##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, DC 20549




---

Form 10-Q



---

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended June 30,
    2004                                            
|          
|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                                                            |  | 66-0619270                           
|(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 July 5,
2004 was 26,400,928.



---






---










INDEX TO FORM 10-Q

|                                                                    |  |                                                                                                                                   |    |      |    | 
|------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                    |  |                                                                                                                                   |    | Page
|                                                                    |  |                                                                                                                                   |    |     
|PART I
    FINANCIAL INFORMATION                                   
|                                                                   
|Item 1.                                                             |  | Condensed Consolidated
    Financial Statements                                                                                   |    |      |    | 
|                                                                    |  | Condensed Consolidated
    Balance Sheets June 30, 2004 and December 31, 2003                                                     |    |      | 1  | 
|                                                                    |  | Condensed Consolidated
    Statements of Operations Three Months and Six Months ended
    June 30, 2004 and June 30, 2003         |    |      | 2  | 
|                                                                    |  | Condensed Consolidated
    Statements of Comprehensive Loss Three Months and Six Months
    ended June 30, 2004 and June 30, 2003 |    |      | 3  | 
|                                                                    |  | Condensed Consolidated
    Statements of Changes in Stockholders Equity Six Months
    ended June 30, 2004 and June 30, 2003     |    |      | 4  | 
|                                                                    |  | Condensed Consolidated
    Statements of Cash Flows Six Months ended June 30, 2004 and
    June 30, 2003                          |    |      | 5  | 
|                                                                    |  | Notes to Unaudited Condensed
    Consolidated Financial Statements                                                                |    |      | 6  | 
|                                                                   
|Item 2.                                                             |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                         |    |      | 19 | 
|                                                                   
|Item 3.                                                             |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                                    |    |      | 39 | 
|                                                                   
|Item 4.                                                             |  | Controls and Procedures                                                                                                           |    |      | 39 | 
|PART II
    OTHER INFORMATION                                      
|                                                                   
|Item 1.                                                             |  | Legal Proceedings                                                                                                                 |    |      | 41 | 
|                                                                   
|Item 2.                                                             |  | Changes in Securities, Use
    of Proceeds and Issuer Purchases of Equity Securities                                              |    |      | 42 | 
|                                                                   
|Item 6.                                                             |  | Exhibits and Reports on
    Form 8-K                                                                                              |    |      | 42 | 
|Signatures                                                          |  |                                                                                                                                   | 44 |     
|AMENDMENT TO AMENDED & RESTATED INITIAL STOCK OPTION PLAN          
|CERTIFICATION OF COMPANY'S CHIEF EXECUTIVE OFFICER                 
|CERTIFICATION OF COMPANY'S CHIEF FINANCIAL OFFICER                 
|SECTION 1350 CERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICER
|SECTION 1350 CERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICER







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##### Table of Contents






PART I

FINANCIAL INFORMATION






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

ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONDENSED CONSOLIDATED BALANCE
SHEETS


(U.S. dollars)


|                                                                                                                                                                |                                            |             |              |              |  |   |              |               | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------ | ------------ |  | - | ------------ | ------------- | 
|                                                                                                                                                                |                                            | June 30,    |              | December 31,
|                                                                                                                                                                |                                            | 2004        |              | 2003        
|                                                                                                                                                                |                                            |             |              |             
|                                                                                                                                                                |                                            | (Unaudited) |              |             
|Assets                                                                                                                                                          |                                            |             |              |              |  |   |              |              
|Cash and cash equivalents                                                                                                                                       |                                            | $           | 80,495,960   |              |  | $ | 80,068,310   |              
|Fixed maturity investments at fair value
    (amortized cost of $87,078,484 and $115,594,199 at June 30,
    2004 and December 31, 2003)                        |                                            |             | 86,397,385   |              |  |   | 117,812,445  |              
|Funds withheld at interest                                                                                                                                      |                                            |             | 616,529,853  |              |  |   | 667,824,819  |              
|Accrued investment income                                                                                                                                       |                                            |             | 1,270,161    |              |  |   | 1,491,170    |              
|Receivable for reinsurance ceded                                                                                                                                |                                            |             | 83,452,417   |              |  |   | 88,480,172   |              
|Other reinsurance receivables                                                                                                                                   |                                            |             | 4,488,690    |              |  |   | 4,580,745    |              
|Deferred policy acquisition costs                                                                                                                               |                                            |             | 98,930,462   |              |  |   | 68,942,628   |              
|Other assets                                                                                                                                                    |                                            |             | 946,710      |              |  |   | 682,050      |              
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              
|                                                                                                                                                                | Total Assets                               |             | $            | 972,511,638  |  |   | $            | 1,029,882,339 | 
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              
|Liabilities                                                                                                                                                     |                                            |             |              |              |  |   |              |              
|Reserves for future policy benefits                                                                                                                             |                                            | $           | 163,175,277  |              |  | $ | 161,105,541  |              
|Interest sensitive contracts liability                                                                                                                          |                                            |             | 643,402,422  |              |  |   | 670,717,546  |              
|Other reinsurance liabilities                                                                                                                                   |                                            |             | 24,805,538   |              |  |   | 55,826,940   |              
|Payable for investments purchased                                                                                                                               |                                            |             | 5,909,652    |              |  |   |             |              
|Accounts payable and accrued expenses                                                                                                                           |                                            |             | 8,154,243    |              |  |   | 7,059,733    |              
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              
|                                                                                                                                                                | Total Liabilities                          |             |              | 845,447,132  |  |   |              | 894,709,760   | 
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              
|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; 26,400,928 and
    26,454,195 shares outstanding at June 30, 2004 and
    December 31, 2003) |                                            |             | 26,400,928   |              |  |   | 26,454,195   |              
|Additional paid-in capital                                                                                                                                      |                                            |             | 334,032,944  |              |  |   | 334,418,029  |              
|Stock warrants                                                                                                                                                  |                                            |             | 1,250,000    |              |  |   | 1,250,000    |              
|Unamortized stock-based compensation                                                                                                                            |                                            |             | (973,108     | )            |  |   | (1,509,022   | )            
|Accumulated other comprehensive (loss) income                                                                                                                   |                                            |             | (768,803     | )            |  |   | 1,840,849    |              
|Accumulated deficit                                                                                                                                             |                                            |             | (232,877,455 | )            |  |   | (227,281,472 | )            
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              
|                                                                                                                                                                | Total Stockholders Equity                 |             |              | 127,064,506  |  |   |              | 135,172,579   | 
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              
|                                                                                                                                                                | Total Liabilities and Stockholders Equity |             | $            | 972,511,638  |  |   | $            | 1,029,882,339 | 
|                                                                                                                                                                |                                            |             |              |              |  |   |              |              

See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements

1



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited and in U.S. dollars)


|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |       |  
|------------------------------------------------------------------------------------------------------- | ------- | -------------------------- | ---------- | ------------------------ | - | ---- | ----------- | ----- | - | - | ---------- | ----- | - | - | ------------ | ----- | -
|                                                                                                        |         |                            |            |                         
|                                                                                                        |         | For the Three Months Ended |            | For the Six Months Ended
|                                                                                                        |         | June 30,                   |            | June 30,                
|                                                                                                        |         |                            |            |                         
|                                                                                                        |         | 2004                       |            | 2003                     |   | 2004 |             | 2003 
|                                                                                                        |         |                            |            |                          |   |      |             |      
|Revenues                                                                                                |         |                            |            |                          |   |      |             |      
|Net premiums                                                                                            |         | $                          | 10,348,881 |                          |   | $    | 58,563,721  |       |   | $ | 24,659,522 |       |   | $ | 119,929,634  |      
|Investment income, net of related expenses                                                              |         |                            | 3,844,066  |                          |   |      | 5,734,738   |       |   |   | 13,094,801 |       |   |   | 13,893,427   |      
|Net realized investment (losses) gains                                                                  |         |                            | (137,885   | )                        |   |      | 4,896,176   |       |   |   | 541,040    |       |   |   | 6,560,044    |      
|Net change in fair value of embedded derivatives                                                        |         |                            | 518,786    |                          |   |      | (1,717,537  | )     |   |   | 1,126,174  |       |   |   | 12,037,322   |      
|Surrender fees and other revenues                                                                       |         |                            | 1,510,568  |                          |   |      | 3,002,778   |       |   |   | 2,585,500  |       |   |   | 4,393,025    |      
|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|Total Revenues                                                                                          |         |                            | 16,084,416 |                          |   |      | 70,479,876  |       |   |   | 42,007,037 |       |   |   | 156,813,452  |      
|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|Benefits and Expenses                                                                                   |         |                            |            |                          |   |      |             |      
|Claim and policy benefits                                                                               |         |                            | 8,769,049  |                          |   |      | 84,425,206  |       |   |   | 19,013,707 |       |   |   | 159,514,646  |      
|Interest credited to interest sensitive products                                                        |         |                            | 1,822,643  |                          |   |      | 4,217,542   |       |   |   | 5,351,892  |       |   |   | 9,089,301    |      
|Policy acquisition costs and other insurance
    expenses                                               |         |                            | 4,654,527  |                          |   |      | 44,631,210  |       |   |   | 12,835,524 |       |   |   | 97,132,274   |      
|Operating expenses                                                                                      |         |                            | 7,268,575  |                          |   |      | 5,922,358   |       |   |   | 10,035,937 |       |   |   | 12,268,488   |      
|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|Total Benefits and Expenses                                                                             |         |                            | 22,514,794 |                          |   |      | 139,196,316 |       |   |   | 47,237,060 |       |   |   | 278,004,709  |      
|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|Loss before cumulative effect of a change in
    accounting principle (Note 5)                          |         |                            | (6,430,378 | )                        |   |      | (68,716,440 | )     |   |   | (5,230,023 | )     |   |   | (121,191,257 | )    
|Cumulative effect of a change in accounting
    principle                                               |         |                            |           |                          |   |      |            |       |   |   | (365,960   | )     |   |   |             |      
|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|Net Loss                                                                                                |         | $                          | (6,430,378 | )                        |   | $    | (68,716,440 | )     |   | $ | (5,595,983 | )     |   | $ | (121,191,257 | )    
|                                                                                                        |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|Loss per common share before cumulative effect
    of a change in accounting principle per common share |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|                                                                                                        | Basic   |                            | $          | (0.25                    | ) |      | $           | (2.66 | ) |   | $          | (0.21 | ) |   | $            | (4.69 | )
|                                                                                                        | Diluted |                            | $          | (0.25                    | ) |      | $           | (2.66 | ) |   | $          | (0.21 | ) |   | $            | (4.69 | )
|Cumulative effect of a change in accounting
    principle per common share                              |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|                                                                                                        | Basic   |                            | $          |                         |   |      | $           |      |   |   | $          | (0.01 | ) |   | $            |      |  
|                                                                                                        | Diluted |                            | $          |                         |   |      | $           |      |   |   | $          | (0.01 | ) |   | $            |      |  
|Net loss per common share                                                                               |         |                            |            |                          |   |      |             |       |   |   |            |       |   |   |              |      
|                                                                                                        | Basic   |                            | $          | (0.25                    | ) |      | $           | (2.66 | ) |   | $          | (0.22 | ) |   | $            | (4.69 | )
|                                                                                                        | Diluted |                            | $          | (0.25                    | ) |      | $           | (2.66 | ) |   | $          | (0.22 | ) |   | $            | (4.69 | )

See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements

2



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS


(Unaudited and in U.S. dollars)


|                                                                            |  |                            |            |                          |  |      |             |      |  |   |            |   |  |   |              |  
|--------------------------------------------------------------------------- |  | -------------------------- | ---------- | ------------------------ |  | ---- | ----------- | ---- |  | - | ---------- | - |  | - | ------------ | -
|                                                                            |  |                            |            |                         
|                                                                            |  | For the Three Months Ended |            | For the Six Months Ended
|                                                                            |  | June 30,                   |            | June 30,                
|                                                                            |  |                            |            |                         
|                                                                            |  | 2004                       |            | 2003                     |  | 2004 |             | 2003
|                                                                            |  |                            |            |                          |  |      |             |     
|Net loss for the period                                                     |  | $                          | (6,430,378 | )                        |  | $    | (68,716,440 | )    |  | $ | (5,595,983 | ) |  | $ | (121,191,257 | )
|Other comprehensive loss:                                                   |  |                            |            |                          |  |      |             |      |  |   |            |   |  |   |              |  
|Unrealized holding (loss) gains on securities
    arising during the period |  |                            | (3,457,243 | )                        |  |      | 2,130,876   |      |  |   | (2,068,612 | ) |  |   | 3,038,746    |  
|Less reclassification adjustment for realized
    (loss) gains in net loss  |  |                            | (137,885   | )                        |  |      | 4,896,176   |      |  |   | 541,040    |   |  |   | 6,560,044    |  
|                                                                            |  |                            |            |                          |  |      |             |      |  |   |            |   |  |   |              |  
|Other comprehensive loss                                                    |  | $                          | (3,319,358 | )                        |  | $    | (2,765,300  | )    |  | $ | (2,609,652 | ) |  | $ | (3,521,298   | )
|                                                                            |  |                            |            |                          |  |      |             |      |  |   |            |   |  |   |              |  
|Total comprehensive loss                                                    |  | $                          | (9,749,736 | )                        |  | $    | (71,481,740 | )    |  | $ | (8,205,635 | ) |  | $ | (124,712,555 | )
|                                                                            |  |                            |            |                          |  |      |             |      |  |   |            |   |  |   |              |  

See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements

3



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY


(Unaudited and in U.S. dollars)


|                                           |  |                          |              |      |  |   |              |  
|------------------------------------------ |  | ------------------------ | ------------ | ---- |  | - | ------------ | -
|                                           |  |                         
|                                           |  | For the Six Months Ended
|                                           |  | June 30,                
|                                           |  |                         
|                                           |  | 2004                     |              | 2003
|                                           |  |                          |              |     
|Preferred shares par value $1.00           |  |                          |              |      |  |   |              |  
|Balance at beginning and end of period     |  | $                        |             |      |  | $ |             |  
|                                           |  |                          |              |      |  |   |              |  
|Common shares par value $1.00              |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        | 26,454,195   |      |  | $ | 26,106,328   |  
|Issuance of shares                         |  |                          |             |      |  |   | 575,000      |  
|Cancellation of shares                     |  |                          | (53,267      | )    |  |   | (102,100     | )
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        | 26,400,928   |      |  | $ | 26,579,228   |  
|                                           |  |                          |              |      |  |   |              |  
|Additional paid-in capital                 |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        | 334,418,029  |      |  | $ | 335,334,932  |  
|Issuance of shares                         |  |                          |             |      |  |   | 325,000      |  
|Cancellation of shares                     |  |                          | (385,085     | )    |  |   | (772,662     | )
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        | 334,032,944  |      |  | $ | 334,887,270  |  
|                                           |  |                          |              |      |  |   |              |  
|Notes receivable from stock sales          |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        |             |      |  | $ | (1,626,493   | )
|Repayments                                 |  |                          |             |      |  |   | 1,250,000    |  
|Interest collected on notes receivable     |  |                          |             |      |  |   | 420,491      |  
|Accrued interest during period             |  |                          |             |      |  |   | (43,998      | )
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        |             |      |  | $ |             |  
|                                           |  |                          |              |      |  |   |              |  
|Stock warrants                             |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        | 1,250,000    |      |  | $ |             |  
|Issuance of warrants                       |  |                          |             |      |  |   | 1,250,000    |  
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        | 1,250,000    |      |  | $ | 1,250,000    |  
|                                           |  |                          |              |      |  |   |              |  
|Unamortized stock based compensation       |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        | (1,509,022   | )    |  | $ | (2,514,693   | )
|Issuance of stock based compensation       |  |                          |             |      |  |   | (900,000     | )
|Cancellation of stock based compensation   |  |                          | 438,352      |      |  |   | 870,832      |  
|Amortization of stock based compensation   |  |                          | 97,562       |      |  |   | 225,017      |  
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        | (973,108     | )    |  | $ | (2,318,844   | )
|                                           |  |                          |              |      |  |   |              |  
|Accumulated other comprehensive
    income |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        | 1,840,849    |      |  | $ | 6,162,525    |  
|Net unrealized losses on securities        |  |                          | (2,609,652   | )    |  |   | (3,521,298   | )
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        | (768,803     | )    |  | $ | 2,641,227    |  
|                                           |  |                          |              |      |  |   |              |  
|Accumulated deficit                        |  |                          |              |      |  |   |              |  
|Balance at beginning of period             |  | $                        | (227,281,472 | )    |  | $ | (95,125,888  | )
|Net loss                                   |  |                          | (5,595,983   | )    |  |   | (121,191,257 | )
|                                           |  |                          |              |      |  |   |              |  
|Balance at end of period                   |  | $                        | (232,877,455 | )    |  | $ | (216,317,145 | )
|                                           |  |                          |              |      |  |   |              |  
|Total Stockholders Equity                 |  | $                        | 127,064,506  |      |  | $ | 146,721,736  |  
|                                           |  |                          |              |      |  |   |              |  

See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements

4



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited and in U.S. dollars)


|                                                                                                                            |                                           |                          |             |             |   |   |              |             |  
|--------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------ | ----------- | ----------- | - | - | ------------ | ----------- | -
|                                                                                                                            |                                           |                         
|                                                                                                                            |                                           | For the Six Months Ended
|                                                                                                                            |                                           | June 30,                
|                                                                                                                            |                                           |                         
|                                                                                                                            |                                           | 2004                     |             | 2003       
|                                                                                                                            |                                           |                          |             |            
|Cash flows from operating activities                                                                                        |                                           |                          |             |             |   |   |              |            
|Net loss                                                                                                                    |                                           | $                        | (5,595,983  | )           |   | $ | (121,191,257 | )          
|Adjustments to reconcile net (loss) to cash used
    by operating activities:                                               |                                           |                          |             |             |   |   |              |            
|Net realized investment (gains)                                                                                             |                                           |                          | (541,040    | )           |   |   | (6,560,044   | )          
|Net change in fair value of embedded derivatives                                                                            |                                           |                          | (1,126,174  | )           |   |   | (12,037,322  | )          
|Amortization of stock based compensation                                                                                    |                                           |                          | 97,562      |             |   |   | 225,016      |            
|Stock warrants expense                                                                                                      |                                           |                          |            |             |   |   | 1,250,000    |            
|Cumulative effect of a change in accounting
    principle                                                                   |                                           |                          | 365,960     |             |   |   |             |            
|Changes in:                                                                                                                 |                                           |                          |             |             |   |   |              |            
|Accrued investment income                                                                                                   |                                           |                          | 221,009     |             |   |   | 1,060,532    |            
|Deferred policy acquisition costs                                                                                           |                                           |                          | 6,166,176   |             |   |   | 79,343,255   |            
|Other reinsurance receivables                                                                                               |                                           |                          | 5,119,810   |             |   |   | 21,351,424   |            
|Other assets                                                                                                                |                                           |                          | (264,660    | )           |   |   | 1,079,173    |            
|Reserves for future policy benefits                                                                                         |                                           |                          | 3,948,496   |             |   |   | (33,899,422  | )          
|Interest sensitive contracts, net of funds
    withheld                                                                     |                                           |                          | (13,292,714 | )           |   |   | (33,784,009  | )          
|Other reinsurance liabilities                                                                                               |                                           |                          | (31,021,402 | )           |   |   | 19,907,227   |            
|Payable for investments purchased                                                                                           |                                           |                          | 5,909,652   |             |   |   |             |            
|Accounts payable                                                                                                            |                                           |                          | 1,094,510   |             |   |   | (2,894,110   | )          
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|                                                                                                                            | Net cash used by operating activities     |                          |             | (28,918,798 | ) |   |              | (86,149,537 | )
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|Cash flows from investing activities                                                                                        |                                           |                          |             |             |   |   |              |            
|Proceeds from sales and maturity of fixed
    maturity investments                                                          |                                           |                          | 48,299,229  |             |   |   | 322,639,650  |            
|Purchase of fixed maturity investments                                                                                      |                                           |                          | (18,952,781 | )           |   |   | (251,254,197 | )          
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|                                                                                                                            | Net cash provided by investing activities |                          |             | 29,346,448  |   |   |              | 71,385,453  |  
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|Cash flows from financing activities                                                                                        |                                           |                          |             |             |   |   |              |            
|Interest accrued on notes receivable                                                                                        |                                           |                          |            |             |   |   | (43,998      | )          
|Interest collected on notes receivable                                                                                      |                                           |                          |            |             |   |   | 420,491      |            
|Repayments of notes receivable                                                                                              |                                           |                          |            |             |   |   | 1,250,000    |            
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|                                                                                                                            | Net cash provided by financing activities |                          |             |            |   |   |              | 1,626,493   |  
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|Increase (decrease) in cash and cash equivalents                                                                            |                                           |                          | 427,650     |             |   |   | (13,137,591  | )          
|Cash and cash equivalents, beginning of period                                                                              |                                           |                          | 80,068,310  |             |   |   | 152,930,908  |            
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|Cash and cash equivalents, end of period                                                                                    |                                           | $                        | 80,495,960  |             |   | $ | 139,793,317  |            
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|Non-Cash disclosures: amounts recorded in
    connection with the cumulative effect of a change in accounting
    principle |                                           |                          |             |             |   |   |              |            
|Deferred policy acquisition costs                                                                                           |                                           | $                        | (36,154,010 | )           |   | $ |             |            
|Reserves for future policy benefits                                                                                         |                                           |                          | (1,878,760  | )           |   |   |             |            
|Interest sensitive contracts, net of funds
    withheld                                                                     |                                           |                          | 38,398,730  |             |   |   |             |            
|                                                                                                                            |                                           |                          |             |             |   |   |              |            
|Cumulative effect of a change in accounting
    principle                                                                   |                                           | $                        | 365,960     |             |   | $ |             |            
|                                                                                                                            |                                           |                          |             |             |   |   |              |            

See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements

5



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.



NOTES TO UNAUDITED CONDENSED 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;
Annuity and Life Re America, Inc., an insurance holding company
based in the United States, and Annuity and Life Reassurance
America, Inc., a life insurance company domiciled in the United
States. Holdings, Annuity and Life Reassurance, Annuity and Life
Re America and Annuity and Life Reassurance America are
collectively referred to herein as the Company.



|   |                                    
|-- | -----------------------------------
|2. | Going Concern Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the
United States of America (US 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 US GAAP for complete
financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto
contained in the Companys Form 10-K for the fiscal
year ended December 31, 2003, as amended. The accounting
policies used in preparing these unaudited condensed
consolidated financial statements are consistent with those
described in Note 3 to the Companys audited
consolidated financial statements for the fiscal year ended
December 31, 2003. In the opinion of management, all
adjustments considered necessary for a fair presentation have
been included in these financial statements. The results of
operations and cash flows for the three and six months ended
June 30, 2004 are not necessarily indicative of results
that may be expected for any other interim period or for the
full year.

The accompanying unaudited condensed consolidated
financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
However, the Company has incurred significant operating losses
during the last three fiscal years and is currently subject to
the contingencies described below and in Note 9, which
raise substantial doubt about the Companys ability to
continue as a going concern. The accompanying unaudited
condensed consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable
to continue as a going concern.

The Company is required to post collateral for
the statutory reserves ceded to it by U.S. based insurers
and reinsurers. A summary of the assets pledged as collateral
and security as of June 30, 2004 and December 31,
2003, respectively, is as follows:

|                                                                                                                           |  |               |            |                   |  |   |            | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ----------------- |  | - | ---------- | 
|                                                                                                                           |  | June 30, 2004 |            | December 31, 2003
|                                                                                                                           |  |               |            |                  
|Cash and investments pledged as security for the
    letters of credit                                                     |  | $             | 58,000,000 |                   |  | $ | 56,000,000 | 
|Cash and investments held in trust for the
    benefit of ceding companies                                                 |  | $             | 29,000,000 |                   |  | $ | 96,000,000 | 
|Cash and investments of U.S. subsidiary
    unavailable for liquidity or collateral needs of Bermuda
    operating company |  | $             | 54,000,000 |                   |  | $ | 49,000,000 | 

As of June 30, 2004, the Company did not
meet the collateral requirements asserted by Connecticut General
Life Insurance Company (CIGNA), the ceding company
under the Companys only remaining guaranteed minimum death
benefit (GMDB) and guaranteed minimum income benefit
(GMIB) reinsurance agreement. As of June 30,
2004, CIGNA was seeking $49 million of collateral in
addition to the $11 million of collateral the Company had
previously provided in the form of a fully collateralized letter
of credit. On July 28, 2004, CIGNA made an $11 million
draw on this letter of credit. The Company does not agree that
the aggregate $60 million collateral requirement currently
asserted by CIGNA is required to be

6



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

posted and has not posted any additional
collateral for this agreement. If CIGNAs asserted
collateral requirement is valid, the Company does not have
sufficient available cash and investments to satisfy
CIGNAs request. The Company is attempting to restructure
the reinsurance agreement or otherwise meet or reduce
CIGNAs request for collateral. If these negotiations are
unsuccessful, CIGNA could initiate arbitration or litigation
proceedings against the Company. The specific relief sought and
the outcome of any proceedings that CIGNA could initiate cannot
be determined at this time. If the Company does not prevail in
any such arbitration or litigation proceedings, 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 plans to continue to receive premiums
and pay claims under its remaining reinsurance treaties;
however, it is not currently underwriting any new treaties or
accepting any new business from its existing treaties. The
Company is currently exploring whether it can, should or will
begin selling new insurance and reinsurance products in the
future, but there is no assurance that it will be able to
successfully develop, underwrite or market any products in the
future.

As more fully discussed in Note 9, the
Company and certain of its present and former directors and
officers are defendants in a purported shareholder class action
lawsuit. On July 20, 2004, the Company announced that it
had reached an agreement in principle with the plaintiffs to
settle the lawsuit.

There can be no assurance that the Company will
be able to improve its operations and liquidity. If the Company
is unable to reposition its investment portfolio to achieve a
substantially higher yield within its investment guidelines,
obtain approval from the court and other parties of an agreement
in principle reached in July 2004 to settle the pending
purported shareholder class action lawsuit (as discussed in
Note 9), experience improvement in the performance of its
reinsurance agreement with Transamerica Occidental Life
Insurance Company (Transamerica) and restructure its
reinsurance agreement with CIGNA, the Company may not be able to
meet its future obligations. The Companys failure to
achieve any one of the foregoing items could have a material
adverse effect on its financial condition and results of
operations and may raise doubt as to its ability to continue as
a going concern.

7



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                      
|-- | ---------------------
|3. | Loss Per Common Share

The following table sets forth the computation of
basic and diluted loss per common share for the three and six
months ended June 30, 2004 and 2003:

|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|------------------------------------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- |  | ---- | ----------- | ---- |  | - | ---------- | - |  | - | ------------ | -
|                                                                                           |  |                             |            |                          
|                                                                                           |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                                           |  |                             |            |                          
|                                                                                           |  | 2004                        |            | 2003                      |  | 2004 |             | 2003
|                                                                                           |  |                             |            |                           |  |      |             |     
|Loss before cumulative effect of a change in
    accounting principle                      |  | $                           | (6,430,378 | )                         |  | $    | (68,716,440 | )    |  | $ | (5,230,023 | ) |  | $ | (121,191,257 | )
|Cumulative effect of a change in accounting
    principle (Note 5)                         |  |                             |           |                           |  |      |            |      |  |   | (365,960   | ) |  |   |             |  
|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Net loss                                                                                   |  | $                           | (6,430,378 | )                         |  | $    | (68,716,440 | )    |  | $ | (5,595,983 | ) |  | $ | (121,191,257 | )
|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Basic:                                                                                     |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Weighted average number of common shares
    outstanding                                   |  |                             | 25,874,495 |                           |  |      | 25,841,057  |      |  |   | 25,841,161 |   |  |   | 25,816,982   |  
|Net loss per common share before cumulative
    effect of a change in accounting principle |  | $                           | (0.25      | )                         |  | $    | (2.66       | )    |  | $ | (0.21      | ) |  | $ | (4.69        | )
|Cumulative effect of a change in accounting
    principle per common share                 |  | $                           |           |                           |  | $    |            |      |  | $ | (0.01      | ) |  | $ |             |  
|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Net loss per common share                                                                  |  | $                           | (0.25      | )                         |  | $    | (2.66       | )    |  | $ | (0.22      | ) |  | $ | (4.69        | )
|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Diluted:                                                                                   |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Weighted average number of common shares
    outstanding                                   |  |                             | 25,874,495 |                           |  |      | 25,841,057  |      |  |   | 25,841,161 |   |  |   | 25,816,982   |  
|Net loss per common share before cumulative
    effect of a change in accounting principle |  | $                           | (0.25      | )                         |  | $    | (2.66       | )    |  | $ | (0.21      | ) |  | $ | (4.69        | )
|Cumulative effect of a change in accounting
    principle per common share                 |  | $                           |           |                           |  | $    |            |      |  | $ | (0.01      | ) |  | $ |             |  
|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Net loss per common share                                                                  |  | $                           | (0.25      | )                         |  | $    | (2.66       | )    |  | $ | (0.22      | ) |  | $ | (4.69        | )
|                                                                                           |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  

The calculation of the diluted loss per common
share does not include the incremental number of shares from the
assumed exercise of options and warrants, or the vesting of
restricted stock grants. At June 30, 2004, 4,565,217
warrants, 722,702 options, and 471,433 shares of unvested
restricted stock were outstanding. At June 30, 2003,
4,457,490 warrants, 939,869 options, and
873,900 shares of unvested restricted stock were
outstanding. The inclusion of these potential common shares
would be considered antidilutive due to the decrease in loss per
common share resulting from the conversion, exercise, or
contingent issuance of these securities.

8



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table sets forth the pro forma
computation of basic and diluted (loss) per common share after
accounting for stock option grants made prior to the
Companys January 1, 2003 adoption of the prospective
method described in Statement of Financial Accounting Standards
(SFAS) No. 148 for the three month and six
month periods ended June 30, 2004 and 2003:

|                                                                                                                              |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- |  | ---- | ----------- | ---- |  | - | ---------- | - |  | - | ------------ | -
|                                                                                                                              |  |                             |            |                          
|                                                                                                                              |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                                                                              |  |                             |            |                          
|                                                                                                                              |  | 2004                        |            | 2003                      |  | 2004 |             | 2003
|                                                                                                                              |  |                             |            |                           |  |      |             |     
|Net loss  as reported                                                                                                        |  | $                           | (6,430,378 | )                         |  | $    | (68,716,440 | )    |  | $ | (5,595,983 | ) |  | $ | (121,191,257 | )
|Pro forma effect on net loss of applying fair
    value accounting to pre January 1, 2003 option grants                       |  |                             | (152,623   | )                         |  |      | (547,800    | )    |  |   | (364,477   | ) |  |   | (1,095,601   | )
|                                                                                                                              |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Net loss  pro forma                                                                                                          |  | $                           | (6,583,001 | )                         |  | $    | (69,269,240 | )    |  | $ | (5,960,460 | ) |  | $ | (122,286,858 | )
|                                                                                                                              |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Loss per common share as reported:                                                                                            |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Basic                                                                                                                         |  | $                           | (0.25      | )                         |  | $    | (2.66       | )    |  | $ | (0.22      | ) |  | $ | (4.69        | )
|Diluted                                                                                                                       |  | $                           | (0.25      | )                         |  | $    | (2.66       | )    |  | $ | (0.22      | ) |  | $ | (4.69        | )
|Pro forma effect on net loss per common share
    of applying fair value accounting to pre January 1, 2003
    option grants: |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Basic                                                                                                                         |  | $                           | (0.01      | )                         |  | $    | (0.02       | )    |  | $ | (0.01      | ) |  | $ | (0.05        | )
|Diluted                                                                                                                       |  | $                           | (0.01      | )                         |  | $    | (0.02       | )    |  | $ | (0.01      | ) |  | $ | (0.05        | )
|Pro forma loss per common share:                                                                                              |  |                             |            |                           |  |      |             |      |  |   |            |   |  |   |              |  
|Basic                                                                                                                         |  | $                           | (0.26      | )                         |  | $    | (2.68       | )    |  | $ | (0.23      | ) |  | $ | (4.74        | )
|Diluted                                                                                                                       |  | $                           | (0.26      | )                         |  | $    | (2.68       | )    |  | $ | (0.23      | ) |  | $ | (4.74        | )



|   |                  
|-- | -----------------
|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, since January 1,
2001, 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
SFAS No. 133  Accounting for Derivative
Instruments and Hedging Activities. The change in the fair value
of these embedded derivatives is included in the annuity segment.

9



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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. All capital raising costs and anticipated costs of
settling a purported shareholder class action lawsuit have been
allocated to the corporate segment. The following table displays
several key measurements for each of the Companys business
segments:

|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- | - |  | - | ----------- | -
|Three Months Ended    |  | Life        |             | Annuity     |  |           |             |             
|June 30, 2004         |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                      |  |             |             |             |  |           |             |             
|Revenues              |  | $           | 10,515,041  |             |  | $         | 5,002,269   |              |  | $ | 567,106    |   |  | $ | 16,084,416  |  
|Benefits and Expenses |  |             | 9,780,675   |             |  |           | 6,215,881   |              |  |   | 6,518,238  |   |  |   | 22,514,794  |  
|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|Segment Income (Loss) |  | $           | 734,366     |             |  | $         | (1,213,612  | )            |  | $ | (5,951,132 | ) |  | $ | (6,430,378  | )
|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|Total Assets          |  | $           | 220,280,815 |             |  | $         | 666,102,422 |              |  | $ | 86,128,401 |   |  | $ | 972,511,638 |  
|                      |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  

|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- |  |  | - | ------------- | -
|Three Months Ended    |  | Life        |             | Annuity     |  |           |             |             
|June 30, 2003         |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                      |  |             |             |             |  |           |             |             
|Revenues              |  | $           | 57,507,429  |             |  | $         | 7,766,799   |              |  | $ | 5,205,648  |  |  | $ | 70,479,876    |  
|Benefits and Expenses |  |             | 96,845,758  |             |  |           | 40,830,738  |              |  |   | 1,519,821  |  |  |   | 139,196,316   |  
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Segment (Loss) Income |  | $           | (39,338,329 | )           |  | $         | (33,063,939 | )            |  | $ | 3,685,827  |  |  | $ | (68,716,440   | )
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Total Assets          |  | $           | 396,766,778 |             |  | $         | 849,885,167 |              |  | $ | 32,087,049 |  |  | $ | 1,278,738,994 |  
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  

|                                                                                       |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|-------------------------------------------------------------------------------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- | - |  | - | ----------- | -
|Six Months Ended                                                                       |  | Life        |             | Annuity     |  |           |             |             
|June 30, 2004                                                                          |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                                                                                       |  |             |             |             |  |           |             |             
|Revenues                                                                               |  | $           | 25,130,541  |             |  | $         | 14,922,344  |              |  | $ | 1,954,152  |   |  | $ | 42,007,037  |  
|Benefits and Expenses                                                                  |  |             | 24,221,596  |             |  |           | 14,802,342  |              |  |   | 8,213,123  |   |  |   | 47,237,060  |  
|                                                                                       |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|Segment Income (Loss) before cumulative effect of
    a change in accounting principle |  | $           | 908,946     |             |  | $         | 120,002     |              |  | $ | (6,258,971 | ) |  | $ | (5,230,023  | )
|                                                                                       |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|Cumulative effect of a change in accounting
    principle                              |  | $           |            |             |  | $         | (365,960    | )            |  | $ |           |   |  | $ | (365,960    | )
|                                                                                       |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|Segment Income (Loss)                                                                  |  | $           | 908,946     |             |  | $         | (245,958    | )            |  | $ | (6,258,971 | ) |  | $ | (5,595,983  | )
|                                                                                       |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  
|Total Assets                                                                           |  | $           | 220,280,815 |             |  | $         | 666,102,422 |              |  | $ | 86,128,401 |   |  | $ | 972,511,638 |  
|                                                                                       |  |             |             |             |  |           |             |              |  |   |            |   |  |   |             |  

|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|--------------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- |  |  | - | ------------- | -
|Six Months Ended      |  | Life        |             | Annuity     |  |           |             |             
|June 30, 2003         |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                      |  |             |             |             |  |           |             |             
|Revenues              |  | $           | 117,677,416 |             |  | $         | 31,869,930  |              |  | $ | 7,266,106  |  |  | $ | 156,813,452   |  
|Benefits and Expenses |  |             | 202,161,913 |             |  |           | 72,804,345  |              |  |   | 3,038,451  |  |  |   | 278,004,709   |  
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Segment (Loss) Income |  | $           | (84,484,497 | )           |  | $         | (40,934,415 | )            |  | $ | 4,227,655  |  |  | $ | (121,191,257  | )
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Total Assets          |  | $           | 396,766,778 |             |  | $         | 849,885,167 |              |  | $ | 32,087,049 |  |  | $ | 1,278,738,994 |  
|                      |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  

10



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                     
|-- | --------------------
|5. | Accounting Standards

Variable
Interest Entities

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (as amended in December 2003,
FIN 46), an interpretation of Accounting
Research Bulletin No. 51. FIN 46 expands upon and
strengthens existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. A variable
interest entity is any legal structure used for business
purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient
financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns or both. The effect of the
adoption of this new accounting pronouncement did not have a
significant impact on the Companys condensed consolidated
financial statements.



| |                                         
| | ----------------------------------------
| | AICPA Statement of Position
    SOP 03-1

In July 2003, the Accounting Standards Executive
Committee of the American Institute of CPAs
(AICPA) issued Statement of Position
(SOP) 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Non-Traditional Long-Duration
Contracts and for Separate Accounts. The SOP is effective
for financial statements for fiscal years beginning after
December 15, 2003 and provides guidance on accounting and
reporting by insurance enterprises for certain nontraditional
long-duration contracts and for separate accounts. The SOP
changed the manner in which life insurance companies account for
certain types of insurance and reinsurance contracts.

The SOP provides guidance for reserving for
contracts with guaranteed minimum death and guaranteed minimum
income benefits. The SOP requires projections of a wide number
of future economic scenarios that impact the present value of
premiums earned and claims paid. Based on these projections and
historical experience, a Benefit Ratio is determined. A reserve
is then determined by applying the Benefit Ratio to premiums
received and then deducting claims paid, both with interest. The
SOP also provides guidance for reserving for annuity agreements
with more than one potential account balance. These types of
exposures are reserved for based upon the highest contractually
determinable balance for each policyholder, without
consideration of surrender fees. While this new SOP does not
change managements view of the profitability of these two
agreements over the long term, the Company does anticipate that
this new standard will increase the volatility of its income for
both of these agreements on a quarterly basis.

The Company has a combined GMDB/ GMIB contract
with CIGNA and an annuity reinsurance agreement with
Transamerica, both of which are affected by the adoption of this
new SOP. On January 1, 2004, the Company adopted this new
accounting standard. The cumulative effect of the change in
accounting principle was a net charge to income of $365,960,
which was reported in the Companys unaudited condensed
consolidated statement of operations as of March 31, 2004.
As a result of adopting the SOP, the amount of reserves carried
for the Companys GMDB/ GMIB reinsurance agreement with
CIGNA was reduced by $1,878,760, favorably impacting the
Companys reported net income. Also as a result of the SOP,
the Company increased its reserves for interest sensitive
contracts liability for its Transamerica contract by $38,398,730
to $611,486,170, and increased its deferred policy acquisition
costs for that contract by $36,154,010 to $65,907,500. The
impact of the adoption of the SOP on the Companys
accounting for the Transamerica annuity reinsurance agreement
was a net charge to income of $2,244,720.

Almost all of the GMDB policies underlying the
Companys reinsurance agreement with CIGNA include a GMIB
feature. Although the individual policyholders will only be
entitled to receive either the death benefit

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

or the income benefit under those policies, the
tables below are presented without any adjustment to reflect
that a policyholder will receive only one benefit. All tables
related to GMDB and GMIB are presented as of June 30, 2004,
and are based on data as of March 31, 2004 (except as
indicated).

The key attributes of the Companys exposure
to GMDB are summarized in the following table:

Guaranteed Minimum Death Benefit

(dollars in millions)


|                                         |  |                   |     |         |  |         |     |       |  |   |      |   |  |   |     | 
|---------------------------------------- |  | ----------------- | --- | ------- |  | ------- | --- | ----- |  | - | ---- | - |  | - | --- | 
|                                         |  |                  
|                                         |  | Type of Contract 
|                                         |  |                  
|                                         |  | Return of Premium |     | Ratchet |  | Roll-Up |     | Total
|                                         |  |                   |     |         |  |         |     |      
|Policyholder account value               |  | $                 | 1   |         |  | $       | 86  |       |  | $ | 201  |   |  | $ | 288 | 
|Net amount at risk                       |  | $                 | 0   |         |  | $       | 24  |       |  | $ | 79   |   |  | $ | 103 | 
|Average age of policyholder              |  |                   | 87  |         |  |         | 63  |       |  |   | 65   |   |  |   | 64  | 
|Range of minimum guarantee return rates  |  |                   | n/a |         |  |         | n/a |       |  |   | 3-6  | % |  |   | n/a | 
|Average of range of minimum return rates |  |                   | n/a |         |  |         | n/a |       |  |   | 5.83 | % |  |   | n/a | 

The key attributes of the Companys exposure
to GMIB are summarized in the following table. To determine the
Companys GMIB net amount at risk in the table below, the
Company assumed the net amount at risk for each policy to be the
present value of the minimum guaranteed annuity payments
available to the policyholder determined in accordance with the
terms of the policy in excess of the policyholders current
account balance at the valuation date. The Company assumes that
all policies annuitize at June 30, 2004. Annuity purchase
rates have been determined based upon the contractually agreed
7-year treasury rate at June 30, 2004 of 4.35%.

Guaranteed Minimum Income Benefit

(dollars in millions)


|                                                   |  |   |      |  
|-------------------------------------------------- |  | - | ---- | -
|Policyholder account value                         |  | $ | 830  |  
|Net amount at risk                                 |  | $ | 182  |  
|Average age of policyholders                       |  |   | 62   |  
|Range of minimum guarantee return rates            |  |   | 3-6  | %
|Average of range of minimum guarantee return rates |  |   | 5.92 | %
|Average years remaining until annuitization        |  |   | 2.41 |  

12



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Guaranteed minimum income benefits entitle a
policyholder to purchase a lifetime annuity payment stream after
the expiration of a stipulated waiting period of at least
7 years. The following table displays the development of
the net amount at risk, determined at June 30, 2004,
assuming all policyholders annuitize immediately at the end of
their stipulated waiting period. For purposes of this display
the aggregate net amount at risk is not projected to increase or
decrease during the remainder of the waiting period.

Guaranteed Minimum Income Benefit

Development of Net Amount at Risk by Waiting
Period


(dollars in millions)


|                         |  |                    |     | 
|------------------------ |  | ------------------ | --- | 
|Year Waiting Period Ends |  | Net Amount at Risk
|                         |  |                   
|2004                     |  | $                  | 2   | 
|2005                     |  |                    | 18  | 
|2006                     |  |                    | 52  | 
|2007                     |  |                    | 100 | 
|2008                     |  |                    | 10  | 
|                         |  |                    |     | 
|Total                    |  | $                  | 182 | 
|                         |  |                    |     | 

The following table displays the net change in
the Companys reserves for liabilities associated with
guaranteed minimum death benefits and guaranteed minimum income
benefits during the three months ended June 30, 2004. The
reserve amount is developed using 1,000 stochastically generated
future economic scenarios based on models and assumptions
regarding future mortality, surrender and annuitization rates.
The Company periodically reviews, and revises if necessary,
these models and assumptions. As reflected below, the Company
has not made any material changes to these reserves in the three
months ended June 30, 2004.

Development of Reserves for

Guaranteed Minimum Death Benefit


and Guaranteed Minimum Income
Benefit


|                          |  |   |           |  
|------------------------- |  | - | --------- | -
|Reserve at March 31, 2004 |  | $ | 9,121,240 |  
|Incurred Benefits         |  |   | 171,000   |  
|Paid Benefits             |  |   | (315,538  | )
|                          |  |   |           |  
|Reserve at June 30, 2004  |  | $ | 8,976,702 |  
|                          |  |   |           |  

The Companys annuity reinsurance agreements
contain minimum interest guarantee provisions that take effect
when the policyholder dies, annuitizes or surrenders their
policy. During the six months ending June 30, 2004 and
2003, the Company paid approximately $5.4 million and
$10.1 million, respectively, for lifetime minimum interest
guarantees. The following table summarizes key information about
the Companys exposure to minimum interest guarantees.

|                                               |  |        |             |  
|---------------------------------------------- |  | ------ | ----------- | -
|Risk Information                               |  | Amount
|                                               |  |       
|Account Value                                  |  | $      | 579,538,869 |  
|Minimum Guarantee                              |  |        | 70,004,619  |  
|Market Value Adjustment                        |  |        | (6,141,066  | )
|                                               |  |        |             |  
|Interest Sensitive Contracts Liability         |  | $      | 643,402,422 |  
|                                               |  |        |             |  
|Weighted Average Attained Age of Policyholders |  |        | 73 years    |  

13



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Companys two remaining annuity
reinsurance agreements are modified coinsurance agreements. As a
result, the invested assets funding the Companys annuity
obligations are held and managed by the insurer issuing the
underlying policies and are reported as funds withheld at
interest in the accompanying unaudited condensed consolidated
balance sheets. The assets funding the Companys annuity
obligations under those agreements are described in the
following table:

|                                            |                                                             |              |             |              |  |  |       |        | 
|------------------------------------------- | ----------------------------------------------------------- | ------------ | ----------- | ------------ |  |  | ----- | ------ | 
|                                            |                                                             |              |             | % of Total  
|Type of Security                            |                                                             | Market Value |             | Market Value
|                                            |                                                             |              |             |             
|Investment grade convertible bonds          |                                                             | $            | 353,628,189 |              |  |  | 55.2% |       
|Investment grade U.S. corporate bonds       |                                                             |              | 168,319,046 |              |  |  | 26.3% |       
|U.S. Government bonds                       |                                                             |              | 48,944,283  |              |  |  | 7.6%  |       
|Mortgage-backed securities                  |                                                             |              | 39,435,351  |              |  |  | 6.2%  |       
|Below investment grade U.S. corporate bonds |                                                             |              | 30,083,244  |              |  |  | 4.7%  |       
|                                            |                                                             |              |             |              |  |  |       |       
|                                            | Total invested assets                                       |              |             | 640,410,113  |  |  |       | 100.0% | 
|                                            |                                                             |              |             |              |  |  |       |       
|Accrued investment income                   |                                                             |              | 4,882,395   |              |  |  |       |       
|                                            |                                                             |              |             |              |  |  |       |       
|                                            | Total market value, including accrued investment
    income |              | $           | 645,292,508  |  |  |       |        | 
|                                            |                                                             |              |             |              |  |  |       |       



|   |                           
|-- | --------------------------
|6. | Related Party Transactions



| |                               
| | ------------------------------
| | XL Capital Ltd and XL Life Ltd

Michael P. Esposito, Jr., a director of the
Company, currently serves as the non-executive Chairman of the
Board of XL Capital Ltd (XL Capital). Henry
C.V. Keeling is a director of the Company and currently
serves as an officer of XL Capital and is the Chief
Executive Officer of XL Re Ltd, a subsidiary of XL
Capital. Robert M. Lichten, a director of the Company, serves as
a director of a United States-based subsidiary of
XL Capital. XL Capital is a major shareholder of the
Company.

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 agreement with the Company with respect to four of
those blocks of business. The Company has also historically been
a party to various insurance and reinsurance relationships with
XL Life and its affiliates, including an excess of loss
reinsurance policy related to minimum interest guarantee
payments under the Companys annuity reinsurance agreement
with Transamerica. The Company and XL Life and its
affiliates agreed to mutually discharge their respective rights
and obligations under all of the parties insurance and
reinsurance relationships in a comprehensive settlement
effective as of July 1, 2003. Under the terms of the
comprehensive settlement, the Company paid $6.0 million to
XL Life and was released from any and all obligations to
XL Life and its affiliates under all of the insurance and
reinsurance agreements among the parties. As part of the
comprehensive settlement, the Company was obligated to pay an
additional $2.0 million to XL Life if prior to
June 30, 2004, the Companys stock traded above
$2.00 per share for a period of 20 out of any
30 consecutive trading days and the Company raised an
aggregate $35.0 million of equity or debt. Because these
two events did not occur prior to June 30, 2004, the
Company was not required to make any such payment to XL Life and
is no longer obligated to do so.

14



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                         
| | ------------------------
| | Indemnification Advances

In accordance with the Companys Amended and
Restated Bye-laws, the Company indemnifies its officers and
directors to the fullest extent permissible under Bermuda law.
Pursuant to the Bye-laws, the Company will make advances for
payment of the expenses incurred in connection with defending
any action for which indemnification has properly been sought.
In connection with a purported shareholder class action lawsuit
(as discussed in Note 9) filed against the Company and
certain of its current and former officers and directors, the
Company had, as of June 30, 2004, made advances of
approximately $139,889 and $52,889 to John F. Burke, its Chief
Executive Officer and a director, and Frederick S. Hammer, the
non-executive Chairman of its Board of Directors, respectively,
for payment of their expenses related to defending this lawsuit.
Advances to Mr. Burke during the three and six months ended
June 30, 2004 were $13,195 and $36,997, respectively.
Advances to Mr. Hammer during the three and six months
ended June 30, 2004 were nil and $3,878, respectively.



|   |                 
|-- | ----------------
|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
plan. Since the inception of the plan, the Company has issued
976,000 shares of restricted stock under the plan. As a
result of certain employees terminating their employment with
the Company, 227,133 shares of restricted stock were
cancelled in 2003 and 53,267 shares of restricted stock
were cancelled in the second quarter of 2004. The following
table summarizes the vesting schedule for the shares of
restricted stock issued to current employees and outstanding as
of June 30, 2004:

|                   |  |                 |         |               |  |            |         |            |  |            |        |  |  |  |         |  |  |  |         | 
|------------------ |  | --------------- | ------- | ------------- |  | ---------- | ------- | ---------- |  | ---------- | ------ |  |  |  | ------- |  |  |  | ------- | 
|                   |  | Employee Shares |         | Shares Vested |  | Shares     |         | Shares     |  | Shares    
|                   |  | Outstanding at  |         | at June 30,   |  | Vesting in |         | Vesting in |  | Vesting in
|Grant Date         |  | June 30, 2004   |         | 2004          |  | 2004       |         | 2005       |  | 2006      
|                   |  |                 |         |               |  |            |         |            |  |           
|February 13, 2002  |  |                 | 53,100  |               |  |            |        |            |  |            |       |  |  |  | 53,100  |  |  |  |        | 
|September 30, 2002 |  |                 | 97,500  |               |  |            | 32,500  |            |  |            | 32,500 |  |  |  | 32,500  |  |  |  |        | 
|February 28, 2003  |  |                 | 200,000 |               |  |            | 66,666  |            |  |            |       |  |  |  | 66,667  |  |  |  | 66,667  | 
|June 25, 2003      |  |                 | 330,000 |               |  |            | 110,000 |            |  |            |       |  |  |  | 110,000 |  |  |  | 110,000 | 
|                   |  |                 |         |               |  |            |         |            |  |            |        |  |  |  |         |  |  |  |         | 
|Total              |  |                 | 680,600 |               |  |            | 209,166 |            |  |            | 32,500 |  |  |  | 262,267 |  |  |  | 176,667 | 
|                   |  |                 |         |               |  |            |         |            |  |            |        |  |  |  |         |  |  |  |         | 

The fair value as determined at the date of grant
of the restricted stock awards that were outstanding on
June 30, 2004 was approximately $1,930,000 and is reflected
in the Companys balance sheet as common shares and
additional paid-in-capital. The fair value of the outstanding
restricted stock is being amortized on a straight-line basis
over the three-year vesting period. Based on the vesting of the
restricted stock, and offset partially by cancellations of
restricted stock, approximately $56,000 was expensed in the six
months ended June 30, 2004. The unamortized balance of
outstanding restricted stock is reflected in the balance sheet
as a component of unamortized stock-based compensation and was
approximately $775,000 at June 30, 2004.



|   |                                    
|-- | -----------------------------------
|8. | Vulnerability Due to Concentrations

The Company has a significant deferred annuity
reinsurance agreement with Transamerica. Due to the size of this
agreement, there is a material concentration of net investment
income, interest credited to interest sensitive products, funds
withheld at interest, deferred policy acquisition costs and
interest sensitive contract liabilities.

15



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

At June 30, 2004 and December 31, 2003,
approximately $556 million and $604 million,
respectively, of the Companys funds withheld at interest
receivable and $580 million and $602 million,
respectively, of the Companys interest sensitive contracts
liability related to its reinsurance agreement with
Transamerica. Also, at June 30, 2004 and December 31,
2003, approximately $63 million and $33 million,
respectively, of the deferred policy acquisition costs asset
related to its reinsurance agreement with Transamerica. The
reinsurance agreement is a modified coinsurance retrocessional
agreement covering policies issued by Indianapolis Life
Insurance Company (Indianapolis Life).
Transamericas agreement with Indianapolis Life is also
structured on a modified coinsurance basis, thus Indianapolis
Life maintains ownership and control of the assets supporting
the Companys obligations to Transamerica. At June 30,
2004, Transamerica had financial strength or claims paying
ratings of A+, AA, Aa3 and AA+ (with a negative outlook) from
A.M. Best, Standard & Poors, Moodys Ratings
and Fitch Ratings, respectively. Indianapolis Life had financial
strength or claims paying ratings of A by A.M. Best, A3 by
Moodys Ratings, and A+ from Standard &
Poors at June 30, 2004.

During the six months ended June 30, 2004
and 2003, the Company recorded approximately $5.4 million
and $10.1 million, respectively, of minimum interest
guarantee payments in connection with the Transamerica annuity
reinsurance agreement. The amount of deferred acquisition costs
recorded as an asset on the Companys balance sheet related
to the Transamerica agreement is based on a series of
assumptions related to the investment performance of the assets
supporting its liabilities under the agreement, as well as
future lapse rates for the underlying policies. These assumed
lapse rates include assumptions regarding future full
surrenders, partial withdrawals, annuitizations and policyholder
deaths. These assumptions have a direct impact on the amount of
expected future minimum interest guarantee payments and on the
Companys estimated expected gross profits on the agreement
and, therefore, on the recoverability of the deferred
acquisition costs carried on its balance sheet. The Company
believes that the assumptions related to investment performance
and lapse rates are reasonable.

As a result of the recapture or termination of
many of the Companys reinsurance agreements, certain of
the Companys remaining agreements, which previously did
not represent a significant percentage of the Companys
business, have become more prominent. For the three and six
months ended June 30, 2004, the Company recorded income of
approximately $0.7 million and $1.2 million,
respectively, related to its life reinsurance agreement with ERC
Life. Premiums associated with this agreement for the three and
six months ended June 30, 2004 were approximately
$3.8 million and $8.8 million, respectively. For the
three and six months ended June 30, 2004, the Company
recorded income of $0.2 million and a loss of
$0.5 million, respectively, related to its life reinsurance
agreement with Fidelity & Guarantee Life. Premiums
associated with this agreement for the three and six months
ended June 30, 2004 were approximately $2.4 million
and $6.1 million, respectively. For the three and six
months ended June 30, 2004, the Company recorded losses of
approximately $1.1 million and $1.9 million,
respectively, related to its life reinsurance agreement with
National States Life. Premiums associated with this agreement
for the three and six months ended June 30, 2004 were
approximately $2.5 million and $5.4 million,
respectively.

The Companys United States domiciled
operating subsidiary, Annuity and Life Reassurance America, was
purchased from a subsidiary of SwissRe on June 1, 2000.
Immediately prior to the acquisition, 100% of Annuity and Life
Reassurance Americas life and annuity policies were
reinsured with Reassure America Life Insurance Company
(Reassure), a subsidiary of SwissRe, under an
indemnity co-insurance agreement. Following the acquisition, the
policies continue to be 100% reinsured with Reassure; however,
Annuity and Life Reassurance America remains the primary
carrier. Reassure is required to indemnify Annuity and Life
Reassurance America for any losses associated with these
policies. Reserves ceded under the reinsurance agreement with
Reassure amounted to approximately $83.2 million and
$88.2 million at June 30, 2004 and December 31,
2003, respectively. As of June 30, 2004, Reassure was rated
A+ (g) (superior) by A.M. Best.

16



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

As of June 30, 2004, the Company did not
meet the collateral requirements asserted by CIGNA, the ceding
company under the Companys only remaining GMDB and GMIB
reinsurance agreement. As of June 30, 2004, CIGNA was
seeking $49.0 million of collateral in addition to the
$11.0 million of collateral the Company had previously
provided in the form of a fully collateralized letter of credit.
On July 28, 2004, CIGNA made an $11.0 million draw on
this letter of credit. The Company does not agree that the
aggregate $60.0 million collateral requirement currently
asserted by CIGNA is required to be posted and has not posted
any additional collateral for the agreement. If CIGNAs
asserted collateral requirement is valid, the Company does not
have sufficient available cash and investments to satisfy
CIGNAs request. The Company is attempting to restructure
the reinsurance agreement or otherwise meet or reduce
CIGNAs request for collateral. If these negotiations are
unsuccessful, CIGNA could initiate arbitration or litigation
proceedings against the Company. The specific relief sought and
the outcome of any proceedings that CIGNA could initiate cannot
be determined at this time. If the Company does not prevail in
any such arbitration or litigation proceedings, it would have a
material adverse effect on the Companys financial
condition, and the Company may be required to liquidate its
operations.

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. The
plaintiffs filed a single consolidated amended complaint in July
2003, adding as defendants XL Capital Ltd and two additional
directors. On October 1, 2003, the Company answered the
amended and consolidated complaint and denied liability on the
claims the plaintiffs have asserted. In January 2004, the court
ordered that a related action that the plaintiffs filed against
KPMG LLP (United States) and KPMG in Bermuda be consolidated
with the action against the Company. In February 2004, the court
denied certain individual defendants motions to dismiss
the action. In March 2004, the court denied motions to dismiss
filed by certain other individual defendants and XL Capital Ltd.
Also in March 2004, KPMG LLP (United States) and KPMG in Bermuda
filed motions to dismiss the action. The court has not yet ruled
on KPMG LLPs (United States), KPMG in Bermudas and
one individual defendants respective motions to dismiss.

On July 20, 2004, the Company announced that
it had reached an agreement in principle with the plaintiffs to
settle the purported shareholder class action lawsuit. The
settlement is without any admission of liability or wrongdoing.
The Company, its directors and officers liability carrier,
and another defendant have agreed to pay an aggregate of
$16.5 million. The Companys share of the settlement
is $2.5 million in cash and an additional $2.5 million
in common shares, although the Company has reserved the right to
elect to pay this portion in cash. The settlement is subject to
full documentation among the parties to the settlement, notice
to the class, court approval and other steps required to
consummate a class action settlement.

On October 8, 2003, the Company was served
with a statutory demand for $640,000 from Imagine Group Holdings
Limited (Imagine), a Bermuda based reinsurance
company, which was subsequently withdrawn. Imagine has since
instituted a civil proceeding in the Bermuda Supreme Court
against the Company, alleging that the Company is obligated to
reimburse it for $640,000 of expenses incurred by Imagine in
connection with a proposed December 2002 capital raising
transaction that was not consummated. On March 11, 2004,
the Company filed an amended defense with the court to which
Imagine responded on April 26, 2004. The Company does not
believe that Imagine is entitled to reimbursement of these
expenses under the applicable agreement and is defending itself
against Imagines claims.

As of June 30, 2004, the Company was
involved in arbitration proceedings with Transamerica. The
arbitration related to Transamericas allegation that the
Company, as of October 31, 2003, owed $17.6 million

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ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

under its annuity reinsurance agreement with
Transamerica. On February 3, 2004, the Company paid
Transamerica $12.6 million representing the net amount the
Company believed was due under the reinsurance agreement as of
October 31, 2003 after deducting $5.0 million for
investment related expenses that the Company believed was owed
to it by Transamerica. Transamerica pursued arbitration with the
Company, asserting that the $5.0 million offset was not
justified and that the Company owed Transamerica the full
$17.6 million plus interest. In addition, through
October 31, 2003, the Company had received monthly
settlement reports from Transamerica prepared on a basis that
the Company believes conformed with the reinsurance agreement
between the parties. For the period subsequent to
October 31, 2003, the Company had only received settlement
reports from Transamerica on a basis that Transamerica alleged
was appropriate but which the Company believed was not
consistent with the reinsurance agreement. The principal
difference was how realized gains and losses related to the
invested assets supporting the annuity obligations were settled
between the parties. Transamerica had not provided the Company
with realized gain and loss information on the basis the Company
believed was appropriate. As a result, in preparing its
financial statements the Company adjusted the amounts reported
to it by Transamerica in the monthly settlement reports for
periods subsequent to October 31, 2003 to reflect what the
Company believed was the appropriate treatment of realized
capital gains and losses.

On July 2, 2004, the Company and
Transamerica agreed to settle all disputes relating to the
arbitration proceedings between the two parties. Pursuant to the
terms of the settlement agreement, Transamerica agreed to
calculate monthly settlements under their reinsurance agreement
in a manner the Company believes is consistent with the original
terms of the agreement. Transamerica also agreed to the
Companys $5.0 million offset of amounts owed to
Transamerica at October 31, 2003. On July 8, 2004, the
Company paid Transamerica approximately $8.7 million,
representing amounts due under the reinsurance agreement as of
April 30, 2004. Although the Company and Transamerica have
agreed on a method for computing future monthly settlements
under the reinsurance agreement, there is a potential for the
Company to become liable for significant net monthly settlement
payments to Transamerica in the future.

The United States Internal Revenue Service
(IRS) is currently conducting an audit of the
Companys United States based subsidiaries. Those companies
currently have a significant tax based net operating loss
carryforward. In addition, the IRS has requested certain
information and documents related to the Companys Bermuda
based operations. While the Companys United States based
subsidiaries have agreed to comply with the IRS requests
for information, both the Company and its Bermuda operating
subsidiary have declined to supply the IRS with the information
it has requested based on the IRS lack of jurisdiction
over those entities. If the IRS were to determine that the
Company or its Bermuda operating subsidiary were engaged in
business in the United States, those entities could be subject
to United States tax at regular corporate rates on their taxable
income that is attributable to a permanent establishment, if
any, in the United States plus an additional 30% branch
profits tax on such income remaining after the regular
tax. Such taxes, if levied, would have an adverse effect on the
Companys business and financial condition.



|    |               
|--- | --------------
|10. | Stock Warrants

On June 30, 2003, the Company issued
warrants to purchase an aggregate one million common shares of
the Company at an exercise price of $1.25 per share to
Hartford Life, the ceding company under the Companys then
largest guaranteed minimum death benefit reinsurance agreement.
The warrants were issued in connection with the recapture of
that agreement, expire on June 30, 2013, and are currently
exercisable. At June 30, 2003, the fair value of these
warrants, using a Black-Scholes pricing model, was estimated at
$1,250,000, which was included in a charge associated with the
recapture that the Company recorded during the second quarter of
2003 as a component of Claim and policy benefits expense. The
expense of issuing these warrants is presented as stock warrants
in the stockholders equity section of the Companys
consolidated balance sheet as at June 30, 2004.

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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, 2003, as amended.

Our company has encountered significant
difficulties during the last three years. In addition to
reporting significant operating losses for those years, we did
not have sufficient available cash and investments to post as
collateral to satisfy all of our obligations under certain of
our reinsurance agreements during 2002 and 2003. During 2003, we
negotiated the termination or recapture of most of our
reinsurance agreements. As of June 30, 2004, we did not
meet the collateral requirements asserted by Connecticut General
Life Insurance Company (CIGNA), the ceding company
under our only remaining guaranteed minimum death benefit
(GMDB) and guaranteed minimum income benefit
(GMIB) reinsurance agreement. As of June 30,
2004, CIGNA was seeking $49 million of collateral in
addition to the $11 million of collateral we had previously
provided in the form of a fully collateralized letter of credit.
On July 28, 2004, CIGNA made an $11 million draw on
this letter of credit. We do not agree that the aggregate
$60 million collateral requirement currently asserted by
CIGNA is required to be posted and we have not posted any
additional collateral for this agreement. If CIGNAs
asserted collateral requirement is valid, we do not have
sufficient available cash and investments to satisfy
CIGNAs request. We are attempting to restructure the
reinsurance agreement or otherwise meet or reduce CIGNAs
request for collateral. If these negotiations are unsuccessful,
CIGNA could initiate arbitration or litigation proceedings
against us. The specific relief sought and the outcome of any
proceedings that CIGNA could initiate cannot be determined at
this time. If we do not prevail in any such arbitration or
litigation proceedings, it would have a material adverse effect
on our financial condition, and we may be required to liquidate
our operations.

The New York Stock Exchange suspended trading in
our common shares prior to the market opening on Friday
July 30, 2004, and has applied to the Securities and
Exchange Commission to delist our common shares. The NYSEs
action was taken in view of the fact we had again fallen below
the NYSEs continued listing standards, as the average
closing price of our common shares had been less than $1.00 over
a consecutive 30-trading-day period. We were previously below
this standard from April through October 2003. Our common shares
are now being traded over the counter under the symbol ANNRF.pk.
If we are unable to list our common shares for trading on any
other national exchange or automated quotation system, it will
adversely affect the public market for and liquidity of our
common shares, and may adversely affect any capital raising or
other strategic transactions we may choose to pursue in the
future.

As of June 30, 2004, we were involved in
arbitration proceedings with Transamerica Occidental Life
Insurance Company (Transamerica). The arbitration
related to Transamericas allegation that, as of
October 31, 2003, we owed $17.6 million under our
annuity reinsurance agreement with Transamerica. On
February 3, 2004, we paid Transamerica $12.6 million
representing the net amount we believed was due under the
reinsurance agreement as of October 31, 2003 after
deducting $5.0 million for investment related expenses that
we believed was owed to us by Transamerica. Transamerica pursued
arbitration with us, asserting that the $5.0 million offset
was not justified and that we owed Transamerica the full
$17.6 million plus interest. In addition, through
October 31, 2003, we had received monthly settlement
reports from Transamerica prepared on a basis that we believe
conformed with the reinsurance agreement between us. For the
period subsequent to October 31, 2003, we had only received
settlement reports from Transamerica on a basis that
Transamerica alleged was appropriate, but which we believed was
not consistent with the reinsurance agreement. The principal
difference was how realized gains and losses related to the
invested assets supporting the annuity

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obligations were settled between us. Transamerica
had not provided us with realized gain and loss information on
the basis we believed was appropriate. As a result, in preparing
our financial statements, we adjusted the amounts reported to us
by Transamerica in the monthly settlement reports for periods
subsequent to October 31, 2003 to reflect what we believed
was the appropriate treatment of realized capital gains and
losses.


On July 2, 2004, we and Transamerica agreed
to settle all disputes relating to the arbitration proceedings
between us. Pursuant to the terms of the settlement agreement,
Transamerica agreed to calculate monthly settlements under the
reinsurance agreement in a manner we believe is consistent with
the original terms of the agreement. Transamerica also agreed to
our $5.0 million offset of amounts owed to Transamerica at
October 31, 2003. On July 8, 2004, we paid
Transamerica approximately $8.7 million, representing
amounts due under the reinsurance agreement as of April 30,
2004. Although we and Transamerica have agreed on a method for
computing future monthly settlements under the reinsurance
agreement, the potential for significant monthly settlement
payments from us to Transamerica in future periods remains. The
amount due from us under this agreement for the month ended
May 31, 2004 is approximately $2.6 million. We have
been attempting to engage Transamerica, and ultimately
Indianapolis Life Insurance Company (Indianapolis
Life), the primary insurance company under the
Transamerica agreement, in discussions aimed at improving
investment returns from the convertible bond portfolio
supporting the liabilities under this agreement and potentially
redesigning the reinsured product to reduce the minimum interest
guarantee exposure to us. Although certain changes have been
implemented in the composition of the investment portfolio, if
we are not successful in convincing Transamerica and
Indianapolis Life to restructure the portfolio further and/or to
redesign the product, we may incur additional losses in the
future.

We plan to continue to receive premiums and pay
claims under our remaining reinsurance treaties; however, we are
not currently underwriting any new treaties or accepting any new
business from our existing treaties. We are currently exploring
whether we can, should or will begin selling new insurance and
reinsurance products in the future, but we cannot assure you
that we will be able to successfully develop, underwrite or
market any products in the future. We are not seeking to
negotiate the termination or recapture of any of our remaining
reinsurance agreements at this time except that, as noted above,
we are seeking to restructure our agreement with CIGNA.

Our remaining life reinsurance agreements
continue to be reinsurance of ordinary life insurance, primarily
for mortality risk. Profitability of our life reinsurance line
depends in large part on the volume and amount of death claims
incurred. While death claims are reasonably predictable over a
long time horizon, they are less predictable over shorter
periods and are subject to fluctuation from quarter to quarter
and year to year, particularly given the relatively small size
of our in force business as a result of recaptures and
terminations in previous periods. Significant fluctuations from
period to period could adversely affect the results of our
operations, as occurred in 2003 and 2002. At June 30, 2004
and December 31, 2003, the total face amount of our life
insurance in force was approximately $16.5 billion and
$17.5 billion, respectively.

Our remaining annuity products are reinsurance of
general account fixed deferred annuities and certain ancillary
risks arising from variable annuities. Profitability of the
annuity reinsurance line is primarily dependent on earning a
spread between the interest rate earned on the assets under
management and the interest rate credited to the policyholder.
This product line is market and interest rate sensitive.
Fluctuations in the general level of interest rates, fixed
income markets, and equity markets from period to period may
cause fluctuations in the results of our operations. The
combined effects of poor market performance and excessive
surrender rates can adversely impact this product line, such as
occurred during the last three fiscal years. At June 30,
2004 and December 31, 2003, our liability for annuity
reinsurance agreements amounted to approximately
$643 million and $671 million, respectively.

Because our financial results are heavily
dependent on three life reinsurance agreements and two annuity
reinsurance agreements, large fluctuations in any one of these
contracts could cause volatility in our overall financial
results.

On January 1, 2004, we adopted AICPA
Statement of Position (SOP) 03-1. The SOP requires us to
record the largest contractually determinable amount payable to
the policyholder of each underlying policy comprising our
Interest sensitive contract liabilities as our reserve for those
policies, rather than simply

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recording reserves based solely on the
policyholder account values. The computation of amounts due
policyholders under our reinsurance contract with Transamerica
includes a market value adjustment and, to the extent the market
value adjustment would require payments to policyholders in
excess of the minimum guarantee amount under the policies, the
reserve required under the SOP is directly influenced by changes
in the value of the underlying assets. The SOP modified the
accounting for liabilities recorded in connection with our
reinsurance contracts, but did not modify the accounting for the
assets supporting the liabilities. As a result, changes in our
reserve levels resulting from underlying asset value changes
will not be offset with corresponding changes in our Funds
withheld asset values. This mismatch will cause volatility in
net income on a quarterly basis, but we believe that it will
have no effect on the underlying profitability of the
Transamerica contract over the long term. To the extent that the
minimum guarantee payable under the policy exceeds the payment
that would be required as a result of the market value
adjustment, the reserves required under the SOP would be based
upon the minimum guarantee and the mismatch between liabilities
and assets is less significant. If we computed our reserves as
if the amounts payable to the policyholders under the
Transamerica contract exceeded the minimum guarantee amount, a
1% increase (decrease) in underlying asset values would
cause a $6 million charge (benefit) to net income.


In addition to the increased net income
volatility the new SOP will cause, it also adversely impacts our
tangible book value, which is GAAP book value less deferred
acquisition costs. Upon its adoption, the SOP required an
increase in our liabilities of approximately $36.6 million
and an increase in deferred acquisition costs of approximately
$36.2 million. While the net impact on our GAAP book value
was minor, our tangible book value was reduced by $1.38 per
share as of January 1, 2004, primarily because the increase
in our deferred acquisition costs was excluded from the tangible
book value computation, while the increase in our liabilities
was included. If the SOP were applied as of December 31,
2003, our tangible book value would have been $1.12 per
share, as opposed to $2.50 per share. At June 30,
2004, our tangible book value was $1.07 per share. Our GAAP
book value at June 30, 2004 was $4.81 per share, as
compared to $5.11 per share at December 31, 2003.

There can be no assurance that we will be able to
improve our operations and liquidity. If we are unable to
reposition our investment portfolio to achieve a substantially
higher yield within our investment guidelines, obtain approval
from the court and other parties of an agreement in principle
reached in July 2004 to settle a pending purported shareholder
class action lawsuit (as discussed below in Part II.
Other Information, Item 1. Legal Proceedings),
experience improvement in the performance of our reinsurance
agreement with Transamerica and restructure our reinsurance
agreement with CIGNA, we may not be able to meet our future
obligations. Our failure to achieve any one of the foregoing
items could have a material adverse effect on our financial
condition and results of operations and may raise significant
doubt as to our ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial
statements do not include any adjustments that might be
necessary should we be unable to continue as a going concern.
For a more detailed discussion of certain factors that could
materially and adversely affect our financial condition and
results of operations, please see  Forward-Looking
and Cautionary Statements.

Critical Accounting Policies

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require our
management to make estimates and assumptions that affect the
amounts of our assets, liabilities, stockholders equity
and 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, 2003, as
amended, 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

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in earnings in the period such deviations occur.
For these contracts, the amortization periods are generally the
estimated life of the policies. We terminated or recaptured
several of our reinsurance agreements during 2003, which caused
us to incur significant deferred acquisition cost write-downs.
While we believe that there will be minimal, if any, termination
or recapture activity in the future, we will consider
transactions in connection with the resolution of outstanding
disputes with certain of our ceding companies, or that are
otherwise economically beneficial to us, which may require write
downs of deferred acquisition costs.


In preparing our financial statements, we make
assumptions about our proportionate share of future investment
income that will be earned from the investment of premiums
received from underlying policyholders by our ceding companies
and about future rates of lapse of policies underlying our
annuity reinsurance contracts when estimating gross profits
arising from these contracts. These assumptions have a direct
impact on the amount of expected future lifetime minimum
interest guarantee (LMIG) 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 LMIG payments
and record additional charges, which would adversely impact our
earnings.

In determining the level of our deferred
acquisition costs related to our Transamerica contract at
June 30, 2004, we assumed future total returns on
convertible bonds of 8.01% for 2004 and each year thereafter.
Additionally, we assumed future average total returns of 6.24%
for 2004 and each year thereafter for the other asset classes in
which policyholder premiums have been invested. We also assumed
a future lapse rate for the underlying policies of approximately
21% in 2004, 18% in 2005 and annual rates of 12% to 17%
thereafter. These assumed lapse rates include assumptions
regarding full surrenders, partial withdrawals, annuitizations
and policyholder deaths. Consistent with our accounting
policies, we review the key assumptions used in determining the
carrying value of our deferred acquisition cost each quarter. A
change in these assumptions could result in additional charges
that would adversely impact future earnings. If our assumptions
for total returns prove to be inaccurate, or if lapse rates
exceed our assumptions, we may be required to make additional
LMIG payments and record additional write downs of deferred
acquisition costs, which would adversely impact future earnings.
Assuming no change in lapse assumptions, the net impact of a
100 basis point decrease in our total return assumptions in
all future years would have required an additional write down of
deferred acquisition costs of approximately $17,000,000 as of
June 30, 2004. Assuming no change in our total return
assumptions, a 1% increase in our lapse assumptions on our
Transamerica annuity agreement in all future years would have
required an additional write down of deferred acquisition costs
of approximately $4,400,000 as of June 30, 2004.

Embedded
Derivatives.We have concluded that
there is an embedded derivative within the Funds withheld at
interest receivable related to one of our annuity reinsurance
contracts written on a modified coinsurance basis that requires
bifurcation and separate accounting under Statement of Financial
Accounting Standards No. 133  Accounting for
Derivative Instruments and Hedging Activities. This embedded
derivative is similar to a total return swap arrangement on the
underlying assets held by our ceding company under the
agreement. The fair value of the embedded derivative is
classified as part of our Funds withheld asset on our balance
sheet. We have developed a cash flow model with the assistance
of outside advisors to arrive at an estimate of the fair value
of this total return swap that uses various assumptions
regarding future cash flows under the affected annuity
reinsurance agreement. The fair value of the embedded derivative
is influenced by changes in credit risk, changes in expected
future cash flows under the annuity reinsurance agreement and
interest rates. The change in fair value of the embedded
derivative is recorded in our statement of operations as Net
change in fair value of embedded derivatives, which is a
non-cash item.

The change in fair value of the embedded
derivative also impacts the emergence of expected gross profits
for purposes of amortizing deferred acquisition costs associated
with the contract. The application of this accounting policy has
increased the volatility of our reported earnings. While we have
made an estimate of the

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fair value of the embedded derivative using a
model that we believe to be appropriate and based upon
reasonable assumptions, the assumptions used are subjective and
may require adjustment in the future. 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 derivative
and our reported earnings. We do not bifurcate and separately
account for the embedded derivatives contained in our
Transamerica annuity reinsurance agreement or our GMDB/ GMIB
reinsurance agreement with CIGNA because we acquired those
agreements prior to the transition date elected by us under
SFAS 133, as amended. Because of the nature of the assets
underlying our Transamerica agreement, which were roughly
61% convertible bonds at June 30, 2004, the
bifurcation and separate accounting for the embedded derivatives
contained in that contract could add significant volatility to
our reported results. If we bifurcated and separately accounted
for the embedded derivatives contained in our GMDB/ GMIB
reinsurance agreement with CIGNA, it also could 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. 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 LMIG payments.
Such LMIG payments are recognized as an expense 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 ceding companies who do not report such information in a
timely manner. These estimates can have a significant effect on
the amounts we report in our financial statements.

Reserves for Policy Benefits, Including Claims
Incurred but not Reported (IBNR) and Interest Sensitive
Contracts Liability.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. Actual results could differ, and
in the past have differed, materially from those estimates. We
monitor actual experience, and where circumstances warrant, will
revise our assumptions and the related reserve estimates.

We reinsure certain minimum guarantees associated
with variable annuity agreements through our combined GMDB/ GMIB
agreement with CIGNA. Our obligations for the CIGNA annuity
contract are reflected on our balance sheet as Reserves
for future policy benefits. Our obligations arising from
our fixed annuity reinsurance agreements come from our
reinsurance agreement with Transamerica and a second smaller
annuity reinsurance agreement. Our obligations for these fixed
annuity contracts are reflected on our balance sheet as
Interest sensitive contracts liability. On
January 1, 2004, we adopted the AICPA Statement of Position
(SOP) 03-1 to account for our combined GMDB/ GMIB agreement
with CIGNA and our annuity reinsurance agreement with
Transamerica.

AICPA Statement of Position
(SOP) 03-1.In July 2003, the
Accounting Standards Executive Committee of the AICPA issued
Statement of Position (SOP) 03-1, Accounting and Reporting
by Insurance Enterprises for Certain Non-Traditional
Long-Duration Contracts and for Separate Accounts, which
provides guidance on accounting and reporting by insurance
enterprises for certain nontraditional long-duration contracts
and for separate accounts. The SOP is effective for financial
statements for fiscal years beginning after December 15,
2003. We adopted the SOP as of January 1, 2004.

We have a combined GMDB/ GMIB contract with CIGNA
and an annuity reinsurance agreement with Transamerica, both of
which are affected by the adoption of this new SOP. The SOP
provides guidance for reserving for contracts with guaranteed
minimum death and guaranteed minimum income benefits. The SOP
requires projections of a wide number of future economic
scenarios that impact the present value of premiums earned and
claims paid. Based on these projections and historical
experience, a Benefit Ratio is determined. A

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reserve is then determined by applying the
Benefit Ratio to premiums received and then deducting claims
paid, both with interest. The SOP also provides guidance for
reserving for annuity agreements with more than one potential
account balance. These types of exposures are reserved for based
upon the highest contractually determinable balance for each
policyholder, without consideration of surrender fees. Upon
adoption of the SOP on January 1, 2004, we recorded a
one-time transition adjustment to our carried reserves for
interest sensitive contracts liability and deferred acquisition
costs asset for the Transamerica annuity reinsurance agreement,
and future policy benefits for the CIGNA contract. The impact of
our adoption of the SOP is discussed below in Operating
Results. While this new SOP does not change
managements view of the profitability of these two
agreements over the long term, we do anticipate that this new
standard will increase the volatility of our income for both of
these agreements on a quarterly basis.


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

Operating Results

Net Loss.For the
three months ended June 30, 2004, we had a net loss of
$(6,430,378), or $(0.25) per basic and fully diluted common
share, as compared with a net loss of $(68,716,440), or $(2.66)
per basic and fully diluted common share, for the three months
ended June 30, 2003. For the six months ended June 30,
2004, we had a net loss, after the cumulative effect of a change
in accounting principle, of $(5,595,983), or $(0.22) per basic
and fully diluted common share, as compared to net loss of
$(121,191,257), or $(4.69) per basic and fully diluted common
share, for the six months ended June 30, 2003.

As discussed elsewhere in this report, on
July 20, 2004, we announced that we had reached an
agreement in principle with the plaintiffs to settle the
purported shareholder class action lawsuit pending against us
and certain of our present and former directors and officers.
Our share of the settlement is $2,500,000 in cash and an
additional $2,500,000 payable, at our option, in cash or common
shares. Our net loss during the three months ended June 30,
2004 was primarily due to a $5,000,000 accrual for our
anticipated portion of the settlement payment, as well as a loss
of approximately $1,780,000 from our annuity reinsurance
agreement with Transamerica. The net loss on the Transamerica
agreement is primarily the result of LMIG payments of
approximately $3.6 million, amortization of deferred
acquisition costs of approximately $2.8 million and reduced
investment income from the agreement, partially offset by a
contingency reserve release of $5.0 million as a result of
the settlement of our dispute with Transamerica. This agreement
is our largest annuity reinsurance agreement, and represented
approximately $556 million, or approximately 90%, of our
Funds withheld at interest receivable as of June 30, 2004.
Net realized investment losses of approximately $138,000 also
contributed to the loss incurred during the period. These losses
were partially offset by income of approximately $470,000 on our
GMDB/ GMIB contract with CIGNA.

In the six months ended June 30, 2004, our
loss before cumulative effect of a change in accounting
principle was $(5,230,023). Included in this loss is the
$5,000,000 accrual for the anticipated settlement of the
shareholder lawsuit and a loss of approximately $849,000 from
our annuity reinsurance agreement with Transamerica. These
losses were partially offset by income of approximately $510,000
on our GMDB/ GMIB contract with CIGNA. Investment income earned
on our general account assets and net realized investment gains
also helped mitigate the loss incurred during the six months
ended June 30, 2004.

In the six months ended June 30, 2004, the
cumulative effect of a change in accounting principle due to the
adoption of Statement of Position (SOP) 03-1 was a net
charge to income of $365,960. As a result of the adoption of the
SOP on January 1, 2004, the amount of Reserves for future
policy benefits relating to our GMDB/ GMIB agreement with CIGNA
was reduced by $1,878,760, favorably impacting our reported net
income. The impact of the adoption of the SOP on our accounting
for the Transamerica annuity reinsurance agreement was a net
charge of $2,244,720 as a result of an increase in Interest
sensitive contracts liability of $38,398,730 partially offset by
an increase in Deferred policy acquisition costs of $36,154,010.

The losses during the three and six months ended
June 30, 2003 were primarily the result of losses
associated with recaptures and terminations of life and annuity
reinsurance agreements and adverse claims

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experience under our life reinsurance agreements.
During the three and six months ended June 30, 2003, we
recorded charges of approximately $55 million and
$94 million, respectively, in connection with the recapture
and termination of a number of our life and annuity reinsurance
agreements, including those with Ohio National, Hartford Life,
and XL Life.


Net Premiums.Net
premium revenue for the three and six month periods ended
June 30, 2004 was $10,348,881 and $24,659,522, a decrease
of 82% and 79%, respectively, from net premium revenue of
$58,563,721 and $119,929,634 for the three and six month periods
ended June 30, 2003. Substantially all premium revenue was
derived from traditional ordinary life reinsurance agreements.
The decline in premium revenue reflects the significant
reduction of business in force resulting from the recapture and
termination of life reinsurance agreements in 2003. At
June 30, 2004, the total face amount of life insurance in
force decreased to approximately $16.5 billion, as compared
with approximately $60.0 billion at June 30, 2003. Our
now largest life reinsurance agreement represented approximately
$7.7 billion of life insurance in force at June 30,
2004 and approximately $8.8 million of premium revenue for
the six months ended June 30, 2004.

Net Investment
Income.Total net investment income
for the three and six month periods ended June 30, 2004 was
$3,844,066 and $13,094,801, respectively, as compared with
$5,734,738 and $13,893,427, respectively, for the three and six
month periods ended June 30, 2003. Net investment income is
comprised of income earned on our general account assets and
income earned on assets held and managed by our reinsurance
cedents under modified coinsurance contracts, which we refer to
as Funds withheld. Both sources of investment income declined
from the comparable prior periods.

Net investment income earned on our general
account assets for the three and six month periods ended
June 30, 2004 was approximately $1,396,000 and $2,951,000,
respectively, as compared to $1,527,000 and $3,409,000,
respectively, for the three and six month periods ended
June 30, 2003. The average annualized yield rate earned on
our general account assets for the three and six months ended
June 30, 2004 was approximately 3.39% and 3.24%,
respectively, as compared with approximately 2.87% and 2.46%,
respectively, for the three and six months ended June 30,
2003. The increase in the effective yield rate was largely due
to the moving a greater portion of our invested assets from cash
and its equivalents to longer duration investments during the
quarter, but the impact was offset by the lower level of
invested assets in the three and six months ended June 30,
2004, as compared to the comparable prior periods in 2003. The
2003 yield rate was lower as it reflected our decision to invest
funds supporting our letters of credit in cash equivalents in an
effort to maximize our collateral funding ability and to
minimize the impact of changing interest rates on our collateral
obligations.

Net investment income earned on Funds withheld
for the three and six month periods ended June 30, 2004 was
approximately $2,448,000 and $10,144,000, respectively, as
compared to approximately $4,207,000 and $10,484,000,
respectively, for the three and six month periods ended
June 30, 2003. The decrease in investment income on our
Funds withheld during the three months ended June 30, 2004
was primarily due to a decreased asset base underlying our
annuity reinsurance agreements, which was largely the result of
four such annuity agreements being recaptured in 2003. The
average annualized yield rates earned on Funds withheld were
approximately 1.74% and 3.40%, respectively, for the three and
six months ended June 30, 2004, as compared with 1.65% and
2.13%, respectively, for the three and six months ended
June 30, 2003. For purposes of calculating the average
yield rates earned on our Funds withheld at interest, we include
our share of the investment income and net realized capital
gains and losses as reported to us through our settlements with
our ceding companies.

Net Realized Investment (Losses)
Gains.Net realized investment
(losses) gains for the three and six month periods ended
June 30, 2004 were $(137,885) and $541,040, respectively,
as compared with net realized investment gains of $4,896,176 and
$6,560,044, respectively, for the three and six month periods
ended June 30, 2003. The realized losses in the three
months ended June 30, 2004 were due to weakening bond
prices caused by increases in interest rates during the quarter
and our decision to sell some of the securities that were more
sensitive to future interest rate increases. The relatively high
level of net realized investment gains for the three and six
months ended June 30, 2003 reflected the significant sales
from our investment portfolio in the first half of 2003 in
connection with the termination and recapture of a number of

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our reinsurance agreements and to meet the
collateral requirements of certain of our ceding companies.
Although we have begun to move a greater portion of our invested
assets into longer duration investments, we plan to continue to
hold a relatively large portion of our assets in short duration
investments until interest rates rise or we conclude they are
not going to rise in the foreseeable future. However, we will
adjust our investment strategy based on developments in the
markets and our business and those adjustments may result in
realized gains or losses being recognized. We make decisions
concerning the sales of invested assets based on a variety of
market, business and other factors.


Net Change in the Fair Value of Embedded
Derivatives.Under SFAS 133, we
are required to bifurcate and separately account for the
embedded derivatives contained in one of our annuity reinsurance
contracts. For the three and six month periods ended
June 30, 2004, the net change in fair value of our embedded
derivatives was an unrealized gain of $518,786 and $1,126,174,
respectively. For the three and six month periods ended
June 30, 2003, the net change in fair value of our embedded
derivatives was an unrealized loss of $(1,717,537) and
unrealized gain of $12,037,322, respectively. At the end of the
second quarter of 2003, we had two annuity reinsurance
agreements with embedded derivatives that we were required to
bifurcate and account for separately. The unrealized loss in our
embedded derivatives during the three month period ended
June 30, 2003 largely reflects losses related to the
termination of one of our annuity reinsurance agreements in the
second quarter of 2003, partially offset by gains due to credit
spreads tightening in the sectors in which the underlying
investments are held. The primary reason for the unrealized gain
in the fair value of our embedded derivative for the six months
ended June 30, 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, which were
reversed upon termination of the reinsurance agreement.

Surrender Fees and Other
Revenue.Surrender fees and other
revenue for the three and six month periods ended June 30,
2004 were $1,510,568 and $2,585,500, respectively, as compared
with $3,002,778 and $4,393,025, respectively, for the three and
six month periods ended June 30, 2003. This income is
primarily derived from surrender fees related to our fixed
annuity agreement with Transamerica. The decrease in revenue is
mainly due to a smaller policyholder base resulting in a lower
absolute level of withdrawals and lower surrender rates. Lower
surrender fee rates charged to the policyholders upon
surrendering their policies also contributed to the decrease in
surrender fees.

Claims and Policy
Benefits.Claims and policy benefits
include both life and variable annuity benefits, including GMDB,
GMIB and, during the first half of 2003, enhanced earnings
benefits (EEB). Claims and policy benefits for the
three months ended June 30, 2004 and 2003 were $8,769,049
and $84,425,206, or 85% and 144% of net premiums, respectively.
For the six months ended June 30, 2004 and 2003, claims and
policy benefits were $19,013,707 and $159,514,646, or 77% and
133% of net premiums, respectively. The absolute decline in
claims and policy benefits compared to the same periods in 2003
was the result of the significant reduction of life insurance in
force from approximately $60.0 billion at June 30,
2003 to approximately $16.5 billion at June 30, 2004,
as well as the termination of our guaranteed minimum death
benefit agreement with Hartford Life in 2003 and the recapture
and termination of other annuity reinsurance agreements. While
the recaptures of life reinsurance agreements during 2003 have
reduced claims and policy benefits in 2004, they may increase
volatility in the level of claims and policy benefits as a
percentage of premiums in the future.

Interest Credited to Interest Sensitive
Products.Interest credited to
Interest sensitive products, which are liabilities we assume
under certain annuity reinsurance agreements, was $1,822,643 and
$5,351,892, respectively, for the three and six month periods
ended June 30, 2004, as compared with $4,217,542 and
$9,089,301, respectively, for the three and six month periods
ended June 30, 2003. Included in Interest credited to
interest sensitive products for the three and six month periods
ended June 30, 2004 are LMIG payments of approximately
$3,583,000 and $5,411,000, respectively, as compared to LMIG
payments of approximately $4,571,000 and $10,057,000,
respectively, for the three and six months ended June 30,
2003. The reduction in LMIG payments in 2004 was primarily due
to improving lapse experience and total returns on our annuity
reinsurance contract with Transamerica during 2003 and the first
quarter of 2004.

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Policy Acquisition Costs and Other Insurance
Expenses.Policy acquisition costs and
other insurance expenses, consisting primarily of allowances and
amortization and write downs of deferred policy acquisition
costs, for the three and six month periods ended June 30,
2004 were $4,654,527 and $12,835,524, respectively, as compared
with $44,631,210 and $97,132,274, respectively, for the three
and six month periods ended June 30, 2003. The decrease for
the three and six months ended June 30, 2004 reflects the
reduction in the size of our book of business during 2003. In
addition, policy acquisition costs and other insurance expenses
for the three and six month periods ended June 30, 2003
included the net write down of deferred acquisition costs
associated with the recapture and termination of contracts of
approximately $30,980,000 and $74,210,000, respectively.

Operating Expenses.Operating expenses for the three month period ended
June 30, 2004 were $7,268,575 or 46.7% of total revenue
(excluding the net change in fair value of embedded
derivatives), as compared with $5,922,358 or 8.2% of total
revenue (excluding the net change in fair value of embedded
derivatives) for the three month period ended June 30,
2003. Operating expenses for the six month period ended
June 30, 2004 were $10,035,937 or 24.5% of total revenue
(excluding the net change in fair value of embedded
derivatives), as compared to $12,268,488 or 8.5% of total
revenue (excluding the net change in fair value of embedded
derivatives) for the six month period ended June 30, 2003.
This proportionate increase in expenses for the three and six
months ended June 30, 2004 reflects the accrual of
$5,000,000 for the anticipated settlement of the purported
shareholder class action lawsuit plus increased professional and
consulting fees partially offset by reduced employee
compensation costs.

Segment Results

We separately track financial results of our life
and annuity operations in segments. Each segment is defined by
the 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, one of our
remaining modified coinsurance annuity reinsurance agreements
has features that constitute an embedded derivative that
requires bifurcation and separate accounting under
SFAS 133  Accounting for Derivative Instruments
and Hedging Activities. The change in the fair value of this
embedded derivative 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. All capital raising costs and
the anticipated costs of settling the purported shareholder
class action lawsuit have been allocated to the corporate
segment. Segment results are reported in Note 4 to our
unaudited condensed consolidated financial statements.

Life Segment.Our
life reinsurance segment is the reinsurance of ordinary life
insurance, primarily for mortality risks. Ordinary life
reinsurance generally is the reinsurance of individual term life
insurance policies, whole life insurance policies and joint and
survivor insurance policies on a 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 is our largest segment as
measured by revenues. Life segment income for the three months
ended June 30, 2004 was $734,366, as compared with segment
loss of $(39,338,329) for the three months ended June 30,
2003. Segment income for the six months ended June 30, 2004
was $908,946, as compared to segment loss of $(84,484,497) for
the six months ended June 30, 2003. In the three and six
months ended June 30, 2004, our largest life reinsurance
agreement produced approximately $725,000 and $1,239,000,
respectively, of income and our second largest life reinsurance
agreement generated $193,000 of income and $544,000 of losses,
respectively. Segment loss in the three and six months ended
June 30, 2003 reflected the costs of recapturing life
reinsurance agreements of approximately $28,310,000 and
$62,410,000, respectively, as well as reported claims under our
life reinsurance agreements that exceeded our expectations in
2003.

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Segment revenues for the three months ended
June 30, 2004 declined 82% to $10,515,041 from $57,507,429
in the second quarter of 2003. Segment revenues for the six
months ended June 30, 2004 declined 79% to $25,130,541 from
$117,677,416 for the first six months of 2003. These declines
reflect our reduced levels of life reinsurance in force as a
result of recaptures of life reinsurance agreements during 2003.
In addition, net investment income attributable to the life
segment for the first six months of 2004 decreased approximately
$1,300,000, as compared with the first six months of 2003,
primarily reflecting a reduction in invested assets allocated to
the life segment as a result of the terminations and recaptures
in 2003.

Segment policy benefits and expenses decreased
90% to $9,780,675 for the three months ended June 30, 2004,
as compared with $96,845,758 for the three months ended
June 30, 2003, which included costs of recaptures in 2003
of $28,310,000. Segment policy benefits and expenses for the six
months ended June 30, 2004 decreased 88% to $24,221,596, as
compared to $202,161,913 for the six months ended June 30,
2003, which included costs of recaptures in 2003 of $62,410,000.
The balance of the decline thus far in 2004 is attributable to
the significant reduction in life insurance in force compared to
the comparable periods during 2003 as well as reported claims
under our life reinsurance agreements that had exceeded our
expectations during 2003. While the recaptures of life
reinsurance agreements during 2003 have reduced claims and
policy benefits in the first half of 2004, they may increase
volatility in the level of claims and policy benefits as a
percentage of premiums in the future.

Annuity Segment.Our
annuity reinsurance segment is the reinsurance of general
account fixed deferred annuities and certain minimum guarantees
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 involve the tax-deferred accumulation of
interest on a single premium paid by the policyholder
(accumulation phase policies). Accumulation phase policies are
subject primarily to investment risk and persistency
(lapse) risk. We also reinsure certain guarantees
associated with variable annuity agreements, including GMDB and
GMIB. As of June 30, 2004, we only reinsured GMDB and GMIB
through a single reinsurance agreement with CIGNA.

Our annuity segment contains the majority of our
assets and exposes us to significant net income volatility from
three sources. First, under SFAS 133  Accounting
for Derivative Instruments and Hedging Activities; we must value
the embedded derivative associated with one 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, as a result of our adoption of AICPA
Statement of Position (SOP) 03-1, changes in our reserve
levels for our Transamerica annuity reinsurance agreement
resulting from underlying asset value changes will not be offset
with corresponding changes in our Funds withheld asset values,
which will cause volatility in net income. To the extent that
the minimum guarantee payable under the policies underlying the
Transamerica agreement exceeds the payment that would be
required as a result of the market value adjustment in those
policies, the reserves required under the SOP would be based
upon the minimum guarantee and the mismatch between liabilities
and assets is less significant. If we computed our reserves as
if the amounts payable to the policyholders under the
Transamerica contract exceeded the minimum guarantee amount, a
1% increase (decrease) in underlying asset values would cause a
$6 million charge (benefit) to net income. Third, our
Transamerica annuity reinsurance contract has exhibited
volatility in the past due to write downs of our deferred
acquisition cost balance which were based upon managements
estimates of future investment performance and lapse experience.
While we believe our current estimates are reasonable, they are
estimates of future events and may prove to be inaccurate. If
such assumptions turn out to be inaccurate, we could be required
to write off additional deferred acquisition costs, which would
have a significant adverse impact on our net income in future
periods. Our annuity reinsurance contract with Transamerica,
which represented 90% of our annuity segment assets at
June 30, 2004, is not expected to generate significant
income in the future.

Segment loss was $(1,213,612) for the three
months ended June 30, 2004, as compared with a loss of
$(33,063,939) for the three months ended June 30, 2003.
During the three months ended June 30, 2004, the
Transamerica annuity reinsurance agreement incurred a loss of
approximately $1,780,000, which was partially offset by
approximately $470,000 of income on our GMDB/ GMIB contract with
CIGNA. The net loss on the

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Transamerica agreement is primarily the result of
LMIG payments of approximately $3.6 million, amortization
of deferred acquisition costs of approximately $2.8 million
and reduced investment income from the agreement, partially
offset by a contingency reserve release of $5.0 million as
a result of the settlement of our dispute with Transamerica. The
loss for the three months ended June 30, 2003 included a
$20,400,000 charge related to the recapture of our largest GMDB
reinsurance contract.


For the six months ended June 30, 2004,
segment income before the cumulative effect of a change in
accounting principle was $120,002, as compared to a loss of
$(40,934,415) for the six months ended June 30, 2003.
Income for the six months ended June 30, 2004 reflects
approximately $981,000 of income produced on our GMDB/ GMIB
contract with CIGNA, offset by an $849,000 loss incurred on our
annuity agreement with Transamerica. As a result of the adoption
of the SOP on January 1, 2004, the amount of reserves for
future policy benefits for our GMDB/ GMIB reinsurance agreement
was reduced by $1,878,760, favorably impacting net income. The
impact of the adoption of the SOP on our accounting for the
Transamerica annuity reinsurance agreement was a cumulative
charge of $2,244,720 as a result of an increase in Interest
sensitive contracts liability of $38,398,730 partially offset by
an increase in Deferred policy acquisition costs of $36,154,010.
The cumulative effect of a change in accounting principle was a
net charge to income of $365,960, resulting in net segment loss
of $(245,958) for the six months ended June 30, 2004.

The loss for the six months ended June 30,
2003 reflected a net loss of $3,620,000 related the termination
of two additional annuity reinsurance agreements in the first
quarter of 2003. We also incurred a loss of approximately
$1,000,000 in the first quarter of 2003 on one of our annuity
reinsurance agreements as the result of an experience refund
adjustment reflecting a change in mortality assumptions by the
cedent under the contract.

Total revenue for our annuity segment declined
36% to $5,002,269 for the three months ended June 30, 2004,
as compared with $7,766,799 for the three months ended
June 30, 2003. Total revenue for our annuity segment
declined 53% to $14,922,344 for the six months ended
June 30, 2004, as compared with $31,869,930 for the six
months ended June 30, 2003. This decline is due to a
decrease in embedded derivative gains of $10,911,148 for the six
months ended June 30, 2004 as compared to the six months
ended June 30, 2003, as well as reduced surrender fee
revenue. Surrender fees from our Transamerica annuity
reinsurance contract decreased by approximately $1,492,210 and
$1,807,525 for the three and six months ended June 30, 2004
compared with the comparable prior periods of 2003.

Policy benefits and expenses for the annuity
segment declined 85% to $6,215,881 for the three months ended
June 30, 2004, as compared with $40,830,738 for the three
months ended June 30, 2003. These expenses declined 80% to
$14,802,342 for the six months ended June 30, 2004, as
compared with $72,804,345 for the six months ended June 30,
2003. The primary components of these expenses are interest
credited to policyholders, LMIG payments, payments and reserve
changes for minimum guarantees associated with variable annuity
contracts and write downs and amortization of deferred
acquisition costs. The decline in policy benefits and expenses
is primarily due the termination of several of our annuity
reinsurance agreements during 2003. In addition, as a result of
a smaller base of policyholders, improved investment returns and
lower lapse rates on the Transamerica annuity reinsurance
agreement, LMIG payments under the contract declined from
approximately $10,057,000 for the first half of 2003 to
approximately $5,411,000 for the first half of 2004. Policy
benefits and expenses for the three and six months ended
June 30, 2003 also included a charge of $20,400,000 for the
recapture of our then largest GMDB contract.

Corporate Segment.The corporate segment includes all of our capital gains and
losses, investment income on undeployed invested assets, capital
raising costs, costs relating to the anticipated settlement of
the purported shareholder class action lawsuit and a
proportionate share of operating expenses based upon how
stockholders equity is deployed to the life and annuity
segments. As a result, the corporate segment, while small
relative to our total company, will likely have volatile results.

Segment losses of $(5,951,132) and $(6,258,971)
were incurred for the three and six months ended June 30,
2004, as compared with income of $3,685,827 and $4,227,655 for
the three and six months ended June 30, 2003. Revenues
declined by 89% to $567,106 for the three month period ended
June 30, 2004, as compared with $5,205,648 for the three
month period ended June 30, 2003, and declined by 73% to
$1,954,152

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for the six month period ended June 30,
2004, as compared with $7,266,106 for the six month period ended
June 30, 2003. The decline in segment revenue is primarily
due to net realized investment (losses) of $(137,885) and gains
of $541,040 in the three and six months ended June 30,
2004, respectively, as compared to net realized investment gains
$4,896,176 and $6,560,044 for the three and six months ended
June 30, 2003.


Segment benefits and expenses increased
significantly to $6,518,238 for the three months ended
June 30, 2004, as compared with $1,519,821 for the three
months ended June 30, 2003. Segment benefits and expenses
increased to $8,213,123 for the six months ended June 30,
2004, as compared with $3,038,452 for the six months ended
June 30, 2003. These increases reflect the $5,000,000
accrual for the anticipated settlement of the purported
shareholder class action lawsuit, as well as an increase in the
percentage of operating expenses allocated to the corporate
segment in the first half of 2004 due to a greater proportionate
share of stockholders equity allocated to the corporate
segment from downsizing our life and annuity segments during
2003.

Financial Condition

Investments

At June 30, 2004 and December 31, 2003,
the majority of our invested assets, including cash and cash
equivalents, were posted as collateral to secure our obligations
under reinsurance agreements and letter of credit facilities or
were required to maintain the statutory capital and surplus
requirements of our U.S. operating subsidiary. At
June 30, 2004, our invested assets, including cash and cash
equivalents, had an aggregate fair value of $166,893,345, as
compared with an aggregate fair value of $197,880,755 at
December 31, 2003. The decline in our invested assets
during the first six months of 2004 was due to a
$22,100,000 million payment we made in connection with the
settlement of the recapture of our life reinsurance agreement
with Metropolitan Life Insurance Companies and a $12,600,000
payment we made to Transamerica in February 2004. At
June 30, 2004, unrealized losses totaled $768,803, as
compared to unrealized gains of $1,840,849 at December 31,
2003. At June 30, 2004 and December 31, 2003, the
weighted average duration of the fixed income securities
included in our invested assets was 3.0 and 3.9 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 and limit
investment in fixed income securities that are non-rated or
below investment grade at the time of purchase to an aggregate
of $3,000,000. In the first half of 2004, we invested
approximately $1 million in securities that were non-rated
at the time of their purchase. While any investment carries some
risk, the risks associated with non-rated or lower-rated
securities generally are greater than the risks associated with
investment grade securities. A fixed income security rated
A by Standard & Poors is considered
to be somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than higher
rated issuers; however, the issuers capacity to meet its
financial commitment on the security is still considered to be
strong. We currently do not invest in any fixed income
securities in emerging markets.

At both June 30, 2004 and December 31,
2003, none of our fixed income securities consisted of below
investment-grade securities. There were approximately
$1 million of non-rated securities held at June 30,
2004. The fair value of below investment-grade and non-rated
investments varies depending on economic and market conditions,
the level of interest rates and the perceived creditworthiness
of the issuer. As noted above, our investment guidelines require
our overall fixed income portfolio to maintain a minimum
weighted average credit quality of A and limit the
amount of our investments in fixed income securities that are
non-rated or below investment grade at the time of purchase. We
monitor the creditworthiness of the portfolio as a whole, and
when the fair market value of a security declines for reasons
other than changes in interest rates or other perceived
temporary conditions, the security is written down to its fair
value. At June 30, 2004, there were no impaired securities
in our portfolio.

30



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At June 30, 2004, mortgage-backed securities
represented approximately 4% of our invested assets, including
cash and cash equivalents, as compared with approximately 11% at
December 31, 2003. 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 June 30, 2004 and
December 31, 2003.

At June 30, 2004, approximately 29% of our
mortgage-backed investment portfolio consisted of securities
with planned repayment schedules, as compared with 7% at
December 31, 2003. These investments are designed to
amortize in a more predictable manner by shifting the primary
risk of prepayment of the underlying collateral to investors in
other tranches of the CMO.

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

Investment Results

|                                                             |  |                        |         |                                  |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------- | -------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                             |  |                        |         |                                  |  |      |         |     
|                                                             |  | Six Months Ended       |         |                                 
|                                                             |  | June 30,               |         | Twelve Months Ended December 31,
|                                                             |  |                        |         |                                 
|                                                             |  | 2004                   |         | 2003                             |  | 2003 |         | 2002 |  | 2001
|                                                             |  |                        |         |                                  |  |      |         |      |  |     
|                                                             |  |                       
|                                                             |  | (Dollars in thousands)
|Total invested assets, including cash and
    equivalents(1) |  | $                      | 166,893 |                                  |  | $    | 224,858 |      |  | $    | 197,881 |   |  | $ | 306,346 |   |  | $ | 423,780 |  
|Investment income, net of related expenses                   |  | $                      | 2,951   |                                  |  | $    | 3,409   |      |  | $    | 5,924   |   |  | $ | 25,931  |   |  | $ | 20,165  |  
|Effective annualized yield rate(2)                           |  |                        | 3.24    | %                                |  |      | 2.46    | %    |  |      | 2.53    | % |  |   | 5.28    | % |  |   | 5.74    | %
|Realized investment gains                                    |  | $                      | 541     |                                  |  | $    | 6,560   |      |  | $    | 6,407   |   |  | $ | 19,749  |   |  | $ | 1,230   |  



---



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

Our remaining two annuity reinsurance agreements
cover individual single premium deferred annuity policies and
are structured as modified coinsurance arrangements. In this
type of arrangement, the ceding company invests the premiums
received from policyholders or engages an investment manager to
do so, credits interest to policyholders accounts,
processes surrenders and engages in other administrative
activities. The ceding company is also required to carry
reserves for these annuity policies based upon certain statutory
rules in the state in which the ceding company is domiciled. The
underlying investments purchased with the premiums received from
policyholders support these statutory reserves.

Historically, when a ceding company enters into
an annuity reinsurance contract structured as a modified
coinsurance 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 arrangements are on a
quota share basis, so the portion that is ceded to us is a fixed
percentage of the liabilities arising from the underlying
policies. Our share of the ceding companys liability is
included on our balance sheet as Interest sensitive
contracts liabilities. However, unlike other reinsurance
arrangements in which we receive cash or investments as
consideration for assuming a portion of the ceding
companys liability, under these types of arrangements, we
have established a receivable called Funds withheld at
interest that is equal to our fixed portion of the
statutory reserves carried by the ceding company. We are
allocated our share of the

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investment income and realized capital gains and
losses that arise from the securities in the investment
portfolio underlying the statutory reserve.


At June 30, 2004, our Funds withheld at
interest receivable related to our annuity reinsurance contracts
had a carrying value of approximately $612 million. Our
agreement with Transamerica accounted for approximately 90% of
our Funds withheld at interest receivable at June 30, 2004,
as compared to 91% at December 31, 2003. At June 30,
2004, the assets held and managed by our ceding companies under
our annuity reinsurance contracts had a combined market value of
$641 million and were invested in convertible bonds and
fixed income securities having a weighted average credit quality
of A- and a weighted average duration of
3.9 years. At December 31, 2003, these assets had a
weighted average credit quality of A- and a weighted
average duration of 5.9 years. In addition, at
June 30, 2004, approximately 4.7% of such assets were
invested in below investment grade securities, as compared with
5.5% of such assets at December 31, 2003.

The average yield rates earned on the assets held
and managed by our ceding companies was approximately 1.74% and
3.40% for the three and six months ended June 30, 2004, as
compared to approximately 1.65% and 2.13% for the three and six
month periods ended June 30, 2003. The average yield rate
earned on the invested premiums funding our annuity obligations
to Transamerica was approximately 1.32% and 3.21% for the three
and six months ended June 30, 2004. The average yield rate
earned on the invested premiums funding our annuity obligations
for the other annuity reinsurance agreement was approximately
5.16% and 5.00% for the three and six months ended June 30,
2004. For purposes of calculating the average yield rate earned
on assets held and managed by our ceding companies, we include
our share of the investment income and net realized capital
gains and losses as reported to us through our settlements with
our ceding companies, although we recently resolved a dispute
with Transamerica regarding the method by which realized gains
and losses are settled under our reinsurance agreement.

Transamerica

Our annuity reinsurance contract with
Transamerica is our largest annuity reinsurance contract and, as
of June 30, 2004, approximately $556 million, or 90%,
of our Funds withheld at interest receivable; approximately
$580 million, or 90%, of our Interest sensitive contracts
liability; and approximately $63 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 during 2003, especially the termination of our
annuity reinsurance agreement with Ohio National, we expect that
the assets and liabilities associated with the Transamerica
contract will continue to represent a significant portion of our
total assets and liabilities in future periods. While we expect
that our adoption of the AICPA SOP 03-1 on January 1,
2004 will increase the volatility of our income for the contract
on a quarterly basis, we do not expect the Transamerica contract
to generate significant income over the long term. The amount of
deferred acquisition costs we record as an asset on our balance
sheet related to the Transamerica contract is based on a series
of assumptions related to the investment performance of the
assets supporting our liabilities under the contract, as well as
future lapse rates for the underlying policies. These assumed
lapse rates include assumptions regarding future full
surrenders, partial withdrawals, annuitizations and policyholder
deaths. While we believe the investment and lapse estimates to
be reasonable, they are estimates of future events and we cannot
assure you that they will prove to be accurate. If such
assumptions turn out to be inaccurate, we could be required to
write off additional deferred acquisition costs, which would
have a significant adverse impact on our net income in future
periods.

At June 30, 2004, the assets funding the
policyholder obligations under the Transamerica agreement had an
average credit quality of A- and an average duration
of 3.9 years, as compared with an average credit quality of
A- and an average duration of 6.1 years at
December 31, 2003. The contract is a retrocessional
arrangement covering VisionMark fixed annuity products issued by
Indianapolis Life, the primary insurance company. The assets
underlying the Transamerica contract are managed by AmerUS
Capital Management, the investment manager appointed by
Indianapolis Life. At June 30, 2004 and December 31,
2003, AmerUS Capital Management had invested approximately 61%
and 64%, respectively 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, government 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

32



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##### Table of Contents



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 six months ended June 30, 2004 and
June 30, 2003, we paid approximately $5,411,000 and
$10,057,000, 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.

According to data provided to us by Transamerica,
at June 30, 2004, the assets held by Indianapolis Life 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          |                                                             | $             | 346,929,421 |              |  | $            | 353,628,189 |             |  |  | 61.2 | %    
|Investment grade U.S. corporate bonds       |                                                             |               | 114,303,762 |              |  |              | 114,196,911 |             |  |  | 19.8 | %    
|Mortgage-backed securities                  |                                                             |               | 33,573,210  |              |  |              | 32,908,179  |             |  |  | 5.7  | %    
|Below investment grade U.S. corporate bonds |                                                             |               | 28,634,817  |              |  |              | 28,741,770  |             |  |  | 5.0  | %    
|U.S. Government bonds                       |                                                             |               | 48,407,711  |              |  |              | 47,753,641  |             |  |  | 8.3  | %    
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                                            | Total invested assets                                       |               | $           | 571,848,921  |  |              | $           | 577,228,690 |  |  |      | 100.0 | %
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      
|Accrued investment income                   |                                                             |               |             |              |  |              | 3,966,718   |             |  |  |      |      
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                                            | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 581,195,408 |  |  |      |       |  
|                                            |                                                             |               |             |              |  |              |             |             |  |  |      |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are statutory book values reported to
    us by the ceding company for the underlying investments and
    represent the value of our Funds withheld at interest
    receivable. We present statutory book values in the above table
    because that is the basis upon which we settle with
    Transamerica. We believe this presents a better understanding of
    potential future returns and cash flows under the contract.

33



---



##### Table of Contents



According to data provided to us by Transamerica,
at June 30, 2004, the credit ratings of the assets
(excluding accrued investment income) held by Indianapolis Life
and managed by AmerUS Capital were approximately as follows:

|                          |                                                             |               |             |              |  |              |             |             |  |  |      |       |  
|------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---- | ----- | -
|                          |                                                             |               |             |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |             | Market Value |  | Market Value
|                          |                                                             |               |             |              |  |             
|AAA                       |                                                             | $             | 71,433,921  |              |  | $            | 69,684,497  |             |  |  | 12.1 | %    
|AA                        |                                                             |               | 54,472,328  |              |  |              | 54,473,408  |             |  |  | 9.4  | %    
|A                         |                                                             |               | 134,456,390 |              |  |              | 133,021,501 |             |  |  | 23.0 | %    
|BBB                       |                                                             |               | 282,851,465 |              |  |              | 291,307,513 |             |  |  | 50.5 | %    
|BB and below              |                                                             |               | 28,634,817  |              |  |              | 28,741,770  |             |  |  | 5.0  | %    
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                          | Total invested assets                                       |               | $           | 571,848,921  |  |              | $           | 577,228,690 |  |  |      | 100.0 | %
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|Accrued investment income |                                                             |               |             |              |  |              | 3,966,718   |             |  |  |      |      
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      
|                          | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 581,195,408 |  |  |      |       |  
|                          |                                                             |               |             |              |  |              |             |             |  |  |      |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors,
    or, if unrated by Standard & Poors, based on an
    equivalent rating assigned by the National Association of
    Insurance Commissioners.                                                                                                                                                                                                                                                           
|   
|(2) | Book values are statutory book values reported to
    us by the ceding company for the underlying investments and
    represent the value of our Funds withheld at interest
    receivable. We present statutory book values in the above table
    because that is the basis upon which we settle with
    Transamerica. We believe this presents a better understanding of
    potential future returns and cash flows under the contract.

According to data provided to us by Transamerica,
at June 30, 2004, the maturity distribution of the assets
held by Indianapolis Life and managed by AmerUS Capital was
approximately as follows:

|                       |                 |               |             |              |  |            |             |             |  |  |      |       |  
|---------------------- | --------------- | ------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ---- | ----- | -
|                       |                 |               |             |              |  | % of Total
|Maturity               |                 | Book Value(1) |             | Market Value |  | Book Value
|                       |                 |               |             |              |  |           
|Within one year        |                 | $             | 30,259,026  |              |  | $          | 30,422,541  |             |  |  | 5.3  | %    
|From one to five years |                 |               | 93,733,447  |              |  |            | 95,601,604  |             |  |  | 16.6 | %    
|From six to ten years  |                 |               | 104,036,754 |              |  |            | 102,464,138 |             |  |  | 17.7 | %    
|More than ten years    |                 |               | 343,819,694 |              |  |            | 348,740,407 |             |  |  | 60.4 | %    
|                       |                 |               |             |              |  |            |             |             |  |  |      |      
|                       | Total all years |               | $           | 571,848,921  |  |            | $           | 577,228,690 |  |  |      | 100.0 | %
|                       |                 |               |             |              |  |            |             |             |  |  |      |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are statutory book values reported to
    us by the ceding company for the underlying investments and
    represent the value of our Funds withheld at interest
    receivable. We present statutory book values in the above table
    because that is the basis upon which we settle with
    Transamerica. We believe this presents a better understanding of
    potential future returns and cash flows under the contract.

Other Annuity Reinsurance Contract

At June 30, 2004, we had one other annuity
reinsurance agreement. At June 30, 2004, the assets funding
the policyholder obligations under this agreement had an average
credit quality of A and an average duration of
approximately 4.11 years, as compared with an average
credit quality of A and an average duration of
approximately 3.95 years at December 31, 2003.

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##### Table of Contents



According to information provided by the ceding
company under this annuity reinsurance contract, at
June 30, 2004, the assets held and managed by this ceding
company were comprised of the following:

|                                      |                                                             |               |            |              |  |              |            |            |  |  |      |       |  
|------------------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ---------- | ---------- |  |  | ---- | ----- | -
|                                      |                                                             |               |            |              |  | % of Total  
|Type of Security                      |                                                             | Book Value(1) |            | Market Value |  | Market Value
|                                      |                                                             |               |            |              |  |             
|Investment grade U.S. corporate bonds |                                                             | $             | 52,344,182 |              |  | $            | 54,122,135 |            |  |  | 85.7 | %    
|Mortgage-backed securities            |                                                             |               | 6,144,752  |              |  |              | 6,527,172  |            |  |  | 10.3 | %    
|Government bonds                      |                                                             |               | 1,190,642  |              |  |              | 1,190,642  |            |  |  | 1.9  | %    
|Below investment grade bonds          |                                                             |               | 1,372,174  |              |  |              | 1,341,474  |            |  |  | 2.1  | %    
|                                      |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                                      | Total invested assets                                       |               | $          | 61,051,750   |  |              | $          | 63,181,423 |  |  |      | 100.0 | %
|                                      |                                                             |               |            |              |  |              |            |            |  |  |      |      
|Accrued investment income             |                                                             |               |            |              |  |              | 915,677    |            |  |  |      |      
|                                      |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                                      | Total market value, including accrued investment
    income |               |            |              |  |              | $          | 64,097,100 |  |  |      |       |  
|                                      |                                                             |               |            |              |  |              |            |            |  |  |      |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are statutory book values reported to
    us by the ceding company for the underlying investments and
    represent the value of our Funds withheld at interest
    receivable. We present statutory book values in the above table
    because that is the basis upon which we settle with the ceding
    company under the contract. We believe this presents a better
    understanding of potential future returns and cash flows under
    the contract.

According to information provided by the ceding
company under this annuity reinsurance agreement, at
June 30, 2004, the credit ratings of the assets (excluding
accrued investment income) held and managed by the ceding
company were approximately as follows:

|                          |                                                             |               |            |              |  |              |            |            |  |  |      |       |  
|------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ---------- | ---------- |  |  | ---- | ----- | -
|                          |                                                             |               |            |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |            | Market Value |  | Market Value
|                          |                                                             |               |            |              |  |             
|AAA                       |                                                             | $             | 3,308,302  |              |  | $            | 3,246,234  |            |  |  | 5.1  | %    
|AA                        |                                                             |               | 4,867,348  |              |  |              | 4,900,050  |            |  |  | 7.8  | %    
|A                         |                                                             |               | 19,704,318 |              |  |              | 20,608,645 |            |  |  | 32.6 | %    
|BBB                       |                                                             |               | 31,799,608 |              |  |              | 33,085,020 |            |  |  | 52.4 | %    
|BB and below              |                                                             |               | 1,372,174  |              |  |              | 1,341,474  |            |  |  | 2.1  | %    
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                          | Total invested assets                                       |               | $          | 61,051,750   |  |              | $          | 63,181,423 |  |  |      | 100.0 | %
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      
|Accrued investment income |                                                             |               |            |              |  |              | 915,677    |            |  |  |      |      
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      
|                          | Total market value, including accrued investment
    income |               |            |              |  |              | $          | 64,097,100 |  |  |      |       |  
|                          |                                                             |               |            |              |  |              |            |            |  |  |      |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As assigned by Standard & Poors,
    or, if unrated by Standard & Poors, based on an
    equivalent rating assigned by the National Association of
    Insurance Commissioners.                                                                                                                                                                                                                                                                                        
|   
|(2) | Book values are statutory book values reported to
    us by the ceding company for the underlying investments and
    represent the value of our Funds withheld at interest
    receivable. We present statutory book values in the above table
    because that is the basis upon which we settle with the ceding
    company under the contract. We believe this presents a better
    understanding of potential future returns and cash flows under
    the contract.

35



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##### Table of Contents



According to information provided by the ceding
company under this annuity reinsurance agreement, at
June 30, 2004, the maturity distribution of the assets held
and managed by the ceding company was approximately as follows:

|                       |                 |               |            |              |  |            |            |            |  |  |      |       |  
|---------------------- | --------------- | ------------- | ---------- | ------------ |  | ---------- | ---------- | ---------- |  |  | ---- | ----- | -
|                       |                 |               |            |              |  | % of Total
|Maturity               |                 | Book Value(1) |            | Market Value |  | Book Value
|                       |                 |               |            |              |  |           
|Within one year        |                 | $             | 7,513,589  |              |  | $          | 7,629,049  |            |  |  | 12.1 | %    
|From one to five years |                 |               | 26,342,945 |              |  |            | 27,898,655 |            |  |  | 44.1 | %    
|From six to ten years  |                 |               | 18,457,615 |              |  |            | 18,772,627 |            |  |  | 29.7 | %    
|More than ten years    |                 |               | 8,737,601  |              |  |            | 8,881,092  |            |  |  | 14.1 | %    
|                       |                 |               |            |              |  |            |            |            |  |  |      |      
|                       | Total all years |               | $          | 61,051,750   |  |            | $          | 63,181,423 |  |  |      | 100.0 | %
|                       |                 |               |            |              |  |            |            |            |  |  |      |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those statutory book values
    reported to us by the ceding company for the underlying
    investments and represent the value of our Funds withheld at
    interest receivable. We present statutory book values in the
    above table because that is the basis upon which we settle with
    the ceding company under the contract. We believe this presents
    a better understanding of potential future returns and cash
    flows under the contract.

Liquidity and Capital Resources

Our liquidity and capital resources are a measure
of our overall financial strength and our ability to generate
cash flows from our operations to meet our operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold and cash and short-term investments. Our principal
obligations and uses of the funds are to post collateral for the
statutory reserves ceded to us by U.S. based insurers and
reinsurers, the payment of policy benefits, acquisition and
operating expenses and the purchase of investments. In addition,
under the current terms of the agreement in principle recently
reached to settle a purported shareholder class action lawsuit
pending against us and certain of our current and former
directors and officers, our share of the settlement will be
$2,500,000 in cash and an additional $2,500,000 payable, at our
option, in cash or common shares.

Under the terms of our reinsurance agreements, we
are required to provide letters of credit or fund trust accounts
with liquid assets to satisfy the collateral requirements of our
ceding companies. At June 30, 2004 and December 31,
2003, letters of credit totaling $47,000,000 and $54,000,000,
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
June 30, 2004 and December 31, 2003, cash and
investments of approximately $58,000,000 and $56,000,000,
respectively, were pledged as collateral for letters of credit.
At June 30, 2004 and December 31, 2003, cash and
investments of $29,000,000 and $96,000,000, respectively, were
held in trust for the benefit of certain of our ceding insurance
companies to provide security and to meet regulatory
requirements.

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 also has made
capital infusions into the U.S. operating subsidiary to
allow the U.S. company to maintain targeted statutory
surplus levels and to provide cash and securities as collateral
for the reinsurance cessions the U.S. operating subsidiary
makes to the Bermuda operating company. At June 30, 2004,
approximately $54,000,000 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.

As of June 30, 2004, we did not meet the
collateral requirements asserted by CIGNA. As of June 30,
2004, CIGNA was seeking $49 million of collateral in
addition to the $11 million of collateral we had

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previously provided in the form of a fully
collateralized letter of credit. On July 28, 2004, CIGNA
made an $11 million draw on this letter of credit. We do
not agree that the aggregate $60 million collateral
requirement currently asserted by CIGNA is required to be posted
and have not posted any additional collateral for this
agreement. If CIGNAs asserted collateral requirement is
valid, we do not have sufficient available cash and investments
to satisfy CIGNAs request. We are attempting to
restructure the reinsurance agreement or otherwise meet or
reduce CIGNAs request for collateral. If these
negotiations are unsuccessful, CIGNA could initiate arbitration
or litigation proceedings against us. The specific relief sought
and the outcome of any proceedings that CIGNA could initiate
cannot be determined at this time. If we do not prevail in any
such arbitration or litigation proceedings, it would have a
material adverse effect on our financial condition, and we may
be required to liquidate our operations.


The New York Stock Exchange suspended trading in
our common shares prior to the market opening on Friday
July 30, 2004, and has applied to the Securities and
Exchange Commission to delist our common shares. The NYSEs
action was taken in view of the fact we had again fallen below
the NYSEs continued listing standards, as the average
closing price of our common shares had been less than $1.00 over
a consecutive 30-trading-day period. We were previously below
this standard from April through October 2003. Our common shares
are now being traded over the counter under the symbol ANNRF.pk.
If we are unable to list our common shares for trading on any
other national exchange or automated quotation system, it will
adversely affect the public market for and liquidity of our
common shares, and may adversely affect any capital raising or
other strategic transactions we may choose to pursue in the
future.

As of June 30, 2004, we were involved in
arbitration proceedings with Transamerica. The arbitration
related to Transamericas allegation that, as of
October 31, 2003, we owed $17.6 million under our
annuity reinsurance agreement with them. On February 3,
2004, we paid Transamerica $12.6 million, representing the
net amount we believed was due under the reinsurance agreement
as of October 31, 2003 after deducting $5.0 million
for investment related expenses that we believe was owed to us
by Transamerica. Transamerica pursued arbitration with us,
asserting that the $5.0 million offset was not justified
and that we owed Transamerica the full $17.6 million plus
interest. In addition, through October 31, 2003, we had
received monthly settlement reports from Transamerica on a basis
that we believe conformed with the reinsurance agreement between
us. For the period subsequent to October 31, 2003, we had
only received settlement reports from Transamerica prepared on a
basis that Transamerica alleged was appropriate, but which we
believed was not consistent with the reinsurance agreement. The
principal difference related to how realized gains and losses
related to the invested assets supporting the annuity
obligations were settled between us. Transamerica had not
provided us with realized gain and loss information on the basis
we believed was appropriate. As a result, in preparing our
financial statements, we adjusted the amounts reported to us by
Transamerica in the monthly settlement reports for periods
subsequent to October 31, 2003 to reflect what we believed
was the appropriate treatment of realized capital gains and
losses.

On July 2, 2004, we and Transamerica agreed
to settle all disputes relating to the arbitration proceedings
between us. Pursuant to the terms of the settlement agreement,
Transamerica agreed to calculate monthly settlements under our
reinsurance agreement in a manner we believe is consistent with
the original terms of the agreement. Transamerica also agreed to
our $5.0 million offset of amounts owed to Transamerica at
October 31, 2003. On July 8, 2004, we paid
Transamerica approximately $8.7 million, representing
amounts due under the reinsurance agreement as of April 30,
2004. Although we and Transamerica have agreed on a method for
computing future monthly settlements under the reinsurance
agreement, the potential for significant monthly settlement
payments from us to Transamerica in future periods remains. The
amount due from us under this agreement for the month ended
May 31, 2004 is approximately $2.6 million.

We continue to experience reduced cash flows due
to the increased volatility of our annuity reinsurance
agreements, lower cash flow levels resulting from our remaining
reinsurance agreements and operating expenses, including
increased professional and consulting fees relating to, among
other things, pending legal proceedings that we are a party to,
our analysis and pursuit of possible strategic alternatives that
may be available to us and our continuing current and periodic
reporting requirements under United States securities laws. As
the result of the recapture or termination of many of our
reinsurance agreements, our insurance in force during 2004 has
decreased significantly as compared to prior periods. Our
investment income has also

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declined during 2004, reflecting lower overall
levels of invested assets in our general account, as well as a
decreased asset base underlying our annuity reinsurance
agreements. Consequently, our operating expenses as a percentage
of our total revenue (excluding the net change in fair value of
embedded derivatives) have also been increasing. If we are
unable to generate sufficient revenue from our operations to
satisfy our obligations, it would have a material adverse effect
on our financial condition, and we may be required to liquidate
our operations.


For the six months ended June 30, 2004, we
utilized $28,918,798 of our cash and equivalents to fund
operating activities, as compared with using cash and
equivalents of $86,149,537 from our operating activities for the
six months ended June 30, 2003. The utilization of our cash
and equivalents during the first six months of 2004 primarily
reflects a $22,100,000 payment of unearned premiums associated
with the recapture of our life reinsurance agreement with the
Metropolitan Life Insurance Companies and the $12,600,000
payment to Transamerica.

At June 30, 2004, our total capitalization,
which consisted entirely of equity, was $127,064,506. During
2001, our Board of Directors approved a share repurchase program
of up to an aggregate of $25,000,000 of our common shares from
time to time in the future if market conditions so dictate. As
of June 30, 2004, no shares had been repurchased under this
program.

We have no material commitments for capital
expenditures as of June 30, 2004, but as noted above, we
would not be able to meet the collateral requirements asserted
by CIGNA if they were deemed valid. We plan to continue to
receive premiums and pay claims under our remaining reinsurance
treaties; however, we are not currently underwriting any new
treaties or accepting any new business from our existing
treaties. We are currently exploring whether we can, should or
will begin selling new insurance and reinsurance products in the
future, but we cannot assure you that we will be able to
successfully develop, underwrite or market any products in the
future.

There can be no assurance that we will be able to
improve our operations and liquidity. If we are unable to
reposition our investment portfolio to achieve a substantially
higher yield within our investment guidelines, obtain approval
from the court and other parties of the agreement in principle
reached in July 2004 to settle the pending purported shareholder
class action lawsuit, experience improvement in the performance
of our reinsurance agreement with Transamerica and restructure
our reinsurance agreement with CIGNA, we may not be able to meet
our future obligations. Our failure to achieve any one of the
foregoing items could have a material adverse effect on our
financial condition and results of operations.

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. Under the Act, neither we nor Annuity and
Life Reassurance may declare or pay a dividend, or make a
distribution out of contributed surplus, if there are reasonable
grounds for believing that: (i) the relevant company is, or
would be after the payment, unable to pay its liabilities as
they become due; or (ii) the realizable value of the
relevant companys assets would thereby be less than the
aggregate of its liabilities and its issued share capital and
share premium accounts. As of and since December 31, 2002,
we have not declared a dividend to shareholders and we do not
expect to declare or pay dividends to shareholders in the near
future. The declaration and payment of future dividends to
holders of our common shares will be at the discretion of our
Board of Directors and will depend upon our 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.

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

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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; the outcome of pending legal
proceedings involving us; our ability to obtain adequate
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 list our common shares
for trading on a national exchange or automated quotation
system; changes in mortality, morbidity and claims experience;
our ability to make accurate estimates and assumptions regarding
future mortality, persistency, lapses, expenses and investment
performance based upon historical results and information
provided to us by our 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 consider the risks and
uncertainties discussed in other documents we have filed with
the Securities and Exchange Commission, and in particular, our
Annual Report on Form 10-K for the year ended
December 31, 2003, as amended. 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

Except as noted below with respect to the impact
of our adoption of AICPA SOP 03-1 effective January 1,
2004, there have been no material changes since
December 31, 2003 with respect to our market risk exposure
described in our Annual Report on Form 10-K for the year
ended December 31, 2003, as amended. 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, 2003, as amended.

On January 1, 2004, we adopted AICPA
Statement of Position (SOP) 03-1. One requirement of the
SOP is for us to record the largest contractually determinable
amount payable to the policyholder of each underlying policy
comprising our Interest sensitive contract liabilities as our
reserve for those policies, rather than simply recording
reserves based solely on the policyholder account values. The
computation of amounts due policyholders under our reinsurance
contract with Transamerica includes a market value adjustment
and, to the extent the market value adjustment would require
payments to policyholders in excess of the minimum guarantee
amount under the policies, the reserve required under the SOP is
directly influenced by changes in the value of the underlying
assets. The SOP modified the accounting for liabilities recorded
in connection with our reinsurance contracts, but did not modify
the accounting for the assets supporting the liabilities. As a
result, changes in our reserve levels resulting from underlying
asset value changes will not be offset with corresponding
changes in our Funds withheld asset values. This mismatch will
cause volatility in net income on a quarterly basis, but we
believe it will have no effect on the underlying profitability
of the Transamerica contract over the long term. To the extent
that the minimum guarantee payable under the policy exceeds the
payment that would be required as a result of the market value
adjustment, the reserves required under the SOP would be based
upon the minimum guarantee and the mismatch between liabilities
and assets is less significant. If we computed our reserves as
if the amounts payable to the policyholders under the
Transamerica contract exceeded the minimum guarantee amount, a
1% increase (decrease) in underlying asset values would cause a
$6 million charge (benefit) to net income.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

In a letter dated March 24, 2004, KPMG in
Bermuda, the Companys independent auditor for the year
ended December 31, 2003, advised the Companys
management and the Audit Committee of the Companys

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Board of Directors of a reportable
condition under standards established by the American
Institute of Certified Public Accountants. The reportable
condition related primarily to the size of the Companys
financial department and the complexity of the accounting
process for the Companys annuity reinsurance contract with
Transamerica. KPMG recommended that the Company simplify the
accounting process for the contract and strengthen its review
procedures to include quarterly reconciliations of a single set
of accounting records to settlement reports provided by
Transamerica and independent reviews of accounting entries
relating to the contract.


As of the end of the period covered by this
Form 10-Q, the Companys management, including its
Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of the effectiveness of the Companys
disclosure controls and procedures. Included in this evaluation
were considerations of the points raised in KPMGs letter
and the Companys response thereto. In particular, the
Company has instituted a process requiring formal review of each
entry in its general ledger relating to its Transamerica
contract by both its Chief Executive Officer and Chief Financial
Officer, and has modified its procedures to better document the
completion of such reviews. The Company has also engaged an
internationally recognized consulting firm to provide additional
financial oversight to the Company regarding contracts effected
by the implementation of SOP 03-1, as well as the
Companys accounting for certain embedded derivatives.
These efforts are in addition to the process of reviewing,
assessing, and formalizing the Companys internal controls
in light of the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which the Company had commenced
prior to the receipt of KPMGs March 24, 2004 letter.
Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the points raised in
KPMGs letter were not indicative of a deficiency in the
Companys system of disclosure controls and procedures and
that the Companys disclosure controls and procedures were
effective.

Other than as described above, there have been no
changes in the Companys internal controls over financial
reporting during the period ended June 30, 2004 that
materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial
reporting.

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PART II

OTHER INFORMATION






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

On and since December 4, 2002, certain of
our shareholders 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. The plaintiffs filed a single
consolidated amended complaint in July 2003, adding as
defendants XL Capital Ltd and two additional directors. On
October 1, 2003, we answered the amended and consolidated
complaint and denied liability on the claims the plaintiffs have
asserted. In January 2004, the court ordered that a related
action that the plaintiffs filed against KPMG LLP (United
States) and KPMG in Bermuda be consolidated with the action
against us. In February 2004, the court denied certain
individual defendants motions to dismiss the action. In
March 2004, the court denied motions to dismiss filed by certain
other individual defendants and XL Capital Ltd. Also in
March 2004, KPMG LLP (United States) and KPMG in Bermuda filed
motions to dismiss the action. The court has not yet ruled on
KPMG LLPs (United States), KPMG in Bermudas and one
individual defendants respective motions to dismiss.

On July 20, 2004, we announced that we had
reached an agreement in principle with the plaintiffs to settle
the purported shareholder class action lawsuit. The settlement
is without any admission of liability or wrongdoing. We, along
with our directors and officers liability carrier and
another defendant, have agreed to pay an aggregate of
$16.5 million. Our share of the settlement is
$2.5 million in cash and an additional $2.5 million in
common shares, although we have reserved the right to elect to
pay this portion in cash. The settlement is subject to full
documentation among the parties to the settlement, notice to the
class, court approval and other steps required to consummate a
class action settlement.

As of June 30, 2004, we were involved in
arbitration proceedings with Transamerica Occidental Life
Insurance Company (Transamerica). The arbitration
related to Transamericas allegation that, as of
October 31, 2003, we owed $17.6 million under our
annuity reinsurance agreement with them. On February 3,
2004, we paid Transamerica $12.6 million, representing the
net amount we believed was due under the reinsurance agreement
as of October 31, 2003 after deducting $5.0 million
for investment related expenses that we believed was owed to us
by Transamerica. Transamerica pursued arbitration with us,
asserting that the $5.0 million offset was not justified
and that we owed Transamerica the full $17.6 million plus
interest. In addition, through October 31, 2003, we had
received monthly settlement reports from Transamerica prepared
on a basis that we believe conformed with the reinsurance
agreement between us. For the period subsequent to
October 31, 2003, we had only received settlement reports
from Transamerica prepared on a basis that Transamerica alleged
was appropriate, but which we believed was not consistent with
the reinsurance agreement. The principal difference related to
how realized gains and losses related to the invested assets
supporting the annuity obligations were settled between us.
Transamerica had not provided us with realized gain and loss
information on the basis we believed was appropriate. As a
result, in preparing our financial statements, we adjusted the
amounts reported to us by Transamerica in the monthly settlement
reports for periods subsequent to October 31, 2003 to
reflect what we believed was the appropriate treatment of
realized capital gains and losses.

On July 2, 2004, we and Transamerica agreed
to settle all disputes relating to the arbitration proceedings
between us. Pursuant to the terms of the settlement agreement,
Transamerica agreed to calculate monthly settlements under the
reinsurance agreement in a manner we believe is consistent with
the original terms of the agreement. Transamerica also agreed to
our $5.0 million offset of amounts owed to Transamerica at
October 31, 2003. On July 8, 2004, we paid
Transamerica approximately $8.7 million, representing
amounts due under the reinsurance agreement as of April 30,
2004. Although we and Transamerica have agreed on a method for
computing future monthly settlements under the reinsurance
agreement, the potential for significant monthly settlement
payments from us to Transamerica in future periods remains.

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On October 8, 2003, we were served with a
statutory demand for $640,000 from Imagine Group Holdings
Limited (Imagine), a Bermuda based reinsurance
company, which was subsequently withdrawn. Imagine has since
instituted a civil proceeding in the Bermuda Supreme Court
against us, alleging that we are obligated to reimburse it for
$640,000 of expenses it incurred in connection with a proposed
December 2002 capital raising transaction that was not
consummated. On March 11, 2004, we filed an amended defense
with the court to which Imagine responded on April 26,
2004. We do not believe that Imagine is entitled to
reimbursement of these expenses under the applicable agreement
and intend to defend ourselves against Imagine Res claims.

There are no other material arbitration or other
legal proceedings currently in process in which we are involved.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 2. | Changes in Securities, Use of Proceeds and
    Issuer, Purchases of Equity Securities

The following table summarizes our equity
security repurchases during the three months ended June 30,
2004:

|                         |  |           |   |            |  |                     |   |                      |  |  |   |  |  |   |            | 
|------------------------ |  | --------- | - | ---------- |  | ------------------- | - | -------------------- |  |  | - |  |  | - | ---------- | 
|                         |  |           |   |            |  | Total Number of     |   | Approximate Dollar  
|                         |  | Total     |   |            |  | Shares Purchased    |   | Value of Shares that
|                         |  | Number    |   | Average    |  | as Part of Publicly |   | May Yet Be Purchased
|                         |  | of Shares |   | Price Paid |  | Announced Plans     |   | Under the Plans or  
|Period                   |  | Purchased |   | Per Share  |  | or Programs         |   | Programs(1)         
|                         |  |           |   |            |  |                     |   |                     
|April 1  April 30, 2004 |  |           |  |            |  |                     |  |                      |  |  |  |  |  | $ | 25,000,000 | 
|May 1  May 31, 2004     |  |           |  |            |  |                     |  |                      |  |  |  |  |  | $ | 25,000,000 | 
|June 1  June 30, 2004   |  |           |  |            |  |                     |  |                      |  |  |  |  |  | $ | 25,000,000 | 
|Total                    |  |           |  |            |  |                     |  |                      |  |  |  |  |  | $ | 25,000,000 | 



---



|    |                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During 2001, the Companys Board of
    Directors approved a share repurchase program to allow the
    Company to repurchase up to an aggregate $25,000,000 of its
    common shares in the future if market conditions so dictate. As
    of June 30, 2004, no shares had been repurchased under the
    program.






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

(a) Exhibits 

|     |  |                                                                                     
|---- |  | ------------------------------------------------------------------------------------
|10.1 |  | Amendment to Amended and Restated Initial Stock
    Option Plan.                    
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of
    the Companys Chief Executive Officer.
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of
    the Companys Chief Financial Officer.
|32.1 |  | Section 1350 Certification of the
    Companys Chief Executive Officer.            
|32.2 |  | Section 1350 Certification of the
    Companys Chief Financial Officer.            

(b) Reports on Form 8-K 

Current Report dated March 30, 2004 was
filed with the Commission on April 6, 2004 reporting
Changes in Registrants Certifying Accountant
under Item 4.

Current Report dated April 21, 2004 was
filed with the Commission on April 22, 2004 reporting
Changes in Registrants Certifying Accountant
under Item 4.

Current Report dated May 11, 2004 was
furnished to the Commission on May 11, 2004 reporting
Results of Operations and Financial Condition under
Item 12.

Current Report dated May 17, 2004 was
furnished to the Commission on May 18, 2004 reporting
Results of Operations and Financial Condition under
Item 12.

Current Report dated June 9, 2004 was filed
with the Commission on June 9, 2004 reporting Other
Events under Item 5.

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Current Report dated July 27, 2004 was filed
with the Commission on July 27, 2004 reporting Other
Events under Item 5.

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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.



SIGNATURES


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



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

Date: August 5, 2004



| |                                 
| | --------------------------------
| | /s/ JOHN W. LOCKWOOD            
| |                                 
| | Name: John W. Lockwood          
| | Title:   Chief Financial Officer

Date: August 5, 2004

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EXHIBIT INDEX

|     |  |                                                                                     
|---- |  | ------------------------------------------------------------------------------------
|10.1 |  | Amendment to Amended and Restated Initial Stock
    Option Plan.                    
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of
    the Companys Chief Executive Officer.
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of
    the Companys Chief Financial Officer.
|32.1 |  | Section 1350 Certification of the
    Companys Chief Executive Officer.            
|32.2 |  | Section 1350 Certification of the
    Companys Chief Financial Officer.