 31, 2003
and 2002, the Company recorded loss of approximately $1,689,000
and $2,180,000, respectively, related to its life reinsurance
contract with MetLife. Premiums associated with this contract
for the three months ended March 31, 2003 and 2002, were
approximately $9,981,000 and $9,479,000, respectively. Effective
March 5, 2003, the Company provided written notice to MetLife of
a premium rate increase in connection with this contract, which
has become a subject of the

11



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys arbitration with MetLife. As a
result of novations and recaptures of certain of the
Companys life reinsurance contracts during the year ended
December 31, 2002 and the first quarter 2003, the Company
expects that its reinsurance contract with MetLife will
represent a larger percentage of the Companys premium,
revenue and net income subsequent to 2002.

On December 31, 2002, the Company entered
into a transaction with XL Life pursuant to which the Company
transferred certain blocks of life reinsurance business to XL
Life. Under the agreement with XL Life, the Company novated five
blocks of life reinsurance business to XL Life, which in turn
entered into a 50% quota share reinsurance contract with the
Company with respect to four of those blocks of business. For
the three months ended March 31, 2003, the Company recorded
revenues and losses of approximately $8,053,000 and $(528,000)
related to this quota share reinsurance contract.

9.     Contingencies

As of March 31, 2003, the Company did not
have sufficient available cash and investments to post
collateral to satisfy its obligations under certain of its
reinsurance treaties. This shortfall was primarily attributable
to collateral requirements asserted by the cedent under the
Companys largest guaranteed minimum death benefits
contract and the cedent under the Companys only guaranteed
minimum income benefits contract. The Companys cedents
have asserted that the Company must satisfy additional
collateral requirements of approximately $172,000,000 in excess
of amounts the Company currently has posted. Of the collateral
requirements asserted by the Companys cedents, at
March 31, 2003, $79,000,000 related to its guaranteed
minimum income benefit contract. The Company is working with the
cedent under that contract to verify the collateral requirements
that have been asserted. If the Company is ultimately unable to
satisfy its collateral obligations under the contracts, its
cedents may elect to pursue the remedies available to them under
the contracts, including arbitration against the Company.

In March 2003, Hartford Life Insurance Company,
the cedent under the Companys largest guaranteed minimum
death benefit reinsurance contract, served notice seeking to
institute arbitration proceedings against the Company alleging
that it has failed to satisfy additional collateral requirements
under the contract of approximately $59,000,000 as
December 31, 2002. The Company does not agree with the
additional collateral requirements asserted by Hartford Life
and, as a result, ceased making claim payments to Hartford Life
under the contract. In April 2003, Hartford Life drew
approximately $18,000,000 of assets held in trust for its
benefit and drew approximately $24,500,000 of letters of credit
that had been issued by Citibank for Hartford Lifes
benefit. As a result of Hartford Lifes draw on the letters
of credit, Citibank seized approximately $20,105,000 in assets
that had been posted by the Company as security under its letter
of credit facility. Consequently, approximately $4,395,000
related to the Companys letter of credit facility is due
and payable by the Company upon Citibanks demand. The
Company believes that the draw on the letters of credit was not
permitted under the reinsurance contract and plans to make the
action a subject of the arbitration proceeding called for by
Hartford Life.

In April 2002, the Company served written notice
of arbitration on MetLife, the cedent under its largest life
reinsurance agreement, seeking equitable relief and monetary
damages based on MetLifes misrepresentation of and failure
to disclose material facts relating to the agreement. In January
2003, the Company also provided written notice to MetLife of a
premium rate increase, effective March 5, 2003, which also
has become a subject of this arbitration. In April 2003, MetLife
informed the Company that if the arbitration panel finds the
rate increase to be valid, MetLife would recapture the
reinsurance agreement as of March 5, 2003. An arbitration
panel is scheduled to hear these claims in December 2003.

While the Company plans to continue receiving
premiums and paying claims under its remaining reinsurance
treaties where no dispute exists, the Company has ceased to
write new reinsurance agreements and has notified its existing
clients that it will not be accepting any new business under
existing treaties on their current terms. The Company does not
anticipate resuming to write new reinsurance agreements in the
foreseeable future. The Companys plans for the future
involve attempting to meet or reduce the additional

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ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

collateral requirements of its ceding companies
by continuing to negotiate the recapture, retrocession, novation
or sale of certain of its reinsurance agreements. During the
first quarter of 2003, these types of transactions resulted in
losses for the Company, and the Company expects to incur
additional losses in connection with similar transactions in the
second quarter of 2003. During the first quarter of 2003, the
Company also instituted substantial premium rate increases on
all of its non-guaranteed premium yearly renewable term
contracts. All of the Companys cedents subject to the rate
increase, except MetLife, have elected to recapture their
reinsurance agreements. As discussed above, MetLife has made the
rate increase a subject of its arbitration with the Company.
MetLife has indicated that its election to recapture is
dependent upon the arbitration panels conclusion about the
validity of the rate increase. 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, it will not be able to satisfy its
obligations in 2003.

The Company also currently has approximately
$40,605,000 of outstanding unsecured letters of credit issued on
its behalf by Citibank. In October 2002, Citibank agreed to
extend the Companys unsecured letter of credit facility
into 2003 in exchange for the Companys agreement to secure
or eliminate the letter of credit facility by June 30,
2003. If the Company is unable to secure or eliminate the letter
of credit facility by that date, Citibank will not renew the
outstanding letters of credit at December 31, 2003.

On November 20, 2002, the State of
Connecticut Insurance Department and the Companys United
States domiciled operating subsidiary, entered into a letter
agreement acknowledging that the Connecticut Insurance
Department is monitoring the financial condition of the
Companys United States domiciled operating subsidiary and
such letter agreement requires 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. In
addition, the Connecticut Insurance Department has requested
weekly updates from senior management of the U.S. operating
subsidiary on the status of the Company and any changes in the
status of the U.S. operating subsidiary. The letter agreement
continues to be effective until March 1, 2004.

On and since December 4, 2002, certain of
the Companys shareholders filed purported shareholder
class action lawsuits against the Company and certain of its
present and former officers and directors in the United States
District Court for the District of Connecticut seeking
unspecified monetary damages. The plaintiffs claim that the
defendants violated certain provisions of the United States
securities laws by making various alleged material misstatements
and omissions in public filings and press releases. No assurance
can be given that the Company will not be required to pay
monetary damages in connection with these lawsuits.

As discussed in Note 6 above, on
December 31, 2002, the Company entered into a transaction
with XL Life pursuant to which the Company transferred certain
blocks of life reinsurance business to XL Life. The Company is
in discussions with XL Life regarding certain post closing
adjustments called for by the master novation agreement entered
into in connection with the transaction. If the Company cannot
reach a satisfactory resolution with XL Life regarding these
adjustments, it may be required to enter into arbitration
proceedings with XL Life under the agreement. If the Company is
unable to prevail in such arbitration proceedings, it may be
required to make substantial cash adjustment payments to XL Life
under the agreement.

On April 8, 2003, the Company received
notice from the New York Stock Exchange that it did not satisfy
the NYSEs continued listing standards as of that date
because the average closing price of the Companys common
shares had been below $1.00 for a 30 consecutive trading
day period. If the Company cannot achieve a $1.00 average share
price for 30 consecutive trading days within six months of
the receipt of this notification, the NYSE will commence
suspension and delisting procedures with respect to its common
shares. In addition, the NYSE informed the Company that it is
considering whether it continues to meet certain of the
NYSEs qualitative continued listing standards due to
concerns over the Companys financial condition.

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

General

Annuity and Life Re (Holdings), Ltd. was
incorporated on December 2, 1997 under the laws of Bermuda.
We provide annuity and life reinsurance to select insurers and
reinsurers through our wholly-owned subsidiaries: Annuity and
Life Reassurance, Ltd., which is licensed under the insurance
laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc., an insurance holding company based in the United
States, and its subsidiary, Annuity and Life Reassurance
America, Inc., a life insurance company authorized to conduct
business in over 40 states of the United States and the
District of Columbia. We acquired Annuity and Life Reassurance
America on June 1, 2000. For more information regarding the
business and operations of our company and its subsidiaries,
please see our Annual Report on Form 10-K for the year
ended December 31, 2002.

As discussed in greater detail elsewhere in this
report, our company continued to encounter significant
difficulties during the three month period ended March 31,
2003. In addition to reporting a significant operating loss for
the first quarter of 2003, we did not have sufficient available
cash and investments at March 31, 2003 to satisfy the
collateral requirements asserted by our cedents under certain of
our reinsurance treaties. Our cedents have asserted that we must
satisfy additional collateral requirements of approximately
$172,000,000 in excess of amounts we currently have posted. We
are currently analyzing these asserted collateral requirements
and have not concluded that such amounts are in fact required to
be posted as collateral under the relevant reinsurance
contracts. As a result of our inability to satisfy our
obligations, certain parties have claimed that we are in breach
of our agreements. As a consequence, such parties have sought
and others may seek remedies for such claimed breaches by us,
and we may be required to enter into arbitration or litigation
proceedings with those parties. If we do not prevail in any such
arbitration or litigation proceeding, it would have a material
adverse effect on our financial condition and we may be required
to liquidate our operations.

We also currently have approximately $40,605,000
of outstanding unsecured letters of credit issued on our behalf
by Citibank. In October 2002, Citibank agreed to extend our
unsecured letter of credit facility into 2003 in exchange for
our agreement to secure or eliminate the letter of credit
facility by June 30, 2003. If we are unable to secure or
eliminate the letter of credit facility by that date, Citibank
will not renew the outstanding letters of credit at
December 31, 2003. In addition, as the result of a draw on
certain letters of credit issued by Citibank for the benefit of
one of our cedents in April 2003, approximately $4,395,000
related to our letter of credit facility is due and payable by
us upon Citibanks demand.

As discussed in Note 6 to our unaudited
consolidated financial statements included elsewhere in this
report, on December 31, 2002, we entered into a transaction
with XL Life pursuant to which we transferred certain blocks of
life reinsurance business to XL Life. We are in discussions with
XL Life regarding certain post closing adjustments called for by
the master novation agreement entered into in connection with
the transaction. If we cannot reach a satisfactory resolution
with XL Life regarding these adjustments, we may be required to
enter into arbitration proceedings with XL Life under the
agreement. If we are unable to prevail in such arbitration
proceedings, we may be required to make substantial cash
adjustment payments to XL Life under the agreement.

While we plan to continue to receive premiums and
pay claims under our remaining reinsurance treaties where no
dispute exists, we have ceased to write new reinsurance
agreements and have notified our existing clients that we will
not be accepting any new business under existing treaties on
their current terms. We do not anticipate resuming to write new
reinsurance agreements in the foreseeable future. Our plans for
the future involve attempting to meet or reduce the additional
collateral requirements of our ceding companies by continuing to
negotiate the recapture, retrocession, novation or sale of
certain of our reinsurance agreements. During the first quarter
of 2003, these types of transactions resulted in losses for us,
and we expect to incur additional losses in connection with
similar transactions in the second quarter. During the first
quarter of 2003, we also instituted substantial premium rate
increases on all of our non-guaranteed premium yearly renewable
term contracts. All of our clients cedents subject to the rate
increase, except The Metropolitan Life Insurance Companies
(MetLife), the cedent under our largest life
reinsurance agreement, have elected to recapture

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their reinsurance agreements. MetLife has made
the rate increase a subject of our pending arbitration
proceedings against it, and MetLife has indicated that its
election to recapture is subject to the arbitration panels
conclusion about the validity of the rate increase. There can be
no assurance that our plans will be sufficient to improve our
operations or liquidity. If we are not successful in
implementing our plans, or if those plans are insufficient, we
will not be able to satisfy our obligations in 2003 and will
likely be required to liquidate our business if we cannot
successfully pursue any other strategic alternative.


Critical Accounting Policies

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require our
management to make estimates and assumptions that affect the
amounts of our assets, liabilities, stockholders equity
and net income. We believe that the following critical
accounting policies, as well as those set forth in our
Form 10-K for the year ended December 31, 2002, detail
the more significant estimates and assumptions used in the
preparation of our consolidated financial statements.

Deferred Policy Acquisition Costs.The costs of acquiring new business,
principally allowances, which vary with and are primarily
related to the production of new business, are deferred. For
traditional life and annuity policies with life contingencies,
deferred policy acquisition costs are charged to expense using
assumptions consistent with those used in computing policy
reserves. Assumptions as to anticipated premiums are estimated
at the date of the policy issuance, or the effective date of the
most recent premium rate increase, and are consistently applied
during the life of the contracts. Deviations from estimated
experience are reflected in earnings in the period such
deviations occur. For these contracts, the amortization periods
are generally the estimated life of the policies. As discussed
elsewhere in this report, we are attempting to improve our
liquidity by novating and recapturing certain of our reinsurance
agreements. If we cannot novate or recapture these reinsurance
agreements on favorable terms, we will incur additional deferred
acquisition cost write downs.

In preparing our financial statements, we make
assumptions about our proportionate share of future investment
income that will be earned from the investment of premiums
received from underlying policyholders by our ceding companies
and about future rates of lapse of policies underlying our
annuity reinsurance contracts when estimating gross profits
arising from such contracts. These assumptions have a direct
impact on the amount of expected future minimum interest
guarantee payments and our estimated expected gross profits on
these annuity reinsurance contracts and, therefore, on the
recoverability of the deferred acquisition costs carried on our
balance sheet for these contracts. While these estimates are
based upon historical results and information provided to us by
our 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 make additional minimum
interest guarantee payments and record additional charges, which
would adversely impact our earnings.

Embedded Derivatives.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 fair value of the embedded
derivative is influenced by changes in credit risk, changes in
expected future cash flows under the annuity contracts and
interest rates. The change in fair value of these embedded
derivatives is recorded in our statement of operations as Net
change in fair value of embedded derivatives, which is a
non-cash item. The change in fair value of these embedded
derivatives also impacts the emergence of expected gross profits
for purposes of amortizing deferred acquisition costs associated
with these contracts. The application of this

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accounting policy has increased the volatility of
our reported earnings. While we have made an estimate of the
fair value of these embedded derivatives using a model that we
believe to be appropriate and based upon reasonable assumptions,
the assumptions used are subjective and may require adjustment
in the future. In addition, as industry standards for estimating
the fair value of embedded derivatives develop, it is possible
that we may modify our methodology. Changes in our assumptions
and industry standards could have a significant impact on the
fair value of the embedded derivatives and our reported
earnings. We do not bifurcate and separately account for the
embedded derivatives contained in certain of our contracts,
including our Transamerica annuity reinsurance agreement and our
guaranteed minimum income benefit reinsurance agreement, because
we acquired those agreements prior to the transition date
elected by us under FAS 133, as amended by FAS 137.
Because of the nature of the assets underlying our Transamerica
contract, which were roughly 65% convertible bonds at
March 31, 2003, the bifurcation and separate accounting for
the embedded derivatives contained in that contract would add
significant volatility to our reported results. If we bifurcated
and separately accounted for the embedded derivative contained
in our guaranteed minimum income benefit reinsurance agreement,
it also would add volatility to our reported results.


Recognition of Revenues and Expenses.Reinsurance premium revenues from life
products with mortality risk are recognized when due from the
policyholders. For those policies with premium paying periods
that are significantly shorter than the total period over which
benefits are expected to be provided, profits are deferred and
recognized as income in a constant relationship to the insurance
in force or, for annuities, in relation to the amount of
expected future benefit payments. Premiums from universal life
and investment-type contracts are recorded on our balance sheet
as interest sensitive contracts liability. Revenues from these
investment-type contracts consist of income earned on the assets
and amounts assessed during the period against
policyholders account balances for mortality charges,
policy administration charges and surrender charges. Items that
are charged to expense represent interest credited to
policyholder accounts and other benefits in excess of related
policyholders account balances, including minimum interest
guarantee payments. Such minimum interest guarantee payments are
recognized when paid upon the surrender of the underlying policy
and are not charged to the policyholders account balances.
We make estimates at the end of each reporting period regarding
premiums and benefits for cedents who do not report such
information in a timely manner. These estimates can have a
significant effect on the amounts we report in our financial
statements.

Reserves for Policy Benefits, Including Claims
Incurred but not Reported (IBNR) and Interest Sensitive Contract
Liabilities.The development of
reserves for policy benefits and for claims incurred but not
reported for our life reinsurance contracts requires us to make
estimates and assumptions regarding mortality, lapse,
persistency, expense and investment experience. Such estimates
are primarily based on historical experience and information
provided by ceding companies. As occurred in the fourth quarter
of 2002, actual results could differ materially from those
estimates. We monitor actual experience, and where circumstances
warrant, will revise our assumptions and the related reserve
estimates.

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

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 month period ended
March 31, 2003, we had a net loss of $(52,474,816), or
$(2.03) per basic and fully diluted common share, as compared to
net income of $10,433,630, or $0.41 per basic and $0.39 per
fully diluted common share, for the three month period ended
March 31, 2002. The loss in the first quarter of 2003 was
primarily the result of losses associated with

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recaptures and terminations of life and annuity
reinsurance agreements and adverse claims experience under our
life reinsurance agreements.


During the first quarter of 2003, we negotiated
the recapture and termination of certain of our reinsurance
agreements, including several life reinsurance agreements and
our annuity reinsurance agreement with Ohio National. In
connection with these recaptures and terminations, we incurred
losses of approximately $(39,585,000), resulting from the net
write down of deferred acquisition costs and cash payments made
to cedents net of reserve releases associated with the
recaptures and terminations, partially offset by the reversal of
cumulative unrealized losses in the embedded derivative under
our Ohio National agreement. Our net loss for the three months
ended March 31, 2003 was also affected by reported claims
under our life reinsurance agreements that exceeded our
expectations. A reduction in investment income and increased
operating expenses for the three months ended March 31,
2003 also contributed to our net loss during the period. These
items are discussed in greater detail below.

Net Premiums.Net
premium revenue for the three month period ended March 31,
2003 decreased 21% to $61,365,914, as compared with $78,006,891
for the three month period ended March 31, 2002.
Substantially all premium revenue was derived from traditional
ordinary life reinsurance. The decline in premium revenue
reflects the significant reduction of business in force
resulting from the novation and recapture of life reinsurance
agreements in the fourth quarter of 2002 and the first quarter
of 2003. At March 31, 2003, the total face amount of life
insurance in force decreased to $69 billion, as compared
with $129 billion at March 31, 2002. As we continue to
novate, terminate and negotiate the recapture of other
reinsurance contracts, we expect our insurance in force and Net
premium revenue to continue to decline. In addition, we have
stopped writing new reinsurance agreements and have notified our
existing clients that we will not be accepting any new business
under existing treaties on their current terms, which we expect
will also adversely impact our net premium revenue going forward.

Net Investment
Income.Total net investment income
for the three month period ended March 31, 2003 was
$8,158,689, as compared with $24,589,790 for the three months
ended March 31, 2002. The decrease in net investment income
is primarily the result of our return of approximately
$147,000,000 of invested assets related to the termination of a
reinsurance agreement that provided cash deposits to us that we
used to secure collateral obligations of our U.S. based
cedents. Net investment income was also affected by a reduction
in our Funds withheld asset due to decreased yield rates on the
assets supporting our Funds withheld, as well as the recapture
and termination of certain of our annuity reinsurance
agreements, including our annuity reinsurance agreement with
Ohio National. The average annualized yield rate earned on our
invested assets (excluding the Funds withheld) for this quarter
was approximately 2.48%, as compared with 5.14% for the three
months ended March 31, 2002. The decline in yield rates
primarily reflects our decision to invest funds supporting our
letters of credit in cash equivalents in an effort to increase
the available capacity under one of our letter of credit
facilities.

Income earned on Funds withheld for the three
month period ended March 31, 2003 was approximately
$6,277,000, as compared to approximately $18,547,000 for the
comparable prior period of 2002. As noted above, the decrease in
investment income on our Funds withheld is primarily due to
reduced yields on the assets underlying our annuity reinsurance
contracts, especially our largest such contract with
Transamerica, and to the termination of certain of our other
annuity reinsurance agreements, including our agreement with
Ohio National. The average annualized yield rate earned on Funds
withheld was approximately 2.51% for the three months ended
March 31, 2003, compared with 5.41% for the three months
ended March 31, 2002.

Net Realized Investment Gains (Losses).Net realized investment gains for the
three month period ended March 31, 2003 were $1,663,868, as
compared with net realized investment losses of $(321,708) for
the three month period ended March 31, 2002. The increase
in Net realized investment gains for the three months ended
March 31, 2003 was the result of the strong credit quality
of our investment portfolio and the low interest rate
environment. We make decisions concerning the sales of our
invested assets based on a variety of market, business and other
factors.

Net Change in the Fair Value of Embedded
Derivatives.For the three month
period ended March 31, 2003, the net change in fair value
of our embedded derivatives was an unrealized gain of
$13,754,859. For the

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three month period ended March 31, 2002, the
net change in fair value of our embedded derivatives was an
unrealized gain of $1,590,098. The primary reason for the
unrealized gain in our embedded derivative for the three month
period ended March 31, 2003 was the termination of our Ohio
National annuity reinsurance agreement in the first quarter of
2003. Widening credit spreads and bond defaults in the portfolio
of assets supporting this agreement had caused unrealized losses
in our embedded derivatives in prior periods. These cumulative
unrealized losses were reversed upon the termination of the Ohio
National agreement. The unrealized gains in our embedded
derivatives during the three month period ended March 31,
2003 also reflect unrealized gains on another of our annuity
reinsurance agreements as a result of credit spreads tightening.


Surrender Fees and Other Revenue.Surrender fees and other revenue for
the three month period ended March 31, 2003 were
$1,390,247, as compared with $3,896,125 for the three month
period ended March 31, 2002. This income is primarily
derived from surrender fees related to our fixed annuity
contract with Transamerica. The decrease in the three month
period ended March 31, 2003, as compared with the three
month period ended March 31, 2002 is mainly due to a
reduction in surrender fees under that contract of approximately
$1,400,000.

Claims and Policy Benefits.Claims and policy benefits for the
three month period ended March 31, 2003 were $75,089,440,
or 122.4% of net premium, as compared with $58,816,606, or 75.4%
of net premium, for the three month period ended March 31,
2002. The increase for the three month period ended
March 31, 2003 was primarily due to reported claims under
our life reinsurance agreements that exceeded of our
expectations. While life reinsurance agreements accounting for a
significant portion of this adverse claims experience were
recaptured or terminated in the first quarter of 2003, we
continue to monitor and analyze our experience under our
remaining agreements. We cannot assure you that claims
experience under our remaining contracts will improve. If claim
experience continues at the levels observed during the fourth
quarter of 2002 and the first quarter of 2003, or increases from
those levels, our operating results would be materially and
adversely affected. The novation, termination and recapture of
additional reinsurance agreements will reduce claims and policy
benefits at an aggregate level in future periods, and may affect
the level of claims and policy benefits as a percentage of
premiums. During the first quarter of 2003, we also increased
our reserves for expected claim payments associated with our
guaranteed minimum death benefit, guaranteed minimum income
benefit and enhanced earnings benefit contracts by approximately
$1,803,000, bringing our total carried balance of these reserves
to $20,303,000 at March 31, 2003. This reserve increase was
made in response to the continuing poor performance of the
financial markets.

During the first quarter of 2003, we performed an
in depth analysis of reported claims related to deaths occurring
prior to December 31, 2002. As a result, we increased our
reserves for incurred but not reported (IBNR) claims by
approximately $4,000,000 in the fourth quarter of 2002 to
reflect a longer than expected reporting lag and a higher
average death benefit. We have not increased our level of IBNR
reserves from December 31, 2002, but are continuing to
monitor and analyze our experience under these life reinsurance
contracts.

We are currently seeking relief from MetLife, our
largest cedent of life insurance, with respect to a reinsurance
contract that has generated mortality experience beyond our
pricing parameters and is producing losses. If we are unable to
rescind or recapture this agreement, we may incur additional
losses in future periods. This life reinsurance agreement is
currently in arbitration related to representations made at the
time we underwrote the agreement and a rate increase we
instituted in the first quarter of 2003.

Interest Credited to Interest Sensitive
Contracts Liabilities.Interest
credited to Interest sensitive contract liabilities, which are
liabilities we assume under certain annuity reinsurance
agreements, was $4,871,759 for the three month period ended
March 31, 2003, as compared with $17,922,346 for the
comparable prior period in 2002. Included in Interest credited
to interest sensitive contracts liabilities for the three month
period ended March 31, 2003 are minimum interest guarantee
payments of approximately $5,107,000, as compared to minimum
interest guarantee payments of $5,192,000 for the comparable
prior period in 2002. The decline in Interest credited to
interest sensitive contracts liabilities for the three month
period ended March 31, 2003 was primarily the result of
poor investment performance of invested premiums managed by the
primary insurance companies under our annuity reinsurance
agreements, especially our

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agreements with Transamerica and Ohio National.
We terminated our reinsurance agreement with Ohio National on
February 14, 2003.


Policy Acquisition and Other Insurance
Expenses.Policy acquisition and other
insurance expenses, consisting primarily of allowances and
amortization and write downs of deferred policy acquisition
costs, for the three month period ended March 31, 2003 were
$52,501,064, as compared with $15,636,118 for the comparable
prior period in 2002. The increase for the three month period
ended March 31, 2003 is primarily due to the net write down
of deferred acquisition costs associated with the recapture and
termination of contracts of approximately $42,250,000. There
were no write downs of deferred acquisition costs associated
with our annuity reinsurance contract with Transamerica during
the three month period ended March 31, 2003. After
adjusting for the losses associated with the recaptures and
terminations, policy acquisition and other insurance expenses
decreased from the first quarter of 2002, reflecting the
reduction in the size of our book of business.

Operating Expenses.Operating expenses for the three month period ended
March 31, 2003 were $6,346,130 or 8.7% of total revenue
(excluding the net change in fair value of embedded
derivatives), as compared with $3,657,792 or 3.4% of total
revenue (excluding the net change in fair value of embedded
derivatives) for three month period ended March 31, 2002.
The increase in expense for the first quarter of 2003 reflects
costs associated with renegotiating employment arrangements and
other employee compensation, increased costs of insurance for
directors and officers liability coverage and increased legal
and audit fees.

Segment Results

We separately track financial results of our life
and annuity operations in segments. Each segment is defined by a
dominant risk characteristic inherent in products in that
segment. The life segment consists of all products where the
dominant risk characteristic is mortality risk. The annuity
segment comprises all products where the dominant risk
characteristic is investment risk. In addition, certain of our
remaining 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 change in the fair value
of these embedded derivatives is included in the annuity
segment. Both the life and annuity segments have specific
assets, liabilities, stockholders equity, revenue,
benefits and expenses that apply only to them. The corporate
segment contains all stockholders equity not otherwise
deployed to the life or annuity segment. In addition, the
corporate segment includes all capital gains and losses from
sales of securities in our portfolio and investment income on
undeployed invested assets. Operating expenses are generally
allocated to the segments proportionately based upon the amount
of stockholders equity deployed to the segment, except for
capital raising costs, which are currently charged directly to
the corporate segment. Segment results are reported in Note 4 to
our unaudited consolidated financial statements.

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

Our life segment loss for the three month period
ended March 31, 2003 was $(45,146,168), as compared with
segment income of $7,226,698 for the comparable prior period of
2002. The significant segment loss in the first quarter of 2003
is primarily due to a loss of approximately $(34,090,000)
relating to the recaptures of life reinsurance agreements by our
cedents, reflecting the write down of deferred acquisition costs
and cash payments made to cedents net of reserve releases
associated with the recaptures. Segment loss for the three
months ended March 31, 2003 was also affected by reported
claims under our life reinsurance agreements that exceeded our
expectations.

Segment revenues for the three month period ended
March 31, 2003 declined 24% to $60,169,987 from $79,146,044
in the first quarter of 2002. This decline reflects our reduced
levels of life insurance in force as a result of novations and
recaptures of life reinsurance agreements during the fourth
quarter of 2002 and the first

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quarter of 2003. We anticipate further declines
in segment revenue in the second quarter of 2003 as the result
of these novations and recaptures. In addition, net investment
income attributable to the life segment for the first quarter of
2003 decreased approximately $2,700,000, as compared with the
first quarter of 2002, reflecting the termination of a
reinsurance agreement that provided cash to us that was used to
fund the collateral requirements of our cedents.


Segment policy benefits and expenses grew 46% to
$105,316,155 for the three month period ended March 31,
2003, as compared with $71,919,346 for the three month period
ended March 31, 2002, reflecting the costs of recaptures of
reinsurance agreements by our cedents. The net cost of
recaptures during the first quarter of 2003 was $34,100,000,
which is comprised of write downs of deferred acquisition costs
of $24,600,000 and the return of unearned premium reserves to
our cedents of $30,800,000, both offset by policy benefit
reserve reductions of $21,300,000. Segment policy benefits and
expenses for the three month period ended March 31, 2003
were also affected by reported claims under our life reinsurance
agreements that exceeded our expectations. If claim experience
continues at the levels observed during the fourth quarter of
2002 and the first quarter of 2003, or increases from those
levels, our operating results would be materially and adversely
affected. The novation, termination and recapture of additional
reinsurance agreements will reduce claims and policy benefits at
an aggregate level in future periods, and may affect the level
of claims and policy benefits as a percentage of premiums.

During the first quarter of 2003, we performed an
in depth analysis of reported claims related to deaths occurring
prior to December 31, 2002. As a result, we increased our
reserves for incurred but not reported (IBNR) claims by
approximately $4,000,000 in the fourth quarter of 2002 to
reflect a longer than expected reporting lag and a higher
average death benefit. We have not increased our level of IBNR
reserves from December 31, 2002, but are continuing to
monitor and analyze our experience under these life reinsurance
contracts.

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 be a small contributor to our
net income, it contains significant volatility from two sources.
First, under FAS 133  Accounting for Derivative
Instruments and Hedging Activities we must value embedded
derivatives in certain of our annuity reinsurance agreements.
This unrealized change in the value of the derivative is
reported in our income statement each quarter. The change in the
value of the derivative can be large, and is driven by financial
market conditions, most notably credit risk related changes.
Second, our Transamerica annuity reinsurance contract has
exhibited volatility due to write downs of our deferred
acquisition cost balance which are based upon managements
estimates of future investment performance and lapse experience.
Our annuity reinsurance contract with Transamerica, which
represented 70% of our annuity segment assets at March 31,
2003, is not expected to generate significant income going
forward.

Segment loss was $(7,870,476) for the three month
period ended March 31, 2003, as compared with income of
$2,936,401 for the three month period ended March 31, 2002,
reflecting a $(4,875,000) loss related to the termination of our
annuity reinsurance agreement with Ohio National (net of the
reversal of cumulative unrealized losses in the embedded
derivative), our second largest such agreement, and to a lesser
extent, the termination of another of our annuity reinsurance
agreements, which produced a net loss of $(620,000). In the
first quarter of 2003, we also incurred a loss of approximately
$(1,000,000) on one of our annuity reinsurance

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##### Table of Contents



agreements reflecting a change in mortality
assumptions by the cedent under the contract.


Under FAS 133, we are required to bifurcate
and separately account for embedded derivatives contained in
certain of our annuity reinsurance agreements. The change in the
fair value of the embedded derivatives is influenced by changes
in credit risk, changes in expected future cash flows under the
annuity reinsurance contracts and interest rate changes. For the
three month period ended March 31, 2003, the net change in
fair value of our embedded derivatives was an unrealized gain of
$13,754,859. For the three month period ended March 31,
2002, the net change in fair value of our embedded derivatives
was an unrealized gain of $1,590,098. The primary reason for the
unrealized gain in our embedded derivative for the three month
period ended March 31, 2003 was the termination of our Ohio
National annuity reinsurance agreement in the first quarter of
2003. Widening credit spreads and bond defaults in the portfolio
of assets supporting this agreement had caused unrealized losses
in our embedded derivatives in prior periods. These cumulative
unrealized losses were reversed upon the termination of the Ohio
National agreement. The unrealized gains in our embedded
derivatives during the three month period ended March 31,
2003 also reflect unrealized gains on another of our annuity
reinsurance agreements as a result of credit spreads tightening.

We increased our reserves for expected claim
payments associated with variable annuity reinsurance products
by $1,803,000 for the first quarter of 2003, bringing our total
carried balance of these reserves to $20,303,000 at
March 31, 2003. These reserves are for expected claim
payments associated with our guaranteed minimum death benefit,
guaranteed minimum income benefit and enhanced earnings benefit
contracts. This reserve increase was made in response to the
continuing poor performance of the financial markets.

Total revenue for our annuity segment declined
10% to $24,103,131 for the three month period ended
March 31, 2003, as compared with $26,915,754 for the three
month period ended March 31, 2002. The decrease is
primarily related to a reduction in surrender fees from our
Transamerica annuity reinsurance contract of approximately
$1,400,000 and a decline in net investment income of
approximately $12,000,000 due to reduced assets under management
by our annuity cedents, as well as decreased yields on those
assets, both offset by an increase in embedded derivative gains
of $12,164,761. The decline in net investment also reflects the
termination of the Ohio National reinsurance agreement.

Policy benefits and expenses for the annuity
segment, which include interest credited to policyholders,
segment specific expenses, and allocated expenses grew 33% to
$31,973,607 for the three month period ended March 31,
2003, as compared with $23,979,353 for the three month period
ended March 31, 2002. The primary component of this
increase is the write down of deferred acquisition costs
associated with our termination of the Ohio National annuity
reinsurance contract, partially offset by reductions in interest
credited to policyholders and reduced amortization of deferred
acquisition costs on our Transamerica annuity reinsurance
contract.

Corporate Segment.The corporate segment includes all of our capital gains and
losses, investment income on undeployed invested assets, capital
raising costs and a proportionate share of operating expenses
based upon how stockholders equity is deployed to the life
and annuity segments. As a result, the corporate segment, while
small relative to our total company, will likely have volatile
results. Segment income grew to $541,828 for the three month
period ended March 31, 2003, as compared with $270,532 for
the three month period ended March 31, 2002. Revenues grew
by 21% to $2,060,459 for the three month period ended
March 31, 2003, as compared with $1,699,398 for the three
month period ended March 31, 2002. Both increases were the
result of realized capital gains of $1,663,868 in the first
quarter of 2003 compared to realized capital losses of
$(321,708) in the first quarter of 2002, partially offset by a
lower percentage of stockholders equity attributable to
the corporate segment in the first quarter of 2003.

Segment benefits and expenses increased 6% to
$1,518,631 for the three month period ended March 31, 2003,
as compared with $1,428,867 for the three month period ended
March 31, 2002. The increase reflects higher operating
expenses, partially offset by a lower percentage of
stockholders equity attributable to the corporate segment
in the first quarter of 2003, as compared to the first quarter
of 2002.

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##### Table of Contents



Financial Condition



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

At March 31, 2003 and December 31,
2002, virtually all of our invested assets were posted as
collateral to secure our obligations under reinsurance
agreements and letter of credit facilities or were required to
maintain the statutory capital and surplus requirements of our
U.S. operating subsidiary. At March 31, 2003, our
invested assets, including cash and cash equivalents, had an
aggregate fair value of $299,864,333, including unrealized gains
of $5,406,527, as compared with an aggregate fair value of
$306,346,337, including unrealized gains of $6,162,525, at
December 31, 2002. The decline in our invested assets
during the first quarter of 2003 was primarily the result of a
reduction in cash and cash equivalents due to premiums received
under our reinsurance agreements, together with net investment
income falling short of claims and policy benefit and expense
outflows under our reinsurance agreements. At March 31,
2003 and December 31, 2002, the weighted average duration
of the fixed income securities included in our invested assets
was 4.0 and 3.8 years, respectively, and the weighted
average investment quality rating was AA at the end
of each period.

Our investments are governed by investment
guidelines established and approved by our Board of Directors.
Our investment objectives are to achieve above average
risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of liquidity
in our portfolio and match the cash flows of our investments to
our related insurance liabilities. Our investment guidelines
require our overall fixed income portfolio to maintain a minimum
weighted average credit quality of A. A fixed income
security rated A by Standard & Poors is
considered to be somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
higher rated issuer; however, the issuers capacity to meet
its financial commitment on the security is still considered to
be strong. As of July 31, 2002, our investment guidelines
were amended to prohibit us from investing in fixed income
securities that are rated below investment grade at the time of
purchase. We do not invest in any fixed income securities in
emerging markets or securities that are not rated by a major
rating agency.

At both March 31, 2003 and December 31,
2002, less than 1% of our fixed income securities consisted of
below investment grade securities. The fair value of such
investments varies depending on economic and market conditions,
the level of interest rates and the perceived creditworthiness
of the issuer. As noted above, our investment guidelines
prohibit the purchase of below investment grade securities, as
these investments are subject to a higher degree of credit risk
than investment grade securities. We monitor the
creditworthiness of the portfolio as a whole, and when the fair
market value of a security declines for reasons other than
changes in interest rates or other perceived temporary
conditions, the security is written down to its fair value.

At March 31, 2003, mortgage-backed
securities represented approximately 9% of our invested assets,
including cash and cash equivalents, as compared with
approximately 10% at December 31, 2002. Investors in these
securities are compensated primarily for reinvestment risk
rather than credit quality risk. Investments in mortgage-backed
securities include collateralized mortgage obligations
(CMOs) and mortgage-backed pass-through
securities. Mortgage backed securities generally are
collateralized by mortgages issued by the Government National
Mortgage Association (GNMA), the Federal National
Mortgage Association and the Federal Home Loan Mortgage
Corporation. Of these, only GNMA mortgages are backed by the
full faith and credit of the U.S. government. Credit risk
generally is not a consideration when investing in agency
mortgage backed securities. Our mortgage backed securities
portfolio had a weighted average investment quality rating of
AAA at both March 31, 2003 and
December 31, 2002.

At March 31, 2003, approximately 4% of our
mortgage-backed investment portfolio consisted of securities
with planned repayment schedules, as compared with 7% at
December 31, 2002. These investments are designed to
amortize in a more predictable manner by shifting the primary
risk of prepayment of the underlying collateral to investors in
other tranches of the CMO.

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

Investment Results

|                                                             |  |                        |         |                                  |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------- | -------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                             |  |                        |         |                                  |  |      |         |     
|                                                             |  | Three Months Ended     |         |                                 
|                                                             |  | March 31,              |         | Twelve Months Ended December 31,
|                                                             |  |                        |         |                                 
|                                                             |  | 2003                   |         | 2002                             |  | 2002 |         | 2001 |  | 2000
|                                                             |  |                        |         |                                  |  |      |         |      |  |     
|                                                             |  |                       
|                                                             |  | (Dollars in thousands)
|Total invested assets, including cash and
    equivalents(1) |  | $                      | 299,864 |                                  |  | $    | 434,127 |      |  | $    | 306,346 |   |  | $ | 423,780 |   |  | $ | 321,819 |  
|Investment income, net of related expenses                   |  | $                      | 1,882   |                                  |  | $    | 6,043   |      |  | $    | 25,931  |   |  | $ | 20,165  |   |  | $ | 20,126  |  
|Effective annualized yield rate(2)                           |  |                        | 2.48    | %                                |  |      | 5.14    | %    |  |      | 5.28    | % |  |   | 5.74    | % |  |   | 6.85    | %
|Realized investment gains (losses)                           |  | $                      | 1,664   |                                  |  | $    | (322    | )    |  | $    | 19,749  |   |  | $ | 1,230   |   |  | $ | (4,817  | )



---



|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 March 31, 2003, our Funds withheld
receivable was $1.0 billion, as compared with
$1.4 billion at December 31, 2002. Historically, when
a ceding company enters into a reinsurance contract structured
as a modified coinsurance or coinsurance funds withheld
arrangement with us, a portion of the ceding companys
liability to the policyholders or, in the case of a
retrocessional arrangement, the primary insurer, is ceded to us.
Our remaining modified coinsurance and coinsurance funds
withheld 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 have established a receivable called
Funds withheld at interest. For annuity reinsurance
agreements, the Funds withheld at interest receivable is equal
to our fixed portion of the statutory reserves carried by the
ceding company. For life reinsurance agreements, the Funds
withheld at interest receivable is equal to the value of the
ceding companys GAAP reserves related to the policies
underlying our life reinsurance agreements, which includes
reserves for pending claims and reserves for incurred but not
reported claims. We are allocated our share of the investment
income and realized capital gains and losses that arise from the
securities in the investment portfolio underlying the Funds
withheld at interest under each type of agreement.

At March 31, 2003, our Funds withheld at
interest receivable related to our annuity reinsurance contracts
had a carrying value of approximately $984 billion. Our contract
with Transamerica accounted for approximately 68% of our Funds
withheld at interest receivable as March 31, 2003, as
compared to 51% at December 31, 2002. The increase in the
proportion of our Funds withheld at interest assets related to
the Transamerica contract generally reflects the decrease in our
Funds withheld at interest asset that resulted from the
termination of our annuity reinsurance agreement with Ohio
National in February 2003. At March 31, 2003, the assets
held and managed by our ceding companies under our annuity
reinsurance contracts were invested in convertible bonds and
fixed income securities having a weighted average credit quality
of A and a weighted average duration of
5.02 years. In addition, at March 31, 2003,
approximately 4.8% of such assets were invested in below
investment grade securities, as compared with 4.2% of such
assets at December 31, 2002. At December 31, 2002,
these assets had a weighted average credit quality of
A and a weighted average duration of 5.3 years.

The average annualized yield rate earned on the
assets held and managed by our ceding companies under our
annuity reinsurance contracts was approximately 2.51% for the
three months ended March 31, 2003, as

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##### Table of Contents



compared to 5.25% for the year ended
December 31, 2002. The average annualized yield rate earned
on the assets funding our annuity obligations to Transamerica
was approximately 1.61% for the three months ended
March 31, 2003, as compared with 4.61% for the year ended
December 31, 2002. For purposes of calculating the average
yield rate earned on assets held and managed by our ceding
companies, including Transamerica, we include net realized
capital gains and losses as reported to us by our ceding
companies.


At March 31, 2003, approximately
$25 million of our Funds withheld at interest receivable
was attributable to a 50% quota share reinsurance contract we
entered into with XL Life Ltd covering certain blocks of life
reinsurance business that we novated to XL Life on
December 31, 2002. The assets related to these life
reinsurance contracts are investment grade corporate and
government securities with an average credit quality of
AA and a weighted average duration of 5.7 years.



| |             
| | ------------
| | Transamerica

Our annuity reinsurance contract with
Transamerica is our largest annuity reinsurance contract and, as
of March 31, 2003, approximately $695 million, or 68%,
of our Funds withheld at interest receivable; approximately
$710 million, or 71%, of our Interest sensitive contracts
liability; and approximately $50 million of the Deferred
policy acquisition costs assets on our balance sheet related to
this contract. As a result of the changes to our remaining book
of business, especially the termination of our annuity
reinsurance contract with Ohio National in February 2003, we
expect that the assets and liabilities associated with the
Transamerica contract will represent a significant portion of
our total assets and liabilities in future periods. We do not
expect the Transamerica contract to generate significant income
in future periods.

At March 31, 2003, the assets funding the
policyholder obligations under the Transamerica contract had an
average credit quality of A and an average duration
of 4.15 years, as compared with an average credit quality
of A- and an average duration of 4.2 years at
December 31, 2002. The contract is a retrocessional
arrangement covering VisionMark fixed annuity products issued by
IL Annuity and Insurance Company, the primary insurance company.
The assets underlying the Transamerica contract are managed by
AmerUS Capital Management, the investment manager appointed by
IL Annuity. At March 31, 2003 and December 31, 2002,
AmerUS Capital Management had invested approximately 65% of the
premiums paid in connection with the underlying policies in
investment grade convertible bonds and had invested the
remaining premiums in investment grade bonds, high yield bonds
and mortgage-backed securities. The value of convertible bonds
is a function of their investment value (determined by comparing
their yield with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege)
and their conversion value (at market value, if converted into
the underlying common stock). To the extent the market price of
the underlying common stock approaches or exceeds the conversion
price, the price of the convertible bonds will be increasingly
influenced by their conversion value. Consequently, the value of
convertible bonds may be influenced by changes in the equity
markets.

While convertible bonds would typically be
expected to produce lower investment income than other fixed
income securities, convertible bonds provide the potential for
higher total returns through the underlying equity component of
the bonds, which are passed on to VisionMark policyholders
through the total return adjustment upon surrender of the
policies. As with the holders of other single premium deferred
annuity policies, a VisionMark policyholder is guaranteed a
return of premiums paid plus a guaranteed minimum interest rate
of 3% to 3.5% per annum over the life of the policy. During the
three months ended March 31, 2003 and the year ended
December 31, 2002, we paid approximately $5,107,000 and
$26,700,000, respectively, under our annuity reinsurance
contract with Transamerica to cover our proportionate share of
the shortfall that arose because the net investment returns on
the assets related to these policies substantially
underperformed the minimum interest guarantees for surrendered
policies.

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##### Table of Contents



According to data provided to us by Transamerica,
at March 31, 2003, the assets held by IL Annuity and
managed by AmerUS Capital were comprised of the following:

|                                            |                                                  |               |             |              |  |              |             |             |  |  |      |       |  
|------------------------------------------- | ------------------------------------------------ | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---- | ----- | -
|                                            |                                                  |               |             |              |  | % of Total  
|Type of Security                            |                                                  | Book Value(1) |             | Market Value |  | Market Value
|                                            |                                                  |               |             |              |  |             
|Investment grade convertible bonds          |                                                  | $             | 484,095,888 |              |  | $            | 463,345,687 |             |  |  | 65.3 | %    
|Investment grade U.S. corporate bonds       |                                                  |               | 133,880,328 |              |  |              | 141,295,236 |             |  |  | 19.9 | %    
|Below investment grade U.S. corporate bonds |                                                  |               | 33,830,636  |              |  |              | 34,503,972  |             |  |  | 4.9  | %    
|Mortgage-backed securities                  |                                                  |               | 35,467,002  |              |  |              | 36,548,945  |             |  |  | 5.1  | %    
|Short term securities                       |                                                  |               | 33,499,020  |              |  |              | 34,237,040  |             |  |  | 4.8  | %    
|                                            |                                                  |               |             |              |  |              |             |             |  |  |      |      
|                                            | Total invested assets                            |               | $           | 720,772,874  |  |              | $           | 709,930,880 |  |  |      | 100.0 | %
|                                            |                                                  |               |             |              |  |              |             |             |  |  |      |      
|Accrued investment income                   |                                                  |               |             |              |  |              | 4,964,374   |             |  |  |      |      
|                                            |                                                  |               |             |              |  |              |             |             |  |  |      |      
|                                            | Total market value, including accrued investment |               |             |              |  |              | $           | 714,895,254 |  |  |      |       |  
|                                            |                                                  |               |             |              |  |              |             |             |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

According to data provided to us by Transamerica,
at March 31, 2003, the credit ratings of the assets
(excluding accrued investment income) held by IL Annuity and
managed by AmerUS Capital were approximately as follows:

|                          |                                                             |               |             |              |  |              |             |             |  |  |      |       |  
|------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---- | ----- | -
|                          |                                                             |               |             |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |             | Market Value |  | Market Value
|                          |                                                             |               |             |              |  |             
|AAA                       |                                                             | $             | 166,711,461 |              |  | $            | 168,469,588 |             |  |  | 23.7 | %    
|AA                        |                                                             |               | 31,404,391  |              |  |              | 31,205,675  |             |  |  | 4.4  | %    
|A                         |                                                             |               | 214,564,497 |              |  |              | 212,986,515 |             |  |  | 30.0 | %    
|BBB                       |                                                             |               | 265,328,306 |              |  |              | 254,309,450 |             |  |  | 35.8 | %    
|BB and below              |                                                             |               | 42,764,219  |              |  |              | 42,959,652  |             |  |  | 6.1  | %    
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                          | Total invested assets                                       |               | $           | 720,772,874  |  |              | $           | 709,930,880 |  |  |      | 100.0 | %
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|Accrued investment income |                                                             |               |             |              |  |              | 4,964,374   |             |  |  |      |      
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                          | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 714,895,254 |  |  |      |       |  
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      



---



|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors, or, if
    unrated by Standard & Poors, based on an
    equivalent rating assigned by the National Association of
    Insurance Commissioners.
|   
|(2) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.           

According to data provided to us by Transamerica,
at March 31, 2003, the maturity distribution of the assets
held by IL Annuity and managed by AmerUS Capital was
approximately as follows:

|                       |                 |               |             |              |  |            |             |             |  |  |      |       |  
|---------------------- | --------------- | ------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ---- | ----- | -
|                       |                 |               |             |              |  | % of Total
|Maturity               |                 | Book Value(1) |             | Market Value |  | Book Value
|                       |                 |               |             |              |  |           
|Within one year        |                 | $             | 149,460,301 |              |  | $          | 148,956,847 |             |  |  | 21.0 | %    
|From one to five years |                 |               | 128,447,173 |              |  |            | 131,993,049 |             |  |  | 18.6 | %    
|From six to ten years  |                 |               | 184,394,743 |              |  |            | 184,907,767 |             |  |  | 26.0 | %    
|More than ten years    |                 |               | 258,470,657 |              |  |            | 244,073,217 |             |  |  | 34.4 | %    
|                       |                 |               |             |              |  |            |             |             |  |  |      |      
|                       | Total all years |               | $           | 720,772,874  |  |            | $           | 709,930,880 |  |  |      | 100.0 | %
|                       |                 |               |             |              |  |            |             |             |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

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##### Table of Contents





| |                                        
| | ---------------------------------------
| | Other Annuity Reinsurance
    Contracts

At March 31, 2003, we had three other
annuity reinsurance contracts that guaranteed crediting rates
that vary in amount and duration. At March 31, 2003, the
assets funding the policyholder obligations under these
contracts had an average credit quality of A and an
average duration of approximately 6.99 years, as compared
with an average credit quality of A and an average
duration of approximately 7.04 years at December 31,
2002.

According to information provided by the ceding
companies under these three annuity reinsurance contracts, at
March 31, 2003, the assets held and managed by those ceding
companies were comprised of as follows:

|                                    |                                                             |               |            |              |  |              |            |             |  |  |      |       |  
|----------------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ---------- | ----------- |  |  | ---- | ----- | -
|                                    |                                                             |               |            |              |  | % of Total  
|Type of Security                    |                                                             | Book Value(1) |            | Market Value |  | Market Value
|                                    |                                                             |               |            |              |  |             
|Canadian provincial bonds           |                                                             | $             | 84,644,617 |              |  | $            | 88,094,690 |             |  |  | 28.0 | %    
|Investment grade US corporate bonds |                                                             |               | 68,416,568 |              |  |              | 73,442,913 |             |  |  | 23.4 | %    
|Investment grade UK corporate bonds |                                                             |               | 78,203,660 |              |  |              | 83,391,371 |             |  |  | 26.5 | %    
|Canadian corporate bonds            |                                                             |               | 47,640,401 |              |  |              | 47,792,342 |             |  |  | 15.3 | %    
|Government bonds                    |                                                             |               | 10,104,295 |              |  |              | 9,663,672  |             |  |  | 3.0  | %    
|Mortgage securities                 |                                                             |               | 5,006,250  |              |  |              | 5,745,000  |             |  |  | 1.8  | %    
|Below Investment grade bonds        |                                                             |               | 8,943,573  |              |  |              | 6,301,868  |             |  |  | 2.0  | %    
|                                    |                                                             |               |            |              |  |              |            |             |  |  |      |      
|                                    | Total invested assets                                       |               | $          | 302,959,364  |  |              | $          | 314,431,856 |  |  |      | 100.0 | %
|                                    |                                                             |               |            |              |  |              |            |             |  |  |      |      
|Accrued investment income           |                                                             |               |            |              |  |              | 5,367,749  |             |  |  |      |      
|                                    |                                                             |               |            |              |  |              |            |             |  |  |      |      
|                                    | Total market value, including accrued investment
    income |               |            |              |  |              | $          | 319,799,605 |  |  |      |       |  
|                                    |                                                             |               |            |              |  |              |            |             |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

According to information provided by the ceding
companies under these three annuity reinsurance contracts, at
March 31, 2003, the credit ratings of the assets (excluding
accrued investment income) held and managed by those ceding
companies were approximately as follows:

|                          |                                                             |               |            |              |  |              |            |             |  |  |      |       |  
|------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ---------- | ----------- |  |  | ---- | ----- | -
|                          |                                                             |               |            |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |            | Market Value |  | Market Value
|                          |                                                             |               |            |              |  |             
|AAA                       |                                                             | $             | 91,955,338 |              |  | $            | 95,828,695 |             |  |  | 30.5 | %    
|AA                        |                                                             |               | 29,787,572 |              |  |              | 31,147,259 |             |  |  | 9.9  | %    
|A                         |                                                             |               | 93,457,270 |              |  |              | 98,455,837 |             |  |  | 31.3 | %    
|BBB                       |                                                             |               | 78,119,611 |              |  |              | 82,548,198 |             |  |  | 26.3 | %    
|BB and below              |                                                             |               | 9,639,573  |              |  |              | 6,451,867  |             |  |  | 2.0  | %    
|                          |                                                             |               |            |              |  |              |            |             |  |  |      |      
|                          | Total invested assets                                       |               | $          | 302,959,364  |  |              | $          | 314,431,856 |  |  |      | 100.0 | %
|                          |                                                             |               |            |              |  |              |            |             |  |  |      |      
|Accrued investment income |                                                             |               |            |              |  |              | 5,367,749  |             |  |  |      |      
|                          |                                                             |               |            |              |  |              |            |             |  |  |      |      
|                          | Total market value, including accrued investment
    income |               |            |              |  |              | $          | 319,799,605 |  |  |      |       |  
|                          |                                                             |               |            |              |  |              |            |             |  |  |      |      



---



|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors, or, if
    unrated by Standard & Poors, based on an equivalent
    rating assigned by the National Association of Insurance
    Commissioners.
|   
|(2) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.           

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##### Table of Contents



According to information provided by the ceding
companies under these three annuity reinsurance contracts, at
March 31, 2003, the maturity distribution of the assets
held and managed by those ceding companies was approximately as
follows:

|                       |                 |               |             |              |  |            |             |             |  |  |      |       |  
|---------------------- | --------------- | ------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ---- | ----- | -
|                       |                 |               |             |              |  | % of Total
|Maturity               |                 | Book Value(1) |             | Market Value |  | Book Value
|                       |                 |               |             |              |  |           
|Within one year        |                 | $             | 9,204,614   |              |  | $          | 9,211,364   |             |  |  | 2.9  | %    
|From one to five years |                 |               | 64,093,254  |              |  |            | 66,795,426  |             |  |  | 21.2 | %    
|From six to ten years  |                 |               | 64,289,080  |              |  |            | 65,168,220  |             |  |  | 20.8 | %    
|More than ten years    |                 |               | 165,372,416 |              |  |            | 173,256,846 |             |  |  | 55.1 | %    
|                       |                 |               |             |              |  |            |             |             |  |  |      |      
|                       | Total all years |               | $           | 302,959,364  |  |            | $           | 314,431,856 |  |  |      | 100.0 | %
|                       |                 |               |             |              |  |            |             |             |  |  |      |      



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

Liquidity and Capital Resources

Our liquidity and capital resources are a measure
of our overall financial strength and our ability to generate
cash flows from our operations to meet our operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold and cash and short term investments. The principal
obligations and uses of the funds are to post collateral for the
statutory reserves ceded to us by U.S. based insured and
reinsurers, the payment of policy benefits, acquisition and
operating expenses and the purchase of investments. Under the
terms of our reinsurance agreements, we are required to provide
letters of credit or fund trust accounts with liquid assets to
satisfy the collateral requirements of our cedents. At
March 31, 2003 and December 31, 2002, letters of
credit totaling $172,000,000 and $174,000,000, respectively, had
been issued in the ordinary course of our business by our
bankers in favor of certain ceding insurance companies
(including our U.S. operating subsidiary) to provide
security and meet regulatory requirements. At March 31,
2003 and December 31, 2002, cash and investments of
approximately $107,000,000 and $115,000,000, respectively, were
pledged as collateral for letters of credit. At both
March 31, 2003 and December 31, 2002, cash and
investments of $125,000,000 were held in trust for the benefit
of certain ceding insurance companies to provide security and to
meet regulatory requirements.

In March 2003, Hartford Life Insurance Company,
the cedent under our largest guaranteed minimum death benefit
reinsurance contract, served notice seeking to institute
arbitration proceedings against us alleging that we had failed
to satisfy additional collateral requirements under the contract
of approximately $59,000,000 as of December 31, 2002. We do
not agree with the additional collateral requirements asserted
by Hartford Life and, as a result, ceased making claim payments
to Hartford Life under the contract. In April 2003, Hartford
Life, drew approximately $18,000,000 of assets held in trust for
its benefit and drew approximately $24,500,000 of letters of
credit that had been issued by Citibank for Hartford Lifes
benefit. As a result of Hartford Lifes draw on the letters
of credit, Citibank seized approximately $20,105,000 in assets
that had been posted by us as security under our letter of
credit facility. Consequently, approximately $4,395,000 related
to our letter of credit facility is due and payable by us upon
Citibanks demand. We believe that the draw on the letters
of credit was not permitted under the reinsurance contract and
plan to make the action a subject of arbitration proceedings
that have been called for by Hartford Life.

As discussed in Note 6 to our unaudited
consolidated financial statements included elsewhere in this
report, on December 31, 2002, we entered into a transaction
with XL Life pursuant to which we transferred certain
blocks of life reinsurance business to XL Life. We are in
discussions with XL Life regarding certain post closing
adjustments called for by the master novation agreement entered
into in connection with the transaction. If we cannot reach a
satisfactory resolution with XL Life regarding these
adjustments, we may be required to enter into arbitration
proceedings with XL Life under the agreement. If we are
unable to prevail in such arbitration proceedings, we may be
required to make substantial cash adjustment payments to
XL Life under the agreement.

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##### Table of Contents



We have two reinsurance operating subsidiaries,
the largest of which is based in and operates out of Bermuda.
Our other reinsurance operating subsidiary is based in and
operates out of the United States. Our Bermuda operating
subsidiary reinsures a large portion of the reinsurance business
written by our U.S. operating subsidiary. The primary
purpose of this reinsurance is to provide reinsurance capacity
to our U.S. operating subsidiary so that it can compete in
its market place. Our Bermuda operating subsidiary has made
capital infusions into the U.S. operating subsidiary to
allow the U.S. company to maintain targeted statutory
surplus levels and to provide cash and securities as collateral
for the reinsurance cessions the U.S. operating subsidiary
makes to the Bermuda operating company. At March 31, 2003
approximately $65,000,000 of our cash and cash equivalents and
fixed income securities were held by the U.S. operating
subsidiary and were not available to us or our Bermuda operating
subsidiary to fund our liquidity or collateral needs. In
addition, our U.S. operating company has entered into a
letter agreement with the Connecticut Insurance Department that,
among other things, restricts the U.S. operating company
from paying dividends or settling inter-company balances with us
or our Bermuda operating company.

We did not have sufficient available cash and
investments at March 31, 2003 to satisfy the collateral
requirements asserted by our cedents under certain of our
reinsurance treaties. Our cedents have asserted that we must
satisfy additional collateral requirements of approximately
$172,000,000 in excess of amounts we currently have posted. We
are currently analyzing these asserted collateral requirements
and have not concluded that such amounts are in fact required to
be posted as collateral under the relevant reinsurance
contracts. As a result of our inability to satisfy our
obligations, certain parties have claimed that we are in breach
of our agreements. As a consequence, such parties have sought
and others may seek remedies for such claimed breaches, and we
may be required to enter into arbitration or litigation
proceedings with those parties. If we do not prevail in any such
arbitration or litigation proceeding, it would have a material
adverse effect on our financial condition and we may be required
to liquidate our operations.

We also currently have approximately $40,605,000
of outstanding unsecured letters of credit issued on our behalf
by Citibank. In October 2002, Citibank agreed to extend our
unsecured letter of credit facility into 2003 in exchange for
our agreement to secure or eliminate the letter of credit
facility by June 30, 2003. If we are unable to secure or
eliminate the letter of credit facility by that date, Citibank
will not renew the outstanding letters of credit at
December 31, 2003, at which time our customers may draw on
such letters of credit and we will be obligated to repay
Citibank for any amounts paid to our customers up to $40,605,000.

At March 31, 2003, our total capitalization,
which consists entirely of equity, was $216,217,204. 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 subsequently determined that
we would not utilize the shelf registration and requested that
the Securities and Exchange Commission withdraw the registration
statement in March 2003.

For the three months ended March 31, 2003,
we utilized $8,435,060 of our cash and equivalents to fund our
operating activities, as compared with generating cash and
equivalents of $14,327,629 from our operating activities for the
three months ended March 31, 2002. The utilization of our
cash and equivalents during the first quarter of 2003 reflects
increased claim payments and the return of unearned premiums
associated with the recaptures and terminations of certain of
our life and annuity reinsurance agreements during the quarter.

While we plan to continue to receive premiums and
pay claims under our remaining reinsurance treaties where no
dispute exists, we have ceased to write new reinsurance
agreements and have notified our existing clients that we will
not be accepting any new business under existing treaties on
their current terms. We do not anticipate resuming to write new
reinsurance agreements in the foreseeable future. Our plans for
the future involve attempting to meet or reduce the additional
collateral requirements of our ceding companies by continuing to
negotiate the recapture, retrocession, novation or sale of
certain of our reinsurance agreements. During the first quarter
of 2003, these types of transactions resulted in losses for us,
and we expect to incur additional losses in connection with
similar transactions in the second quarter of 2003. We have also
instituted substantial premium rate increases on all of our
non-guaranteed premium yearly renewable term contracts that
remain in force. There can be no assurance that our plans will
be sufficient to improve our operations or liquidity. If we are
not successful in implementing our plans, or if those plans are
insufficient, we will not be

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able to satisfy our obligations in 2003 and will
likely be required to liquidate our business if we cannot
successfully pursue any other strategic alternative. The report
of our independent auditors included in our Annual Report on
Form 10-K for the year ended December 31, 2002
contains a paragraph expressing substantial doubt regarding our
ability to continue as a going concern.


Both we and our Bermuda operating subsidiary,
Annuity and Life Reassurance, are required to comply with the
provisions of the Bermuda Companies Act that regulate the
payment of dividends and the making of distributions from
contributed surplus. Neither we nor Annuity and Life Reassurance
may declare or pay a dividend, or make a distribution out of
contributed surplus, if there are reasonable grounds for
believing that: (i) the relevant company is, or would be
after the payment, unable to pay its liabilities as they become
due; or (ii) the realizable value of the relevant
companys assets would thereby be less than the aggregate
of its liabilities and its issued share capital and share
premium accounts. As of December 31, 2002, we could not
reasonably determine that we met these grounds. Accordingly, on
February 19, 2003, we announced that we would not declare
or pay a dividend on our common shares during the first quarter
of 2003. The declaration and payment of future dividends to
holders of our common shares will be at the discretion of our
Board of Directors and will depend upon our earnings and
financial condition, capital requirements of our subsidiaries,
the ability of our operating subsidiaries to pay dividends to
us, regulatory considerations and other factors the Board of
Directors deems relevant. We do not expect to declare or pay
dividends in the near future.

During 2001, our Board of Directors approved a
share repurchase program of up to $25,000,000 of our common
stock. While our Board has given us the flexibility to
repurchase our common stock in the future if market conditions
so dictate, at the present time we do not anticipate
repurchasing any common shares.

We have no material commitments for capital
expenditures as of March 31, 2003, but as noted above, we
have significant obligations that we will not be able to satisfy
unless we are able to negotiate the termination, recapture, or
novation of certain reinsurance agreements on favorable terms,
or raise capital. Since beginning our efforts to raise capital,
we have been unable to do so, and there can be no assurances
that our efforts to raise capital or pursue other strategic
alternatives will be successful.

Forward-Looking and Cautionary
Statements

This report, together with other statements and
information we may provide, contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements may include, but are not
limited to, projections of revenues, income or loss, capital
expenditures, plans for future operations and financing needs or
plans, as well as assumptions relating to the foregoing. The
words expect, project,
estimate, predict,
anticipate, believe and similar
expressions are intended to identify forward-looking statements,
although not all forward-looking statements include these
expressions. Forward-looking statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or
quantified. Future events and actual results, performance and
achievements could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements.
Factors that could materially and adversely affect our
operations and financial condition and/or cause our actual
results of operations or financial condition to differ from
those expressed or implied in our forward-looking statements
include, but are not necessarily limited to, our ability to meet
the obligations associated with our current business and to fund
our continuing operations; our ability to reduce or otherwise
satisfy our collateral obligations through novations, recaptures
or otherwise; our ability to increase our financial ratings; the
ability of our cedents to manage successfully assets they hold
on our behalf; our success in managing our investments; our
ability to maintain the listing of our common shares on the New
York Stock Exchange; changes in mortality, morbidity and claims
experience; our ability to make accurate estimates and
assumptions regarding future mortality, persistency, lapses,
expenses and investment performance based upon historical
results and information provided to us by our cedents; our
ability to underwrite business; unanticipated withdrawal or
surrender activity; changes in market conditions, including
changes in interest rate levels; the competitive environment;
the impact of recent and possible future terrorist attacks and
the U.S. governments response thereto; our ability to
attract and retain clients; the loss of a key executive;
regulatory changes (such as changes in U.S. tax law and
insurance regulation that directly affect the competitive
environment for our products); and a prolonged economic
downturn. Investors are also directed to

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##### Table of Contents



consider the risks and uncertainties discussed in
documents we have filed with the Securities and Exchange
Commission, and in particular, our Annual Report on
Form 10-K for the year ended December 31, 2002. We do
not undertake to update any forward-looking statement that may
be made from time to time by or on our behalf.





Item 3.Quantitative
and Qualitative Disclosures About Market Risk

There have been no material changes since
December 31, 2002 with respect to our market risk exposure
described in our Annual Report on Form 10-K for the year
ended December 31, 2002. Please refer to
Item 7A: Quantitative and Qualitative Disclosures
About Market Risk in our Annual Report on Form 10-K
for the year ended December 31, 2002.




Item 4.Controls
and Procedures

Within 90 days prior to the filing date of
this Form 10-Q, the Companys Chief Executive Officer/
Chief Financial Officer conducted a review of the effectiveness
of the design and operation of the Companys disclosure
controls and procedures. Based on that review, the Chief
Executive Officer/ Chief Financial Officer concluded that the
Companys disclosure controls and procedures were adequate.
There have been no significant changes in the Companys
internal controls or in other factors (including any corrective
actions with regard to significant deficiencies and material
weaknesses) that could significantly affect those controls
subsequent to the date of his evaluation.




PART II






OTHER INFORMATION





Item 1.     Legal
Proceedings

On April 23, 2002, we served written notice
of arbitration on The Metropolitan Life Insurance Companies
(MetLife), the cedent under our largest life
reinsurance agreement, seeking equitable relief and monetary
damages based on MetLifes misrepresentation of and failure
to disclose material facts known to it relating to the
agreement. On January 30, 2003, we also provided written
notice to MetLife of a premium rate increase, effective
March 5, 2003, which also has become a subject of this
arbitration. In April 2003, MetLife informed us that, if the
arbitration panel finds the premium rate increase valid, MetLife
would recapture the reinsurance agreement as of March 5,
2003. An arbitration panel is scheduled to hear these claims in
December 2003.

On and since December 4, 2002, certain of
our shareholders have filed purported shareholder class action
lawsuits against us and certain of our present and former
officers and directors in the United States District Court for
the District of Connecticut seeking unspecified monetary
damages. The plaintiffs claim that the defendants violated
certain provisions of the United States securities laws by
making various alleged material misstatements and omissions in
public filings and press releases. A response by us is not due
until after the date the plaintiffs file a single consolidated
complaint, which they have not yet done.

On February 6, 2003, we were served with a
statutory demand under Bermuda law from Manufacturers Life
Insurance Company, Barbados Branch (Manulife)
related to our alleged failure to return or collateralize a
letter of credit Manulife issued on our behalf. On
February 25, 2003, we filed an application with the Bermuda
Supreme Court seeking an injunction to prevent Manulife from
filing proceedings to wind up our business on the basis that
Manulife is not a creditor of ours and therefore did not have
standing to make the statutory demand. On March 21, 2003,
the court held in our favor and issued an injunction preventing
Manulife from commencing winding up proceedings based upon that
demand. Since that date, as the result of recaptures of certain
reinsurance agreements by cedents of our U.S. operating
subsidiary, the need for Manulifes letter of credit
facility has been eliminated, and the letter of credit has been
terminated.

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##### Table of Contents



On March 18, 2003, Hartford Life Insurance
Company, the cedent under our largest guaranteed minimum death
benefit reinsurance contract, served notice seeking to institute
arbitration proceedings against us alleging that we have failed
to satisfy additional collateral requirements under the contract
of approximately $59.0 million. We do not agree with the
additional collateral requirements asserted by Hartford Life
and, as a result, ceased making claim payments to Hartford Life
under the contract. In April 2003, Hartford Life drew
approximately $18.0 million of assets held in trust for its
benefit and drew approximately $24.5 million of letters of
credit that had been issued by Citibank for Hartford Lifes
benefit. We believe that the draw on the letters of credit was
not permitted under the reinsurance contract and plan to make
the action a subject of the arbitration proceedings called for
by Hartford Life. The arbitration is in its preliminary stages.

There are no other arbitration or other legal
proceedings currently in process.




Item 2.     Changes
in Securities and Use of Proceeds

On March 11, 2003, our Board approved the
issuance of 200,000 shares of restricted stock to John F. Burke
in connection with his appointment as our President and Chief
Executive Officer. Issuance of the restricted stock required no
investment decision on the part of the recipient. If the grant
were deemed to be a sale of securities under the Securities Act
of 1933 (the Act), we believe such sale would be
exempt from the Act pursuant to Section 4(2) thereof or
Regulation S thereunder.




Item 5.     Other
Information

On February 14, 2003, we terminated our
annuity reinsurance agreement with The Ohio National Life
Insurance Company, which had been our second largest annuity
reinsurance agreement as of that date. For further information
regarding this transaction, please refer to our Current Reports
on Form 8-K and Form 8-K/ A dated February 14,
2003, filed on March 3, 2003 and April 16, 2003,
respectively.

Effective February 28, 2003, John F. Burke,
our Chief Financial Officer and Secretary, assumed
responsibility as our President and Chief Executive Officer; he
continues to serve as our Chief Financial Officer and Secretary.
Also effective as of that date, our Board of Directors dissolved
the Transition Committee that had been formed to oversee our
operations until a new Chief Executive Officer was selected.

During 1998, certain of our officers purchased
163,121 of our common shares, and we made loans to the officers
to partially finance such purchases. The loans accrued interest
at 7% per annum and became due and payable in April 2003.
In connection with the renegotiation or termination of certain
officers employment agreements, we have deemed the
outstanding loans of those officers to have been repaid in
exchange for the officers agreeing to forego certain bonus,
severance or other payments that are or may become payable to
them. At March 31, 2003, such loans of $500,000 with
accrued interest of $199,364 had been deemed repaid. We intend
to pursue repayment in full of all amounts due from our former
Chief Executive Officer, Lawrence S. Doyle. At March 31,
2003, Mr. Doyles outstanding loan was $500,000, with
accrued interest of $199,458.

On April 8, 2003, we received notice from
the New York Stock Exchange that we did not satisfy the
NYSEs continued listing standards as of that date because
the average closing price of our common shares had been below
$1.00 for a 30 consecutive trading day period. If we cannot
achieve a $1.00 average share price for 30 consecutive
trading days within six months of the receipt of this
notification, the NYSE will commence suspension and delisting
procedures with respect to our common shares. In addition, the
NYSE informed us that it is considering whether we continue to
meet certain of the NYSEs qualitative continued listing
standards due to concerns over our financial condition.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits 

|     |  |                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Employment Agreement, dated as of April 3,
    2003, by and between Annuity and Life Re (Holdings), Ltd. and
    John F. Burke.
|99.1 |  | Section 1350 Certification of the
    Companys Chief Executive Officer and Chief Financial
    Officer.                       

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(b) Reports on Form 8-K 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Current Report on Form 8-K dated
    December 31, 2002 and filed on January 16, 2003,
    reporting a transaction with XL Life Ltd, a subsidiary of
    XL Capital Ltd, pursuant to which the Company transferred
    certain blocks of life reinsurance business to XL Life. The
    Form 8-K also included unaudited pro forma condensed
    consolidated financial statements for the nine months ended
    September 30, 2002.                                                                                                                                                                                                                                                                                                                              
|
| | Current Report on Form 8-K dated
    February 24, 2003 and filed on February 25, 2003,
    reporting several recent developments that had occurred with
    respect to the Company, including the Companys expectation
    of a significant loss for the quarter and year ended
    December 31, 2002 and the termination of the Companys
    annuity reinsurance contract with The Ohio National Life
    Insurance Company.                                                                                                                                                                                                                                                                                                                                 
|
| | Current Report on Form 8-K dated
    February 14, 2003 and filed on March 3, 2003,
    providing additional information regarding the termination of
    the Companys annuity reinsurance agreement with The Ohio
    National Life Insurance Company. An amended Current Report on
    Form 8-K/ A was filed on April 16, 2003 to provide
    unaudited pro forma condensed consolidated financial statements
    for the year ended December 31, 2002, reflecting the
    termination of the Companys reinsurance agreement with
    Ohio National and the transfer of certain blocks of life
    reinsurance business to XL Life Ltd, as well as other
    terminations and recaptures of reinsurance contracts during 2002
    and through March 31, 2003.
|
| | Current Report on Form 8-K dated and filed
    on April 3, 2003, regarding the Companys release of
    its financial results for the three and twelve month periods
    ended December 31, 2002, which also included consolidated
    financial statements for those periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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ANNUITY AND LIFE RE (HOLDINGS), LTD.






SIGNATURES


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



| |                                     
| | ------------------------------------
| | ANNUITY AND LIFE RE (HOLDINGS), LTD.
|
| | /s/ JOHN F. BURKE                   
| |                                     
| | Name: John F. Burke                 

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

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

Date: May 15, 2003

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##### Table of Contents






CERTIFICATION

I, John F. Burke, certify that:



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



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



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



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



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



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

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

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

May 15, 2003

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##### Table of Contents






EXHIBIT INDEX

|     |  |                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Employment Agreement, dated as of April 3,
    2003, by and between Annuity and Life Re (Holdings), Ltd. and
    John F. Burke.
|99.1 |  | Section 1350 Certification of the
    Companys Chief Executive Officer and Chief Financial
    Officer.                       

35