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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


FORM 10-Q/A-1

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended March 31,
    2002                                           
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-23625

ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact name of registrant as specified in its
charter)


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

441-296-7667

(Registrants Telephone number, including
area code)


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

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

The number of the registrants Common Shares
(par value $1.00 per share) outstanding as of May 5, 2002
was 25,826,428.



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TABLE OF CONTENTS



|                                                           |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|EXPLANATORY NOTE                                          
|PART I                                                    
|FINANCIAL INFORMATION                                     
|CONSOLIDATED BALANCE SHEETS                               
|CONSOLIDATED STATEMENTS OF OPERATIONS                     
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME           
|CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS      
|                                                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|ANNUITY AND LIFE RE (HOLDINGS), LTD. SIGNATURES           



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INDEX TO FORM 10-Q/A

|                 |  |                                                                                                                                                         |    |      |    | 
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                 |  |                                                                                                                                                         |    | Page
|                 |  |                                                                                                                                                         |    |     
|Explanatory Note |  |                                                                                                                                                         | 1  |     
|                 |  | PART I  FINANCIAL
    INFORMATION                                                                                                                      |    |      |    | 
|                
|ITEM 1.          |  | Unaudited Consolidated Financial Statements                                                                                                             |    |      |    | 
|                 |  | Consolidated Balance Sheets
    March 31, 2002 (as restated) and December 31, 2001 (as
    restated)                                                    |    |      | 2  | 
|                 |  | Consolidated Statements of Operations
    Three Months ended March 31, 2002 (as restated) and
    March 31, 2001 (as restated)                          |    |      | 3  | 
|                 |  | Consolidated Statements of Comprehensive
    Income
    Three Months ended March 31, 2002 (as restated) and
    March 31, 2001 (as restated)            |    |      | 4  | 
|                 |  | Consolidated Statements of Cash Flows
    Three Months ended March 31, 2002 (as restated) and
    March 31, 2001 (as restated)                          |    |      | 5  | 
|                 |  | Consolidated Statements of Changes in
    Stockholders Equity
    Three Months ended March 31, 2002 (as restated) and
    March 31, 2001 (as restated) |    |      | 6  | 
|                 |  | Notes to Unaudited Consolidated Financial
    Statements                                                                                                |    |      | 7  | 
|ITEM 2.          |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                               |    |      | 14 | 
|ITEM 3.          |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                          |    |      | 27 | 
|Signatures       |  |                                                                                                                                                         | 28 |     
|Certifications   |  |                                                                                                                                                         | 29 |     



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EXPLANATORY NOTE

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

Except for Note 10 to the Unaudited
Consolidated Financial Statements included in this Amendment
No. 1 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2002, this amendment does
not update information that was presented in our original
Quarterly Report on Form 10-Q to reflect developments that
have occurred since we filed the original Form 10-Q.

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

1



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PART I




FINANCIAL INFORMATION


ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED BALANCE SHEETS

(U.S. dollars)

|                                                                                                                                                             |                                            |                |               |                   |  |   |               |               | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -------------- | ------------- | ----------------- |  | - | ------------- | ------------- | 
|                                                                                                                                                             |                                            | March 31, 2002 |               | December 31, 2001
|                                                                                                                                                             |                                            |                |               |                  
|                                                                                                                                                             |                                            | (unaudited)    |               | (as restated)    
|                                                                                                                                                             |                                            | (as restated)  |               |                  
|Assets                                                                                                                                                       |                                            |                |               |                   |  |   |               |              
|Cash and cash equivalents                                                                                                                                    |                                            | $              | 54,263,150    |                   |  | $ | 104,793,019   |              
|Fixed maturity investments at fair value
    (amortized cost of $378,859,293 and $312,420,719 at
    March 31, 2002 and December 31, 2001)                   |                                            |                | 379,864,135   |                   |  |   | 318,987,432   |              
|Funds withheld at interest                                                                                                                                   |                                            |                | 1,480,738,867 |                   |  |   | 1,489,689,347 |              
|Accrued investment income                                                                                                                                    |                                            |                | 5,130,855     |                   |  |   | 4,897,063     |              
|Receivable for investments sold                                                                                                                              |                                            |                | 564,698       |                   |  |   | 23,815        |              
|Receivable for reinsurance ceded                                                                                                                             |                                            |                | 95,610,308    |                   |  |   | 97,807,529    |              
|Deposits and other reinsurance receivables                                                                                                                   |                                            |                | 70,613,226    |                   |  |   | 76,139,222    |              
|Deferred policy acquisition costs                                                                                                                            |                                            |                | 219,412,542   |                   |  |   | 209,074,192   |              
|Other assets                                                                                                                                                 |                                            |                | 9,857,065     |                   |  |   | 9,360,971     |              
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              
|                                                                                                                                                             | Total Assets                               |                | $             | 2,316,054,846     |  |   | $             | 2,310,772,590 | 
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              
|Liabilities                                                                                                                                                  |                                            |                |               |                   |  |   |               |              
|Reserves for future policy benefits                                                                                                                          |                                            | $              | 234,133,221   |                   |  | $ | 221,865,755   |              
|Interest sensitive contracts liability                                                                                                                       |                                            |                | 1,505,943,959 |                   |  |   | 1,519,596,075 |              
|Other deposit liabilities                                                                                                                                    |                                            |                | 137,000,000   |                   |  |   | 137,000,000   |              
|Other reinsurance liabilities                                                                                                                                |                                            |                | 17,527,259    |                   |  |   | 17,340,304    |              
|Payable for investments purchased                                                                                                                            |                                            |                | 5,946,480     |                   |  |   | 2,030,516     |              
|Accounts payable and accrued expenses                                                                                                                        |                                            |                | 9,751,937     |                   |  |   | 10,751,098    |              
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              
|                                                                                                                                                             | Total Liabilities                          |                | $             | 1,910,302,855     |  |   | $             | 1,908,583,748 | 
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              
|Stockholders Equity                                                                                                                                         |                                            |                |               |                   |  |   |               |              
|Preferred shares (par value $1.00; 50,000,000
    shares authorized; no shares outstanding)                                                                  |                                            | $              |              |                   |  | $ |              |              
|Common shares (par value $1.00; 100,000,000
    shares authorized; 25,838,828 and 25,705,328 shares outstanding
    at March 31, 2002 and December 31, 2001) |                                            |                | 25,838,828    |                   |  |   | 25,705,328    |              
|Additional paid-in capital                                                                                                                                   |                                            |                | 334,478,932   |                   |  |   | 332,447,062   |              
|Notes receivable from stock sales                                                                                                                            |                                            |                | (1,552,161    | )                 |  |   | (1,317,259    | )            
|Restricted stock (123,408 shares at
    March 31, 2002)                                                                                                      |                                            |                | (2,001,683    | )                 |  |   |              |              
|Accumulated other comprehensive income                                                                                                                       |                                            |                | 904,470       |                   |  |   | 6,418,469     |              
|Retained earnings                                                                                                                                            |                                            |                | 48,083,605    |                   |  |   | 38,935,242    |              
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              
|                                                                                                                                                             | Total Stockholders Equity                 |                | $             | 405,751,991       |  |   | $             | 402,188,842   | 
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              
|                                                                                                                                                             | Total Liabilities and Stockholders Equity |                | $             | 2,316,054,846     |  |   | $             | 2,310,772,590 | 
|                                                                                                                                                             |                                            |                |               |                   |  |   |               |              

See accompanying Notes to Unaudited Consolidated
Financial Statements

2



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ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited and in U.S. dollars)


|                                                                                             |         |                            |             |               |  |   |            |       |  
|-------------------------------------------------------------------------------------------- | ------- | -------------------------- | ----------- | ------------- |  | - | ---------- | ----- | -
|                                                                                             |         |                           
|                                                                                             |         | For the Three Months Ended
|                                                                                             |         | March 31,                 
|                                                                                             |         |                           
|                                                                                             |         | 2002                       |             | 2001         
|                                                                                             |         |                            |             |              
|                                                                                             |         | (as restated)              |             | (as restated)
|Revenues                                                                                     |         |                            |             |               |  |   |            |      
|Net premiums                                                                                 |         | $                          | 78,006,891  |               |  | $ | 53,513,153 |      
|Investment income, net of related expenses                                                   |         |                            | 24,589,790  |               |  |   | 23,089,810 |      
|Net realized investment (losses) gains                                                       |         |                            | (321,708    | )             |  |   | 25,621     |      
|Net change in fair value of embedded derivatives                                             |         |                            | 1,590,098   |               |  |   | (148,927   | )    
|Surrender fees and other revenues                                                            |         |                            | 3,896,125   |               |  |   | 3,133,471  |      
|                                                                                             |         |                            |             |               |  |   |            |      
|Total Revenues                                                                               |         | $                          | 107,761,196 |               |  | $ | 79,613,128 |      
|                                                                                             |         |                            |             |               |  |   |            |      
|Benefits and Expenses                                                                        |         |                            |             |               |  |   |            |      
|Claim and policy benefits                                                                    |         | $                          | 58,815,606  |               |  | $ | 41,624,668 |      
|Interest credited to interest sensitive products                                             |         |                            | 17,922,346  |               |  |   | 8,291,470  |      
|Policy acquisition costs and other insurance
    expenses                                    |         |                            | 15,636,118  |               |  |   | 25,025,150 |      
|Collateral costs                                                                             |         |                            | 1,295,704   |               |  |   |           |      
|Operating expenses                                                                           |         |                            | 3,657,792   |               |  |   | 2,665,070  |      
|                                                                                             |         |                            |             |               |  |   |            |      
|Total Benefits and Expenses                                                                  |         | $                          | 97,327,566  |               |  | $ | 77,606,358 |      
|                                                                                             |         |                            |             |               |  |   |            |      
|Net income before cumulative effect of a change
    in accounting principle                  |         | $                          | 10,433,630  |               |  | $ | 2,006,770  |      
|Cumulative effect of a change in accounting
    principle (Note 2)                           |         |                            |            |               |  | $ | (3,665,735 | )    
|                                                                                             |         |                            |             |               |  |   |            |      
|Net Income (Loss)                                                                            |         | $                          | 10,433,630  |               |  | $ | (1,658,965 | )    
|                                                                                             |         |                            |             |               |  |   |            |      
|Net income per common share before cumulative
    effect of a change in accounting principle |         |                            |             |               |  |   |            |      
|                                                                                             | Basic   |                            | $           | 0.41          |  |   | $          | 0.08  |  
|                                                                                             | Diluted |                            | $           | 0.39          |  |   | $          | 0.08  |  
|Cumulative effect of a change in accounting
    principle per common share                   |         |                            |             |               |  |   |            |      
|                                                                                             | Basic   |                            | $           |              |  |   | $          | (0.15 | )
|                                                                                             | Diluted |                            | $           |              |  |   | $          | (0.15 | )
|Net income (loss) per common
    share                                                       |         |                            |             |               |  |   |            |      
|                                                                                             | Basic   |                            | $           | 0.41          |  |   | $          | (0.07 | )
|                                                                                             | Diluted |                            | $           | 0.39          |  |   | $          | (0.07 | )

See accompanying Notes to Unaudited Consolidated
Financial Statements

3



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


(Unaudited and in U.S. dollars)


|                                                                                      |  |                            |            |               |  |   |            |  
|------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ------------- |  | - | ---------- | -
|                                                                                      |  |                           
|                                                                                      |  | For the Three Months Ended
|                                                                                      |  | March 31,                 
|                                                                                      |  |                           
|                                                                                      |  | 2002                       |            | 2001         
|                                                                                      |  |                            |            |              
|                                                                                      |  | (as restated)              |            | (as restated)
|Net income (loss) for the period                                                      |  | $                          | 10,433,630 |               |  | $ | (1,658,965 | )
|Other comprehensive income:                                                           |  |                            |            |               |  |   |            |  
|Unrealized holding (losses) gains on
    securities arising during the period         |  |                            | (5,835,707 | )             |  |   | 4,431,190  |  
|Less reclassification adjustment for realized
    (losses) gains in net income (loss) |  |                            | (321,708   | )             |  |   | 25,621     |  
|                                                                                      |  |                            |            |               |  |   |            |  
|Other comprehensive (loss) income                                                     |  | $                          | (5,513,999 | )             |  | $ | 4,405,569  |  
|                                                                                      |  |                            |            |               |  |   |            |  
|Total Comprehensive Income                                                            |  | $                          | 4,919,631  |               |  | $ | 2,746,604  |  
|                                                                                      |  |                            |            |               |  |   |            |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

4



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ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited and in U.S. dollars)


|                                                                                         |                                           |                            |              |               |   |   |             |             |  
|---------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------- | ------------ | ------------- | - | - | ----------- | ----------- | -
|                                                                                         |                                           |                           
|                                                                                         |                                           | For the Three Months Ended
|                                                                                         |                                           | March 31,                 
|                                                                                         |                                           |                           
|                                                                                         |                                           | 2002                       |              | 2001         
|                                                                                         |                                           |                            |              |              
|                                                                                         |                                           | (as restated)              |              | (as restated)
|Cash flows from operating activities                                                     |                                           |                            |              |               |   |   |             |            
|Net income (loss)                                                                        |                                           | $                          | 10,433,630   |               |   | $ | (1,658,965  | )          
|Adjustments to reconcile net income (loss) to
    cash provided by operating activities: |                                           |                            |              |               |   |   |             |            
|Cumulative effect of a change in accounting
    principle                                |                                           |                            |             |               |   |   | 3,665,735   |            
|Net realized investment losses (gains)                                                   |                                           |                            | 321,708      |               |   |   | (25,621     | )          
|Net change in fair value of embedded derivatives                                         |                                           |                            | (1,590,098   | )             |   |   | 148,927     |            
|Amortization of restricted stock                                                         |                                           |                            | 163,687      |               |   |   |            |            
|Changes in:                                                                              |                                           |                            |              |               |   |   |             |            
|Accrued investment income                                                                |                                           |                            | (233,792     | )             |   |   | (211,847    | )          
|Deferred policy acquisition costs                                                        |                                           |                            | (10,338,350  | )             |   |   | 3,518,796   |            
|Deposits and other reinsurance receivables                                               |                                           |                            | 7,723,217    |               |   |   | (3,294,897  | )          
|Other assets                                                                             |                                           |                            | (496,093     | )             |   |   | (1,375,680  | )          
|Reserves for future policy benefits                                                      |                                           |                            | 12,267,466   |               |   |   | 4,447,934   |            
|Interest sensitive contracts, net of funds
    withheld                                  |                                           |                            | (3,111,538   | )             |   |   | (3,787,142  | )          
|Other reinsurance liabilities                                                            |                                           |                            | 186,955      |               |   |   | (219,277    | )          
|Accounts payable                                                                         |                                           |                            | (999,163     | )             |   |   | (361,527    | )          
|                                                                                         |                                           |                            |              |               |   |   |             |            
|                                                                                         | Net cash provided by operating activities |                            | $            | 14,327,629    |   |   | $           | 846,436     |  
|                                                                                         |                                           |                            |              |               |   |   |             |            
|Cash flows from investing activities                                                     |                                           |                            |              |               |   |   |             |            
|Proceeds from sales of fixed maturity investments                                        |                                           | $                          | 175,541,454  |               |   | $ | 39,688,054  |            
|Purchase of fixed maturity investments                                                   |                                           |                            | (238,878,784 | )             |   |   | (71,119,566 | )          
|                                                                                         |                                           |                            |              |               |   |   |             |            
|                                                                                         | Net cash (used) by investing activities   |                            | $            | (63,337,330   | ) |   | $           | (31,431,512 | )
|                                                                                         |                                           |                            |              |               |   |   |             |            
|Cash flows from financing activities                                                     |                                           |                            |              |               |   |   |             |            
|Issuance of shares                                                                       |                                           | $                          |             |               |   | $ | 57,609      |            
|Interest accrued on notes receivable                                                     |                                           |                            | (23,522      | )             |   |   | (20,125     | )          
|Interest collected on notes receivable                                                   |                                           |                            | 38,620       |               |   |   |            |            
|Issuance of note receivable                                                              |                                           |                            | (250,000     | )             |   |   |            |            
|Dividends paid to stockholders                                                           |                                           |                            | (1,285,266   | )             |   |   | (1,275,133  | )          
|                                                                                         |                                           |                            |              |               |   |   |             |            
|                                                                                         | Net cash (used) by financing activities   |                            | $            | (1,520,168    | ) |   | $           | (1,237,649  | )
|                                                                                         |                                           |                            |              |               |   |   |             |            
|Decrease in cash and cash equivalents                                                    |                                           | $                          | (50,529,869  | )             |   | $ | (31,822,725 | )          
|Cash and cash equivalents, beginning of period                                           |                                           |                            | 104,793,019  |               |   |   | 52,691,974  |            
|                                                                                         |                                           |                            |              |               |   |   |             |            
|Cash and cash equivalents, end of period                                                 |                                           | $                          | 54,263,150   |               |   | $ | 20,869,249  |            
|                                                                                         |                                           |                            |              |               |   |   |             |            

See accompanying Notes to Unaudited Consolidated
Financial Statements

5



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY


(Unaudited and in U.S. dollars)


|                                            |  |                            |             |               |  |   |             |  
|------------------------------------------- |  | -------------------------- | ----------- | ------------- |  | - | ----------- | -
|                                            |  |                           
|                                            |  | For the Three Months Ended
|                                            |  | March 31,                 
|                                            |  |                           
|                                            |  | 2002                       |             | 2001         
|                                            |  |                            |             |              
|                                            |  | (as restated)              |             | (as restated)
|Preferred shares par value $1.00            |  |                            |             |               |  |   |             |  
|Balance at beginning and end of period      |  | $                          |            |               |  | $ |            |  
|                                            |  |                            |             |               |  |   |             |  
|Common shares par value $1.00               |  |                            |             |               |  |   |             |  
|Balance at beginning of period              |  | $                          | 25,705,328  |               |  | $ | 25,499,999  |  
|Issuance of shares                          |  |                            | 133,500     |               |  |   | 2,664       |  
|                                            |  |                            |             |               |  |   |             |  
|Balance at end of period                    |  | $                          | 25,838,828  |               |  | $ | 25,502,663  |  
|                                            |  |                            |             |               |  |   |             |  
|Additional paid-in capital                  |  |                            |             |               |  |   |             |  
|Balance at beginning of period              |  | $                          | 332,447,062 |               |  | $ | 329,496,091 |  
|Issuance of shares                          |  |                            | 2,031,870   |               |  |   | 54,945      |  
|                                            |  |                            |             |               |  |   |             |  
|Balance at end of period                    |  | $                          | 334,478,932 |               |  | $ | 329,551,036 |  
|                                            |  |                            |             |               |  |   |             |  
|Notes receivable from stock sales           |  |                            |             |               |  |   |             |  
|Balance at beginning of period              |  | $                          | (1,317,259  | )             |  | $ | (1,367,241  | )
|Issuance of note receivable                 |  |                            | (250,000    | )             |  |   |            |  
|Interest collected on notes receivable      |  |                            | 38,620      |               |  |   |            |  
|Accrued interest during period              |  |                            | (23,522     | )             |  |   | (20,125     | )
|                                            |  |                            |             |               |  |   |             |  
|Balance at end of period                    |  | $                          | (1,552,161  | )             |  | $ | (1,387,366  | )
|                                            |  |                            |             |               |  |   |             |  
|Restricted stock                            |  |                            |             |               |  |   |             |  
|Balance at beginning of period              |  | $                          |            |               |  | $ |            |  
|Issuance of shares                          |  |                            | (2,165,370  | )             |  |   |            |  
|Amortization of restricted stock            |  |                            | 163,687     |               |  |   |            |  
|                                            |  |                            |             |               |  |   |             |  
|Balance at end of period                    |  | $                          | (2,001,683  | )             |  | $ |            |  
|                                            |  |                            |             |               |  |   |             |  
|Accumulated other comprehensive
    income  |  |                            |             |               |  |   |             |  
|Balance at beginning of period              |  | $                          | 6,418,469   |               |  | $ | 2,064,971   |  
|Net unrealized (losses) gains on securities |  |                            | (5,513,999  | )             |  |   | 4,405,569   |  
|                                            |  |                            |             |               |  |   |             |  
|Balance at end of period                    |  | $                          | 904,470     |               |  | $ | 6,470,540   |  
|                                            |  |                            |             |               |  |   |             |  
|Retained earnings                           |  |                            |             |               |  |   |             |  
|Balance at beginning of period              |  | $                          | 38,935,242  |               |  | $ | 84,636,496  |  
|Net income (loss)                           |  |                            | 10,433,630  |               |  |   | (1,658,965  | )
|Stockholder dividends                       |  |                            | (1,285,266  | )             |  |   | (1,275,133  | )
|                                            |  |                            |             |               |  |   |             |  
|Balance at end of period                    |  | $                          | 48,083,605  |               |  | $ | 81,702,398  |  
|                                            |  |                            |             |               |  |   |             |  
|Total Stockholders Equity                  |  | $                          | 405,751,991 |               |  | $ | 441,839,271 |  
|                                            |  |                            |             |               |  |   |             |  

See accompanying Notes to Unaudited Consolidated
Financial Statements

6



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.






NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


(as restated)


1.     Organization

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

2.     Restatement

The Company has restated its financial statements
for the fiscal year ended December 31, 2001 and the fiscal
quarter ended March 31, 2002 to reflect the application of
Statement of Financial Accounting Standard 133 
Accounting for Derivative Instruments and Hedging Activities,
which requires the Company to bifurcate and separately account
for embedded derivatives contained in certain of the
Companys annuity reinsurance agreements. The Company is
required to carry these embedded derivatives on its balance
sheet at fair value and the unrealized changes in the value of
these embedded derivatives are reflected in net income as Net
change in fair value of embedded derivatives. The fair value of
these embedded derivatives at January 1, 2001 was a loss of
$3,665,735 and this has been accounted for as a cumulative
effect of a change in accounting principle. The change in fair
value of the Companys embedded derivatives during 2001 was
a gain of $5,029,027. Additionally, an adjustment of $1,320,184
has been made in 2001 to increase the amortization of deferred
acquisition costs to reflect the revised emergence of profits on
the affected reinsurance agreements as a result of the change in
fair value of the embedded derivatives. For the year ended
December 31, 2001, the net impact on reported earnings was
a $43,107 gain.

In the fourth quarter of 2001, the Company
recorded a charge of $33,000,000 in connection with minimum
interest guarantees associated with its largest annuity
reinsurance contract. The $33,000,000 charge was made up of
$13,500,000 of estimated minimum interest guarantee payments
made in 2001 and a $19,500,000 reserve for estimated future
minimum interest guarantee payments. The Company had originally
recorded the $19,500,000 reserve component of the $33,000,000
charge as an increase to its Interest sensitive contracts
liability. In its restated financial statements for the fiscal
year ended December 31, 2001, the Company has reclassified
the $19,500,000 as a write down of deferred acquisition costs.
At March 31, 2002, the reserve related to estimated future
minimum interest guarantee payments was $21,675,000. This amount
has similarly been reclassified as a write down of deferred
acquisition costs in connection with the restatement of the
Companys financial statements for the fiscal quarter ended
March 31, 2002. The reclassification did not change the
Companys reported net (loss) for the fiscal year ended
December 31, 2001 or the fiscal quarter ended
March 31, 2002; however, certain components of the
Companys Consolidated Balance Sheet as of those dates and
Consolidated Statements of Operations for the periods then ended
have changed as a result of this reclassification.

Further, based on information now available to
the Company, the Company has also restated its financial
statements for the fiscal years ended December 31, 2001 and 2000
to record approximately $13,500,000 and $2,800,000,
respectively, of minimum interest guarantee payments made in the
periods in which they were paid. The $13,500,000 of payments
made in 2001 were included in the $33,000,000 charge taken in
the fourth quarter of 2001. The Company originally recorded the
full $13,500,000 expense in the fourth quarter of 2001 because
that was the quarter in which the Company first received data
that enabled it to estimate the amount of such payments
accurately. As part of the restatement of the Companys
financial statements for the fiscal year ended December 31,
2001, the $13,500,000 expense has been reallocated to the
quarterly periods in that year in which the payments were made.
Similarly, the Company has recognized the $2,800,000 of minimum

7



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest guarantee payments made in 2000 as an
expense rather than as a reduction in Interest sensitive
contracts liabilities. There was a corresponding decrease of
$1,914,853 in the amortization of deferred acquisition costs in
2000 as a result of the minimum interest guarantee payments made
in that year. The net effect on the Companys net income in
2000 was a reduction of $885,459. The decrease in the
amortization of deferred acquisition costs in 2000 had the
effect of increasing the amount of unamortized deferred
acquisition costs as at December 31, 2000. Because the
Company determined that deferred acquisition costs on the
Companys largest annuity reinsurance contract should be
written down to their estimated recoverable amount during 2001,
the write down in costs in 2001 has been adjusted to reflect the
increased balance of unamortized deferred acquisition costs that
existed at December 31, 2000. The impact of this aspect of
the restatement on net income in 2001 was a reduction of
$1,914,853. Certain components of the Companys
Consolidated Balance Sheets as of December 31, 2001 and
2000 and as of March 31, 2002, as well as certain
components of the Companys Consolidated Statements of
Operations for the periods then ended and the three month period
ended March 31, 2001, have changed as a result of this
restatement. Further, the Company has allocated portions of the
$19,500,000 reserve component of the $33,000,000 charge taken in
the fourth quarter of 2001, and a similar $24,700,000 charge
taken in the third quarter of 2001 in connection with the same
contract, across prior quarters in that year. This reallocation
does not affect the reported net (loss) for the year ended
December 31, 2001, but it does affect reported net income
(loss) for each of the quarters in that year.

The following table summarizes the effect of
these changes to the Companys previously issued financial
statements for the fiscal year ended December 31, 2001 and
for the three month periods ended March 31, 2002 and 2001.
The restatement described above had no net effect on the
Companys cash flows provided by operating activities for
the periods then ended, so no information regarding the
Companys Consolidated Statement of Cash Flows is presented
in the table.

|                                                    |  |          |               |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |               | 
|--------------------------------------------------- |  | -------- | ------------- | --------- |  | ---------------- | ---------- | --------- |  | -------- | ----------- | - |  | - | ---------- | - |  | - | ------------- | 
|                                                    |  |          |               |           |  |                 
|                                                    |  |          |               | Effect of |  |                 
|                                                    |  |          |               |           |  |                 
|                                                    |  | As       |               |           |  | Minimum          |            | As       
|                                                    |  | Reported |               | FAS 133   |  | Reclassification |            | Guarantee |  | Restated
|                                                    |  |          |               |           |  |                  |            |           |  |         
|Consolidated Balance Sheet at March 31,
    2002    |  |          |               |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |               | 
|Funds withheld at interest                          |  | $        | 1,477,785,478 |           |  | $                | 2,953,389  |           |  | $        |            |   |  | $ |           |   |  | $ | 1,480,738,867 | 
|Deferred acquisition costs                          |  |          | 241,808,483   |           |  |                  | (721,203   | )         |  |          | (21,674,738 | ) |  |   |           |   |  |   | 219,412,542   | 
|Interest sensitive contracts liability              |  |          | 1,524,818,385 |           |  |                  |           |           |  |          | (21,674,738 | ) |  |   | 2,800,312  |   |  |   | 1,505,943,959 | 
|Stockholders Equity                                |  |          | 406,320,116   |           |  |                  | 2,232,187  |           |  |          |            |   |  |   | (2,800,312 | ) |  |   | 405,751,991   | 
|                                                   
|Consolidated Balance Sheet at
    December 31, 2001 |  |          |               |           |  |                  |            |           |  |          |             |   |  |   |            |   |  |   |               | 
|Funds withheld at interest                          |  | $        | 1,488,326,056 |           |  | $                | 1,363,291  |           |  | $        |            |   |  | $ |           |   |  | $ | 1,489,689,347 | 
|Deferred acquisition costs                          |  |          | 229,894,376   |           |  |                  | (1,320,184 | )         |  |          | (19,500,000 | ) |  |   |           |   |  |   | 209,074,192   | 
|Interest sensitive contracts liability              |  |          | 1,536,295,763 |           |  |                  |           |           |  |          | (19,500,000 | ) |  |   | 2,800,312  |   |  |   | 1,519,596,075 | 
|Stockholders Equity                                |  |          | 404,946,046   |           |  |                  | 43,107     |           |  |          |            |   |  |   | (2,800,312 | ) |  |   | 402,188,842   | 

8



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                          |  |          |             |           |  |                  |            |           |  |          |             |   |  |   |             |   |  |   |             |  
|----------------------------------------------------------------------------------------- |  | -------- | ----------- | --------- |  | ---------------- | ---------- | --------- |  | -------- | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                          |  |          |             |           |  |                 
|                                                                                          |  |          |             | Effect of |  |                 
|                                                                                          |  |          |             |           |  |                 
|                                                                                          |  | As       |             |           |  | Minimum          |            | As       
|                                                                                          |  | Reported |             | FAS 133   |  | Reclassification |            | Guarantee |  | Restated
|                                                                                          |  |          |             |           |  |                  |            |           |  |         
|Consolidated Statements of Operations for the
    year ended December 31, 2001            |  |          |             |           |  |                  |            |           |  |          |             |   |  |   |             |   |  |   |             |  
|Net change in fair value of embedded derivatives                                          |  | $        |            |           |  | $                | 5,029,027  |           |  | $        |            |   |  | $ |            |   |  | $ | 5,029,027   |  
|Interest credited to interest sensitive products                                          |  |          | 68,758,418  |           |  |                  |           |           |  |          | (19,500,000 | ) |  |   |            |   |  |   | 49,258,418  |  
|Policy acquisition and other insurance expenses                                           |  |          | 105,045,512 |           |  |                  | 1,320,184  |           |  |          | 19,500,000  |   |  |   | 1,914,853   |   |  |   | 127,780,549 |  
|Cumulative effect of a change in accounting
    principle                                 |  |          |            |           |  |                  | (3,665,735 | )         |  |          |            |   |  |   |            |   |  |   | (3,665,735  | )
|Net (Loss)                                                                                |  |          | (38,709,686 | )         |  |                  | 43,107     |           |  |          |            |   |  |   | (1,914,853  | ) |  |   | (40,581,431 | )
|                                                                                         
|Consolidated Statements of Operations for the
    three month period ended March 31, 2002 |  |          |             |           |  |                  |            |           |  |          |             |   |  |   |             |   |  |   |             |  
|Net change in fair value of embedded derivatives                                          |  | $        |            |           |  | $                | 1,590,098  |           |  | $        |            |   |  | $ |            |   |  | $ | 1,590,098   |  
|Interest credited to interest sensitive products                                          |  |          | 14,660,400  |           |  |                  |           |           |  |          | 3,261,946   |   |  |   |            |   |  |   | 17,922,346  |  
|Policy acquisition and other insurance expenses                                           |  |          | 19,497,045  |           |  |                  | (598,981   | )         |  |          | (3,261,946  | ) |  |   |            |   |  |   | 15,636,118  |  
|Net Income                                                                                |  |          | 8,244,551   |           |  |                  | 2,189,079  |           |  |          |            |   |  |   |            |   |  |   | 10,433,630  |  
|                                                                                         
|Consolidated Statements of Operations for the
    three month period ended March 31, 2001 |  |          |             |           |  |                  |            |           |  |          |             |   |  |   |             |   |  |   |             |  
|Net change in fair value of embedded derivatives                                          |  | $        |            |           |  | $                | (148,927   | )         |  | $        |            |   |  | $ |            |   |  | $ | (148,927    | )
|Interest credited to interest sensitive products                                          |  |          | 6,691,470   |           |  |                  |           |           |  |          |            |   |  |   | 1,600,000   |   |  |   | 8,291,470   |  
|Policy acquisition and other insurance expenses                                           |  |          | 17,065,533  |           |  |                  | (884,451   | )         |  |          |            |   |  |   | 8,844,068   |   |  |   | 25,025,150  |  
|Cumulative effect of a change in accounting
    principle                                 |  |          |            |           |  |                  | (3,665,735 | )         |  |          |            |   |  |   |            |   |  |   | (3,665,735  | )
|Net Income (Loss)                                                                         |  |          | 11,715,314  |           |  |                  | (2,930,211 | )         |  |          |            |   |  |   | (10,444,068 | ) |  |   | (1,658,965  | )

3.     Basis of
Presentation

The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP) for interim financial
information and in accordance with Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements. These consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Companys
amended Form 10-K for the fiscal year ended

9



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2001. In the opinion of
management, all adjustments considered necessary for a fair
presentation have been included in these financial statements.

4.     Income (Loss)
Per Share

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

|                                                                                                             |  |              |            |              |  |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ------------ |  | - | ---------- | -
|                                                                                                             |  | 2002         |            | 2001        
|                                                                                                             |  |              |            |             
|                                                                                                             |  | (dollars, as |            | (dollars, as
|                                                                                                             |  | restated)    |            | restated)   
|Net income available to common shareholders
    before cumulative effect of a change in accounting principle |  | $            | 10,433,630 |              |  | $ | 2,006,770  |  
|Cumulative effect of a change in accounting
    principle                                                    |  |              |           |              |  |   | (3,665,735 | )
|                                                                                                             |  |              |            |              |  |   |            |  
|Net income (loss) available to common
    shareholders                                                       |  | $            | 10,433,630 |              |  | $ | (1,658,965 | )
|                                                                                                             |  |              |            |              |  |   |            |  
|Basic:                                                                                                       |  |              |            |              |  |   |            |  
|Weighted average number of common shares
    outstanding                                                     |  |              | 25,710,374 |              |  |   | 25,501,331 |  
|Net income per share before cumulative effect of
    a change in accounting principle                        |  | $            | 0.41       |              |  | $ | 0.08       |  
|Cumulative effect of a change in accounting
    principle                                                    |  | $            |           |              |  | $ | (0.15      | )
|                                                                                                             |  |              |            |              |  |   |            |  
|Net income (loss) per share                                                                                  |  | $            | 0.41       |              |  | $ | (0.07      | )
|                                                                                                             |  |              |            |              |  |   |            |  
|Diluted:                                                                                                     |  |              |            |              |  |   |            |  
|Weighted average number of common shares
    outstanding                                                     |  |              | 26,973,881 |              |  |   | 25,501,331 |  
|Net income per share before cumulative effect of
    a change in accounting principle                        |  | $            | 0.39       |              |  | $ | 0.08       |  
|Cumulative effect of a change in accounting
    principle                                                    |  | $            |           |              |  | $ | (0.15      | )
|                                                                                                             |  |              |            |              |  |   |            |  
|Net income (loss) per share                                                                                  |  | $            | 0.39       |              |  | $ | (0.07      | )
|                                                                                                             |  |              |            |              |  |   |            |  

5.     Business
Segments

During the first quarter of 2002, the
Companys management began to separately track financial
results of the Companys life and annuity operations in
segments. Each segment is defined by a dominant risk
characteristic inherent in all products in that segment. The
life segment consists of all products where the dominant risk
characteristic is mortality risk. The annuity segment comprises
all products where the dominant risk characteristic is
investment risk. In addition, as discussed in Note 2 above,
certain of the Companys modified coinsurance and
coinsurance funds withheld annuity reinsurance agreements have
features that constitute embedded derivatives that require
bifurcation and separate accounting under
FAS 133  Accounting for Derivative Instruments
and Hedging Activities. The cumulative effect of the application
of FAS 133 to the agreements through January 1, 2001
and the change in the fair value of these embedded derivatives
are included in the annuity segment. Both the life and annuity
segments have specific assets, liabilities, stockholders
equity, revenue, benefits and expenses that apply only to them.
The corporate segment contains all stockholders equity not
deployed to the life or annuity segment. In addition, the
corporate segment includes all capital gains and losses from
sales of securities in our portfolio and investment income on
undeployed invested assets. Operating expenses are allocated to
the segments proportionately based upon the amount of
stockholders equity deployed to the segment. The Company
believes that investors will better

10



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

understand the Companys profitability, risk
profile and capital deployment through this change. There are no
intersegment transactions.

The following table displays several key
measurements for each of our business segments.

|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 
|------------------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | 
|Three Months Ended        |  | Life        |             | Annuity     |  |           |               |             
|March 31, 2002            |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                          |  |             |             |             |  |           |               |             
|(as restated, see Note 2) |  |             |             |             |  |           |               |             
|Revenues                  |  | $           | 79,146,044  |             |  | $         | 26,915,754    |              |  | $ | 1,699,398   |  |  | $ | 107,761,196   | 
|Benefits and Expenses     |  |             | 71,956,828  |             |  |           | 23,997,423    |              |  |   | 1,373,316   |  |  |   | 97,327,566    | 
|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 
|Segment Income            |  | $           | 7,189,217   |             |  | $         | 2,918,331     |              |  | $ | 326,083     |  |  | $ | 10,433,630    | 
|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 
|Total Assets              |  | $           | 566,428,888 |             |  | $         | 1,588,375,551 |              |  | $ | 161,250,407 |  |  | $ | 2,316,054,846 | 
|                          |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               | 

|                                                                                     |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               |  
|------------------------------------------------------------------------------------ |  | - | ----------- |  |  | - | ------------- | - |  | - | ----------- |  |  | - | ------------- | -
|Three Months Ended                                                                   |  |   |             |  |  |   |               |  
|March 31, 2001                                                                       |  |   |             |  |  |   |               |  
|                                                                                     |  |   |             |  |  |   |               |  
|(as restated, see Note 2)                                                            |  |   |             |  |  |   |               |  
|Revenues                                                                             |  | $ | 52,403,111  |  |  | $ | 23,537,665    |   |  | $ | 3,672,352   |  |  | $ | 79,613,128    |  
|Benefits and Expenses                                                                |  |   | 48,268,988  |  |  |   | 27,820,111    |   |  |   | 1,517,258   |  |  |   | 77,606,358    |  
|                                                                                     |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               |  
|Segment Income (Loss) before cumulative effect of
    change in accounting principle |  | $ | 4,134,123   |  |  | $ | (4,282,446    | ) |  | $ | 2,155,093   |  |  | $ | 2,006,770     |  
|Cumulative effect of a change in accounting
    principle                            |  |   |            |  |  |   | (3,665,735    | ) |  |   |            |  |  |   | (3,665,735    | )
|                                                                                     |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               |  
|Net Segment Income (Loss)                                                            |  | $ | 4,134,123   |  |  | $ | (7,948,181    | ) |  | $ | 2,155,093   |  |  | $ | (1,658,965    | )
|                                                                                     |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               |  
|Total Assets                                                                         |  | $ | 304,343,877 |  |  | $ | 1,632,014,571 |   |  | $ | 262,947,177 |  |  | $ | 2,199,305,625 |  
|                                                                                     |  |   |             |  |  |   |               |   |  |   |             |  |  |   |               |  

6.     Accounting
Standards

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

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



|   |                           
|-- | --------------------------
|7. | Related Party Transactions

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

11



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##### Table of Contents



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

under the agreement, to be reimbursed from any
proceeds the Company receives from its arbitration proceeding
with Transamerica.

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



|   |                 
|-- | ----------------
|8. | Restricted Stock

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



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

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



|    |                                    
|--- | -----------------------------------
|10. | Going Concern and Subsequent Events

The accompanying unaudited consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. However, the
Company incurred significant operating losses in the second and
third quarters of 2002, and has announced that it anticipates
reporting a significant loss for the year 2002. Further, the
financial strength ratings of the Companys operating
subsidiaries were downgraded in July, 2002 by A.M. Best,
Standard & Poors, and Fitch Ratings, and there have
been further downgrades since that date. Also, the Company is
required to post collateral for the statutory reserves ceded to
it by U.S. based insurers and reinsurers. The Company did not
have sufficient available cash and investments to satisfy the
collateral requirements asserted by its cedents as of
December 31, 2002 under certain of its reinsurance
treaties. The Companys cedents now assert that the Company
must satisfy additional collateral requirements of approximately
$140 million, which includes collateral requirements asserted as
of December 31, 2002 and additional collateral requirements
asserted since that date. The Company is currently analyzing
these asserted collateral requirements and has not concluded
that such amounts are in fact required to be posted as
collateral under the relevant reinsurance contracts. Certain
providers of letters of credit issued on behalf of the Company
totaling approximately $59 million have also demanded the
return or collateralization of those letters of credit. As a
result of the Companys inability to satisfy its
obligations, certain parties have claimed that the Company is in
breach of its agreements. As a consequence, certain parties have
sought and others may seek remedies for such claimed breaches by
the Company, and the Company may be required to enter into
arbitration or litigation proceedings with those parties. The
Company has also been served with a statutory demand under
Bermuda law related to the Companys alleged failure to
satisfy certain obligations. If such statutory demands is held
to be valid and the Company is unable to satisfy the related
obligations, the party making such demand would be entitled to
institute proceedings seeking the liquidation of the Company.

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ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

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

General

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

Critical Accounting Policies

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

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

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

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reinsurance agreement with Transamerica
Occidental Life Insurance Company, because we acquired those
agreements prior to the transition date elected by us under
FAS 133, as amended by FAS 137. Because of the nature
of the assets underlying our Transamerica contract, which were
roughly 69% convertible bonds at March 31, 2002, the
bifurcation and separate accounting for the embedded derivatives
contained in that contract would add significant volatility to
our reported results.


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

Operating Results

Net Income (Loss).For the three month period ended
March 31, 2002, we had net income of $10,434,000 or $0.41
per basic common share and $0.39 per fully diluted common share,
as compared to a net loss of $(1,659,000) or $(0.07) per basic
and fully diluted common share for the three month period ended
March 31, 2001, reflecting strong growth in our life
segment, improved operating results in our annuity segment
following significant write downs during 2001 and an unrealized
gain in the fair value of embedded derivatives (net of their
related changes in deferred acquisition cost amortization) of
$2,189,000.

Under FAS 133, we are required to carry the fair
value of the embedded derivatives contained in certain of our
annuity reinsurance contracts on our balance sheet, and
unrealized changes in the fair value of those embedded
derivatives are reflected in our net income. The change in fair
value of the embedded derivatives is influenced by changes in
credit risk, yield curve shifts, changes in expected future cash
flows under the annuity reinsurance contracts and, to a lesser
extent, interest rate changes. The change in fair value also
affects the emergence of expected gross profits under the
contracts for purposes of amortizing deferred acquisition costs.
The cumulative effect of the change in accounting principle as
of January 1, 2001 was a loss of $(3,666,000), or $(0.15)
per basic and fully-diluted common share, which is reflected in
our net income for the three month period ended March 31,
2001.

Our net income is significantly affected by our
annuity reinsurance contract with Transamerica, which is our
largest annuity reinsurance contract and represented
approximately $903 million, or 61.1%, of our Funds withheld
at interest receivable as of March 31, 2002, as compared
with approximately $962 million, or approximately 65%, of our
Funds withheld at interest receivable as of December 31,
2001. During 2001, with respect to the Transamerica contract, we
recorded approximately $13,500,000 of minimum interest guarantee
payments made to policyholders and write downs of deferred
acquisition costs of approximately $46,115,000. These payments
and write downs are primarily the result of a high level of
surrenders by policyholders coupled with poor investment
performance on the assets supporting our obligations under the
reinsurance contract, and included $1,600,000 of minimum
interest guarantee payments and approximately $8,844,000 in
write downs of deferred acquisition costs in the three month
period ended March 31, 2001. While we have written down
deferred acquisition costs to what we believe to be an
appropriate level based upon reasonable assumptions about future
investment performance and surrenders, the write downs are
estimates. Actual amounts of income earned and amounts payable
upon future surrenders may be significantly higher or lower than
the amounts estimated. If actual experience varies significantly
from the assumptions used to write down the deferred acquisition
costs in 2001, additional write downs may be needed in the
future.

Net Premiums.Net
premium revenue for the three month period ended March 31,
2002 increased 46% to $78,007,000, as compared with $53,513,000
for the three month period ended March 31, 2001.
Substantially all the premium revenue was derived from
traditional ordinary life reinsurance. The growth in premium
revenue reflects the level of new business written and the
increase in the face amount of insurance in force. At
March 31, 2002 the total face amount of life insurance in
force was $129 billion compared with $83 billion at
March 31, 2001, a 55% increase. New business writings and
premium levels are significantly influenced by the seasonal
nature of the life reinsurance marketplace and by large
transactions and therefore can fluctuate from period to period.

Net Investment
Income.Total net investment income
for the three month period ended March 31, 2002 was
$24,590,000, as compared with $23,090,000 for the three month
period ended March 31, 2001. The

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increase in investment income is primarily due to
a deposit of $137,000,000 from a third party reinsurer during
the fourth quarter of 2001 that is used to fund collateral
requirements of our ceding companies. The average yield rate
earned on an annualized basis on our invested assets, including
deposits with reinsurers, but excluding Funds withheld, for the
three month period ended March 31, 2002 was approximately
5.14%, as compared with 6.52% for the three months ended
March 31, 2001. The decline in yield reflects our higher
than normal commitment to cash during the first quarter of 2002
as a result of receiving the $137,000,000 deposit late in the
fourth quarter of 2001 and a generally lower interest rate
environment.


Income earned on Funds withheld for the three
month period ended March 31, 2002 was $18,547,000, as
compared with $18,050,000 for the three month period ended
March 31, 2001. The modest increase in investment income
was the result of a relatively stable asset base in both periods
but a slight increase in yield rate. The average annualized
yield rate earned on Funds withheld was 5.41% for the three
months ended March 31, 2002, compared with 4.68% for the
three months ended March 31, 2001. For purposes of
calculating the average yield rate earned on our Funds withheld,
we include net realized capital gains and losses as reported to
us by our ceding companies in accordance with statutory
accounting principles. The increase in yield on our Funds
withheld is primarily due to an increase in yield on our
Transamerica annuity reinsurance contract.

Net Realized Investment (Losses) Gains.Net realized investment losses for the
three month period ended March 31, 2002 were $(322,000), as
compared with net realized investment gains of $26,000 for the
three month period ended March 31, 2001. These gains and
losses resulted from normal management of our investment
portfolio intended to improve performance and increase future
operating income. We do not consider realized gains and losses
from the sale of our invested assets to be recurring components
of earnings. We make decisions concerning the sales of our
invested assets based on a variety of market, business and other
factors.

Net Change in Fair Value of Embedded
Derivatives.Embedded derivative gains
and losses represent changes in the value of embedded
derivatives hosted by certain of our fixed annuity reinsurance
contracts. For the three month period ended March 31, 2002,
the change in fair value of our embedded derivatives was an
unrealized gain of $1,590,000. For the three month period ended
March 31, 2001, the unrealized loss in fair value of our
embedded derivatives was $(149,000). The unrealized gain in the
embedded derivatives during the three month period ended
March 31, 2002 was primarily the result of credit spreads
tightening. The unrealized loss in the embedded derivatives
during the three month period ended March 31, 2001 was
primarily related to repositioning of the underlying assets.

Surrender Fees and Other Revenue.Surrender fees and other revenue for
the three month period ended March 31, 2002 were
$3,896,000, as compared with $3,133,000 for the three month
period ended March 31, 2001. This income is primarily
derived from surrender fees related to our fixed annuity
products. The increase in revenue for the three months ended
March 31, 2002, as compared to the three months ended
March 31, 2001, is primarily due to increases in surrender
and withdrawal levels.

Claims and Policy Benefits.Claims and policy benefits for the
three month period ended March 31, 2002 were $58,816,000,
or 75.4% of net premium, as compared with $41,625,000, or 77.8%
of net premium, for the three month period ended March 31,
2001. The increase in claims and policy benefits in the three
month period ended March 31, 2002 is primarily due to
growth in our life reinsurance business. The reduction in our
claims and policy benefit ratio is the result of improved
mortality experience for the three month period ended
March 31, 2002, as compared to the three month period ended
March 31, 2001. We are currently seeking relief from our
ceding insurers with respect to two reinsurance contracts that
have generated mortality experience beyond our pricing
parameters and are producing losses. If we are unable to
rescind, recapture, reprice, or otherwise restructure these
agreements, we may incur additional losses on these contracts in
future periods. Although we expect mortality to be fairly
constant over long periods of time, it will fluctuate from
period to period. Reserves for future policy benefits are
determined by claims reported from ceding companies, our
aggregate experience, seasonal claim patterns and overall
mortality trends.

Interest Credited to Interest Sensitive
Products.Interest credited to
interest sensitive products, which are liabilities we assume
under certain annuity reinsurance agreements, for the three
month period ended

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March 31, 2002 was $17,922,000, as compared
with $8,291,000 for the three month period ended March 31,
2001. Included in Interest credited to interest sensitive
products for the three month period ended March 31, 2002
are minimum interest guarantee payments of approximately
$5,192,000, as compared to minimum interest guarantee payments
of $1,600,000 for the three month period ended March 31,
2001. The increase in Interest credited to interest sensitive
products for the three month period ended March 31, 2002
was primarily caused by these minimum interest guarantee
payments and by growth in the policyholder liability arising in
connection with our reinsurance agreement with Ohio National,
partially offset by a decrease in the size of our liability
under our reinsurance agreement with Transamerica due to
surrenders.


Policy Acquisition and Other Insurance
Expenses.Policy acquisition and other
insurance expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, for the three
month period ended March 31, 2002 were $15,636,000, as
compared with $25,025,000 for the three month period ended
March 31, 2001. The decrease for the three month period
ended March 31, 2002 is primarily due to reduced
amortization of deferred acquisition costs on our Transamerica
annuity reinsurance contract as a result of write downs in prior
periods, including a write down of $8,844,000 during the three
month period ended March 31, 2001. The write downs taken in
2001 were primarily due to exposure to minimum interest
guarantee payments under the Transamerica contract and higher
than expected surrender rates on the policies underlying that
contract.

Collateral Costs.Collateral costs comprise fees charged
by a third party reinsurer to provide cash deposits to us. These
deposits are used to fund excess statutory reserve requirements
of our clients and are recorded on our consolidated balance
sheet as a deposit liability. These costs were $1,296,000 for
the three month period ended March 31, 2002. Because our
collateral funding facility was not in place until the fourth
quarter of 2001, no costs were incurred for the three month
period ended March 31, 2001.

Operating Expenses.Operating expenses for the three month period ended
March 31, 2002 were $3,658,000 or 3.4% of total revenue
(excluding the net change in fair value of embedded derivatives)
compared with $2,665,000 or 3.3% of total revenue (excluding the
net change in fair value of embedded derivatives) for three
month period ended March 31, 2001. We consider our
operating expense level to be low by industry standards and to
be in line with our goal of being a low cost provider.

Segment Results

During the first quarter of 2002, we began to
separately track financial results of our life and annuity
operations in segments. Each segment is defined by a dominant
risk characteristic inherent in all products in that segment.
The life segment consists of all products where the dominant
risk characteristic is mortality risk. The annuity segment
comprises all products where the dominant risk characteristic is
investment risk. In addition, as discussed in Note 2 to the
financial statements included in this report, certain of our
modified coinsurance and coinsurance funds withheld annuity
reinsurance agreements have features that constitute embedded
derivatives that require bifurcation and separate accounting
under FAS 133  Accounting for Derivative
Instruments and Hedging Activities. The cumulative effect of the
application of FAS 133 through January 1, 2001 and the
change in the fair value of these embedded derivatives since
that date are included in the annuity segment. Both the life and
annuity segments have specific assets, liabilities,
stockholders equity, revenue, benefits and expenses that
apply only to them. The corporate segment contains all
stockholders equity not deployed to the life or annuity
segment. In addition, the corporate segment includes all capital
gains and losses from sales of securities in our portfolio and
investment income on undeployed invested assets. Operating
expenses are allocated to the segments proportionately based
upon the amount of stockholders equity deployed to the
segment. We believe that investors will better understand our
profitability, risk profile and capital deployment through this
change.

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

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Our life segment is our largest segment as
measured by profitability. Our life segment income for the three
month period ended March 31, 2002 was $7,189,000, as
compared with segment income of $4,134,000 for the comparable
prior period of 2001, reflecting growth in our life business.

Segment revenues for the three month period ended
March 31, 2002 grew 51% to $79,146,000 from $52,403,000 in
the first quarter of 2001. Our revenue growth was primarily
related to a 51% growth in life premium to $75,163,000 for the
three month period ended March 31, 2002, as compared with
$51,003,000 for the three month period ended March 31,
2001. The balance of the growth in revenue was derived from
investment income earned on funds deposited with us by a third
party reinsurer that are used to fund collateral requirements of
our clients.

Premium growth in our life segment was benefited
materially from the availability to us of our collateral
financing facility. We believe that this facility, which
provides us with funds to secure a substantial portion of our
obligations to cedents, is unique in the life reinsurance
industry and may provide us with a competitive advantage.
However, this reinsurer may in the future provide a similar
facility to one or more of our competitors, which could
eliminate this competitive advantage.

Segment policy benefits and expenses grew 49% to
$71,957,000 for the three month period ended March 31,
2002, as compared with $48,269,000 for the three month period
ended March 31, 2001, reflecting the increase in premium
volume and face amount of insurance in force. Segment benefits
and expenses for the first quarter of 2002 include collateral
costs of $1,296,000 associated with our collateral funding
facility that were not present in 2001. Overall benefits and
expenses were in line with our expectations.

Our life segment continues to perform well with a
return on revenue of 9.1% and a return on equity of 16.9% for
the first quarter of 2002.

Annuity Segment.Our
annuity reinsurance segment is the reinsurance of general
account fixed deferred annuities, general account payout annuity
obligations and certain risks arising from variable annuities.
With respect to the general account fixed annuities we reinsure,
our agreements generally relate to individual general account
single premium deferred annuity policies, which either involve
the tax-deferred accumulation of interest on a single premium
paid by the policyholder (accumulation phase policies) or are
annuities that pay fixed amounts periodically to policyholders
over a fixed period of time or their lives (payout phase
policies). Accumulation phase policies are subject primarily to
investment risk and persistency (lapse) risk, while payout phase
policies are primarily subject to investment risk and mortality
(longevity) risk. We also reinsure certain guarantees associated
with variable annuity contracts, including guaranteed minimum
death benefits, enhanced earnings benefits and guaranteed
minimum income benefits.

Our annuity segment contains the majority of our
assets. While we would expect it to be a small contributor to
our net income, it contains significant volatility from two
sources. First, under FAS 133  Accounting for
Derivative Instruments and Hedging Activities we must bifurcate
and separately account for embedded derivatives in certain of
our annuity reinsurance agreements. The unrealized change in the
value of these embedded derivatives is reported in our income
statement each quarter. The change in the value of the embedded
derivative can be large, and is driven by financial market
conditions, most notably credit risk related changes. Second,
our Transamerica annuity reinsurance contract has exhibited
volatility due to write downs of our deferred acquisition cost
balance which are based upon managements estimates of
future investment performance and lapse experience. In 2001, we
determined that our Transamerica annuity contract was in a loss
position, and wrote down approximately $46,115,000 of deferred
acquisition costs. In the first quarter of 2002, we purchased
$10,000,000 of reinsurance from a subsidiary of XL Capital
Ltd, a related party, for a premium of $1,500,000 million,
to provide an additional layer of protection against minimum
interest guarantee payments under the Transamerica annuity
reinsurance contract. In estimating the $46,115,000 in write
downs, we were required to make estimates, including estimates
of future lapse rates on the underlying business and future
investment income on the assets supporting this business, each
of which impact our estimates of future minimum interest
guarantee payments. There can be no assurance that our estimates
will prove to be accurate, and if they do not, we may be
required to recognize additional losses. Our annuity reinsurance
contract with Transamerica, which represented approximately 62%
of our annuity segment assets at March 31, 2002, is not
expected to generate net income going forward.

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Segment income improved to $2,918,000 for the
three month period ended March 31, 2002, as compared with a
loss of $(7,949,000) for the three month period ended
March 31, 2001. The segment net loss for the three month
period ended March 31, 2001 included $10,444,000 of minimum
interest guarantee payments and write downs of deferred
acquisition costs with respect to the Transamerica contact. The
first quarter of 2002 also includes income on our second largest
annuity reinsurance contract that was not written until the
third quarter of 2001.

Segment income for the three month period ended
March 31, 2001 also includes a loss of $(3,666,000) from
the cumulative effect of a change in accounting principle as of
January 1, 2001 relating to the application of
FAS 133. Under FAS 133, we are required to carry the
fair value of the embedded derivatives contained in certain of
our annuity reinsurance contracts on our balance sheet, and
unrealized changes in the fair value of those embedded
derivatives are reflected in our net income. The change in fair
value of the embedded derivatives is influenced by changes in
credit risk, yield curve shifts, changes in expected future cash
flows under the annuity reinsurance contracts and, to a lesser
extent, interest rate changes. For the three month period ended
March 31, 2002, the change in fair value of our embedded
derivatives (net of their related changes in deferred
acquisition cost amortization) was an unrealized gain of
$2,189,000. For the three month period ended March 31,
2001, the change in fair value of our embedded derivatives (net
of their related changes in deferred acquisition cost
amortization) was an unrealized gain of $736,000. The unrealized
gain in the embedded derivatives during the three month period
ended March 31, 2002 was primarily the result of credit
spreads tightening.

Total revenue for our annuity segment grew 14% to
$26,916,000 for the three month period ended March 31,
2002, as compared with $23,538,000 for the three month period
ended March 31, 2001. The increase is primarily related to
changes in the fair value of our embedded derivatives and an
increase in investment income.

Policy benefits and expenses for the annuity
segment, which include interest credited to policyholders,
segment specific expenses, and allocated expenses declined 14%
to $23,997,000 for the three month period ended March 31,
2002, as compared with $27,820,000 for the month period ended
March 31, 2001. The primary component of these expenses is
interest credited to policyholders, which increased primarily as
a result of minimum interest guarantee payments under our
annuity reinsurance contract with Transamerica and the inclusion
of our annuity reinsurance contract with Ohio National in the
first quarter of 2002 that was not in force in the first quarter
of 2001. However, these increases were offset by reduced
amortization of deferred acquisition costs on our Transamerica
reinsurance contract as a result of write downs in prior
periods, including a write down of $8,844,000 in the first
quarter of 2001.

Our annuity line is not performing well due to
our annuity reinsurance contract with Transamerica. However,
segment results for the three month period ended March 31,
2002 were favorably impacted by embedded derivative gains,
resulting in a return on equity of 14.2%, as compared to a
negative return on equity of (22.4)% for the three month period
ended March 31, 2001.

Corporate Segment.The corporate segment includes all capital gains and losses from
our own portfolio, investment income on undeployed invested
assets, and a proportionate share of operating expenses based
upon how stockholders equity is deployed to the life and
annuity segments. As a result, the corporate segment, while
small relative to our total company, will likely have volatile
results. Segment income declined 85% to $326,000 for the three
month period ended March 31, 2002, as compared with
$2,155,000 for the three month period ended March 31, 2001.
Revenues declined by 54% to $1,699,000 for the three month
period ended March 31, 2002, as compared with $3,672,000
for the three month period ended March 31, 2001. Both
declines were primarily driven by a the movement of
stockholders equity to the life segment to support its
growth. Realized capital losses of $(322,000) in the first
quarter of 2002 compared to realized capital gains of $26,000 in
the first quarter of 2001 also contributed to both declines.

Segment benefits and expenses declined by 9% to
$1,373,000 for the three month period ended March 31, 2002,
as compared with $1,517,000 for the three month period ended
March 31, 2001. This decline was also driven by the
deployment of stockholders equity to the life segment.

19



---



##### Table of Contents



Financial Condition



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

At March 31, 2002, our invested assets,
including cash and cash equivalents, had an aggregate fair value
of $434,127,000, including unrealized gains of approximately
$904,000, compared with an aggregate fair value of $423,780,000,
including unrealized gains of $6,418,000 at December 31,
2001. Our unrealized gains decreased during the first quarter of
2002 primarily as the result of general changes in interest
rates during the period. At March 31, 2002, our portfolio
was comprised of fixed income securities with a weighted average
credit quality rating of AA and a weighted average
duration of 4.0 years, compared with a weighted average
credit quality rating of AA+ and a weighted average
duration of 3.7 years at December 31, 2001.

Our investments are governed by investment
guidelines established and approved by our board of directors.
Our investment objectives are to achieve above average
risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of
liquidity, and match the cash flows of our investments to our
related insurance liabilities. Our investment guidelines require
our overall fixed income portfolio to maintain a minimum
weighted average credit quality of A. A fixed income
security rated A by Standard & Poors is
considered by Standard & Poors to be somewhat
susceptible to the adverse effects of changes in circumstances
and economic conditions, however, the issuers capacity to
meet its financial commitment on the security is still
considered to be strong. Our investment guidelines allow us to
invest in fixed income securities that are rated below
investment grade but limit these investments to 10% of our
invested assets. We do not invest in any fixed income securities
in emerging markets or securities which are not rated by a major
rating agency.

At March 31, 2002, $2,414,000 at fair value,
or 0.6% of our fixed income securities (0.6% of
Stockholders Equity), consisted of below investment grade
securities, as compared with $3,749,000 at fair value, or 1.2%
of our fixed income securities (0.9% of Stockholder
Equity) at December 31, 2001. The fair value of such
investments may vary depending on economic and market
conditions, the level of interest rates and the perceived
creditworthiness of the issuer. As noted above, our investment
guidelines limit the purchase of below investment grade
securities, as these investments are subject to a higher degree
of credit risk than investment grade securities. We monitor the
creditworthiness of the portfolio as a whole and when the fair
market value of a security declines for reasons other than
changes in interest rates or other perceived temporary
conditions, the security is written down to its net realizable
value. At March 31, 2002, there was one impaired security
in our portfolio, which was written down by $600,000.

At March 31, 2002, mortgage backed
securities represented approximately 13% of our invested assets,
including cash and cash equivalents, compared to approximately
11% of our invested assets, including cash and cash equivalents,
at December 31, 2001. Investors in these securities are
compensated primarily for reinvestment risk rather than credit
quality risk. Investments in mortgage backed securities include
collateralized mortgage obligations (CMOs) and
mortgage backed pass-through securities. Mortgage backed
securities generally are collateralized by mortgages issued by
the Government National Mortgage Association (GNMA),
the Federal National Mortgage Association (FNMA) and
the Federal Home Loan Mortgage Corporation (FHLMC).
Of these, only GNMA mortgages are backed by the full faith and
credit of the U.S. government. Credit risk generally is not
a consideration when investing in such mortgage backed
securities. Our mortgage backed securities portfolio had a
weighted average investment quality rating of AAA at
both March 31, 2002 and December 31, 2001.

20



---



##### Table of Contents



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

Investment Results

|                                                             |  |                        |         |                                  |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------- | -------------------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                             |  |                        |         |                                 
|                                                             |  |                        |         | Twelve Months Ended December 31,
|                                                             |  | Three Months Ended     |         |                                 
|                                                             |  | March 31, 2002         |         | 2001                             |  | 2000 |         | 1999
|                                                             |  |                        |         |                                  |  |      |         |     
|                                                             |  |                       
|                                                             |  | (dollars in thousands)
|Total invested assets, including cash and
    equivalents(1) |  | $                      | 434,127 |                                  |  | $    | 423,780 |      |  | $ | 321,819 |   |  | $ | 304,060 |  
|Investment income, net of related expenses                   |  |                        | 6,043   |                                  |  |      | 20,165  |      |  |   | 20,126  |   |  |   | 20,483  |  
|Effective yield rate(2)                                      |  |                        | 5.14    | %                                |  |      | 5.74    | %    |  |   | 6.85    | % |  |   | 6.29    | %
|Realized investment (losses) gains                           |  | $                      | (322    | )                                |  | $    | 1,230   |      |  | $ | (4,817  | ) |  | $ | (1,285  | )



---



|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fair value at end of the indicated period.                                                                                                                                                                                                                                                     
|   
|(2) | The effective yield rate equals (i) net
    investment income divided by (ii) the average of total
    adjusted invested assets (fixed maturities at amortized cost,
    including assets on deposit with reinsurers) at the end of each
    calendar quarter included in the indicated period.



| |                           
| | --------------------------
| | Funds Withheld at Interest

At March 31, 2002, our Funds withheld
receivable was $1,480,739,000, compared to $1,489,689,000 at
December 31, 2001. When a ceding company enters into an
annuity reinsurance contract structured as a modified
coinsurance or coinsurance funds withheld arrangement with us, a
portion of the ceding companys liability to the
policyholders or, in the case of a retrocessional arrangement,
the primary insurer, is ceded to us. Our arrangements are
generally on a quota share basis, so the portion that is ceded
to us is a fixed percentage of the liabilities arising from the
underlying policies. Our share of the ceding companys
liability is included on our Balance Sheet as Interest
sensitive contracts liabilities. However, unlike other
reinsurance arrangements in which we receive cash or investments
as consideration for assuming a portion of the ceding
companys liability, under these types of arrangements, we
establish a receivable called Funds withheld at
interest that is equal to our fixed portion of the
statutory reserves carried by the ceding company. We are then
allocated our share of the investment income and realized
capital gains and losses that arise from the securities in the
investment portfolio underlying the statutory reserve.

We currently have annuity reinsurance contracts
with six ceding companies. At March 31, 2002, the premiums
held and managed by our ceding companies were invested in
convertible bonds and fixed income securities having a weighted
average credit quality of A- and a weighted average
duration of 5.0 years. Also at March 31, 2002,
approximately 3.4% of the premiums held and managed by our
ceding companies were invested in below investment grade
securities. At December 31, 2001, these assets had a
weighted average credit quality of A and a weighted
average duration of 5.0 years. In addition, approximately
4.0% of the assets were invested in below investment grade
securities on that date.

The average annualized yield rate earned on our
Funds withheld receivable was approximately 5.41% for the three
months ended March 31, 2002, compared to 4.59% for the year
ended December 31, 2001. At March 31, 2002,
approximately 61% and 19% of our Funds withheld at interest
asset represented receivables from Transamerica and The Ohio
National Life Insurance Company, respectively, compared with 65%
and 15%, respectively, at December 31, 2001. The decrease
in the proportion of our Funds withheld asset related to the
Transamerica contract reflects the continued high surrender rate
on the policies underlying that contract, as well as the growth
of the Funds withheld asset related to our contract with Ohio
National. The average annualized yield rates earned on the
assets funding our annuity obligations to Transamerica and Ohio
National were approximately 4.65% and 7.59%, respectively, for
the three months ended March 31, 2002, compared with 3.94%
and 7.91%, respectively, for the year ended December 31,
2001. For purposes of calculating the

21



---



##### Table of Contents



average annualized yield rate earned on assets
held and managed by our ceding companies, including Transamerica
and Ohio National, we include net realized capital gains and
losses as reported to us by our ceding companies in accordance
with statutory accounting principles.


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

According to data provided to us by Transamerica,
at March 31, 2002 the assets held by IL Annuity and managed
by AmerUS Capital were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Convertible bonds                                           |  | $          | 661,731,101 |              |  | $          | 625,426,280 |  |  |  | 68.6  | 
|Investment grade U.S. corporate bonds                       |  |            | 169,622,465 |              |  |            | 168,615,290 |  |  |  | 18.5  | 
|Below investment grade U.S. corporate bonds                 |  |            | 42,413,717  |              |  |            | 42,205,435  |  |  |  | 4.6   | 
|Short term securities                                       |  |            | 75,709,199  |              |  |            | 75,124,586  |  |  |  | 8.3   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 949,476,482 |              |  | $          | 911,371,591 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 7,695,396   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 919,066,987 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 

According to data provided to us by Transamerica,
at March 31, 2002 the credit ratings of the assets
(excluding accrued investment income) held by IL Annuity and
managed by AmerUS Capital were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 138,475,656 |              |  | $          | 144,875,424 |  |  |  | 15.9  | 
|AA                                                          |  |            | 79,471,013  |              |  |            | 75,122,350  |  |  |  | 8.2   | 
|A                                                           |  |            | 229,683,034 |              |  |            | 223,515,971 |  |  |  | 24.5  | 
|BBB                                                         |  |            | 459,433,062 |              |  |            | 425,652,712 |  |  |  | 46.7  | 
|BB and below                                                |  |            | 42,413,717  |              |  |            | 42,205,134  |  |  |  | 4.7   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 949,476,482 |              |  | $          | 911,371,591 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 7,695,396   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 919,066,987 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 



---



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

22



---



##### Table of Contents



According to data provided to us by Transamerica,
at March 31, 2002 the maturity distribution of the assets
(excluding accrued investment income) held by IL Annuity and
managed by AmerUS Capital was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       | 
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 39,752,173  |              |  | $          | 39,784,353  |  |  |  | 4.4   | 
|From one to five years |  |            | 263,546,635 |              |  |            | 261,895,116 |  |  |  | 28.7  | 
|From six to ten years  |  |            | 261,600,737 |              |  |            | 253,810,466 |  |  |  | 27.8  | 
|More than ten years    |  |            | 384,576,937 |              |  |            | 355,881,656 |  |  |  | 39.1  | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 
|Total all years        |  | $          | 949,476,482 |              |  | $          | 911,371,591 |  |  |  | 100.0 | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 

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

According to data provided to us by Ohio
National, at March 31, 2002 the assets held and managed by
Ohio National were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Corporate bonds                                             |  | $          | 202,910,225 |              |  | $          | 203,817,980 |  |  |  | 76.0  | 
|Asset backed securities                                     |  |            | 57,999,808  |              |  |            | 57,876,465  |  |  |  | 21.6  | 
|Mortgage backed securities                                  |  |            | 5,598,854   |              |  |            | 5,774,150   |  |  |  | 2.2   | 
|Government bonds                                            |  |            | 561,671     |              |  |            | 561,671     |  |  |  | 0.2   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 267,070,558 |              |  | $          | 268,030,266 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 3,664,573   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 271,694,839 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 

At March 31, 2002 the credit ratings of the
assets (excluding accrued investment income) held and managed by
Ohio National were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 26,861,653  |              |  | $          | 27,093,976  |  |  |  | 10.1  | 
|AA                                                          |  |            | 20,933,543  |              |  |            | 21,056,732  |  |  |  | 7.9   | 
|A                                                           |  |            | 102,222,354 |              |  |            | 103,457,872 |  |  |  | 38.6  | 
|BBB                                                         |  |            | 113,860,782 |              |  |            | 113,288,353 |  |  |  | 42.3  | 
|Below BBB                                                   |  |            | 3,192,226   |              |  |            | 3,133,333   |  |  |  | 1.1   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 267,070,558 |              |  | $          | 268,030,266 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 3,664,573   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 271,694,839 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 



---



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

23



---



##### Table of Contents



According to data provided to us by Ohio
National, at March 31, 2002 the maturity distribution of
the assets (excluding accrued investment income) held and
managed by Ohio National was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       | 
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 561,671     |              |  | $          | 561,671     |  |  |  | 0.2   | 
|From one to five years |  |            | 13,743,614  |              |  |            | 13,666,008  |  |  |  | 5.1   | 
|From six to ten years  |  |            | 122,504,789 |              |  |            | 123,333,460 |  |  |  | 46.0  | 
|More than ten years    |  |            | 130,260,484 |              |  |            | 130,469,127 |  |  |  | 48.7  | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 
|Total all years        |  | $          | 267,070,558 |              |  | $          | 268,030,266 |  |  |  | 100.0 | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 

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

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
March 31, 2002 the assets held and managed by those ceding
companies were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Canadian provincial bonds                                   |  | $          | 89,380,492  |              |  | $          | 89,068,622  |  |  |  | 28.7  | 
|Investment grade US corporate bonds                         |  |            | 102,159,897 |              |  |            | 102,806,305 |  |  |  | 33.1  | 
|Investment grade UK corporate bonds                         |  |            | 77,893,812  |              |  |            | 77,893,812  |  |  |  | 25.1  | 
|Investment grade Canadian corporate bonds                   |  |            | 17,828,183  |              |  |            | 17,647,647  |  |  |  | 5.7   | 
|All other securities                                        |  |            | 23,250,913  |              |  |            | 22,765,989  |  |  |  | 7.4   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 310,513,297 |              |  | $          | 310,182,375 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 5,723,291   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 315,905,666 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
March 31, 2002 the credit ratings of the assets (excluding
accrued investment income) held and managed by those ceding
companies were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 39,222,170  |              |  | $          | 39,436,278  |  |  |  | 12.8  | 
|AA                                                          |  |            | 30,746,692  |              |  |            | 30,776,554  |  |  |  | 9.9   | 
|A                                                           |  |            | 172,142,076 |              |  |            | 172,541,737 |  |  |  | 55.6  | 
|BBB                                                         |  |            | 61,568,675  |              |  |            | 61,468,869  |  |  |  | 19.8  | 
|BB and below                                                |  |            | 6,833,684   |              |  |            | 5,958,937   |  |  |  | 1.9   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total invested assets                                       |  | $          | 310,513,297 |              |  | $          | 310,182,375 |  |  |  | 100.0 | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Accrued investment income                                   |  |            |             |              |  |            | 5,723,291   |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 315,905,666 |  |  |  |       | 
|                                                            |  |            |             |              |  |            |             |  |  |  |       | 



---



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

24



---



##### Table of Contents



According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
March 31, 2002 the maturity distribution of the assets
(excluding accrued investment income) held and managed by those
ceding companies was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       | 
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | 
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 17,170,361  |              |  | $          | 17,272,916  |  |  |  | 5.6   | 
|From one to five years |  |            | 72,249,451  |              |  |            | 73,140,936  |  |  |  | 23.6  | 
|From six to ten years  |  |            | 72,033,496  |              |  |            | 71,173,578  |  |  |  | 22.9  | 
|More than ten years    |  |            | 149,059,989 |              |  |            | 148,594,945 |  |  |  | 47.9  | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 
|Total all years        |  | $          | 310,513,297 |              |  | $          | 310,182,375 |  |  |  | 100.0 | 
|                       |  |            |             |              |  |            |             |  |  |  |       | 

Liquidity and Capital Resources

Our liquidity and capital resources are a measure
of our overall financial strength and our ability to generate
cash flows from our operations to meet operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold, funds drawn from our collateral funding facility, and cash
and short term investments. The principal obligations and uses
of the funds are the payment of policy benefits, acquisition and
operating expenses and the purchase of investments.

For the three-month period ended March 31,
2002 we generated $14,328,000 from our operating activities as
compared with $846,000 from our operating activities for the
three months ended March 31, 2001. This change is primarily
related to the development of our life reinsurance segment.

At March 31, 2002 our total capitalization,
which consists entirely of equity, was $405,752,000. We believe
this level of capital is sufficient to support our insurance
writings and growth for the near future. However, as a Bermuda
reinsurer we are required to post collateral for the statutory
reserves ceded to us by U.S. based insurers and reinsurers.
During 2001, we entered into a reinsurance agreement with a
third party reinsurer to cede excess U.S. Statutory reserves
(the amount by which our cedents U.S. Statutory reserves
exceed our U.S. GAAP reserves for certain life insurance
contracts subject to certain state statutory regulations known
as Triple-X) to the reinsurer. Under the agreement, the
reinsurer is obligated to fund the collateral requirements
associated with these excess U.S. Statutory reserves by making
cash deposits with us. As of March 31, 2002, we had
received deposits of $137,000,000 from the reinsurer. We expect
to cede additional excess U.S. Statutory reserves to, and
receive additional deposits from, the reinsurer in the future.
The reinsurer has the right to terminate the agreement with
180 days notice, which would require us to return all
deposits. Absent a termination by the reinsurer or by us, the
agreement will terminate and all deposits received by us will be
returned on the fifth anniversary of the agreement unless it is
extended by the parties. We receive the benefit of investment
income from the funds received by us and pay the reinsurer
certain fees associated with the contract. These fees are
determined principally by the amount of deposits received by us.
For the first quarter of 2002 these fees were $1,296,000 and are
recorded as Collateral costs in our Statement of Operations. As
part of this contract we deposited $41,000,000 with the
reinsurer, which is included in Deposits and other reinsurance
receivables.

On March 1, 2002 we filed a shelf
registration statement on Form S-3 to register under the
Securities Act of 1933 $200,000,000 of senior debt to be sold in
one or more transactions on a delayed basis. We may issue some
or all of this debt in the future, although the registration
statement is currently not effective and, therefore, we may not
issue debt under it at this time. This debt, if and when issued,
would be used for general corporate purposes, including capital
contributions to our operating subsidiaries, and to fund
collateral requirements of our cedents. In the future, we may
issue additional debt or other forms of capital to assist in
meeting our liquidity and capital needs, including funding the
collateralization needs of our cedents. During 2001, our Board
of Directors approved a share repurchase program of up to
$25,000,000 of our common shares. While our Board has given us
the flexibility to repurchase our common shares in the future if
market conditions so dictate, we have not repurchased any common
shares, as we anticipate utilizing this capital to support our
business growth.

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At March 31, 2002 and December 31,
2001, letters of credit totaling $185,000,000 and $197,000,000,
respectively, issued in the ordinary course of our business had
been issued by our bankers in favor of certain ceding insurance
companies to provide security and meet regulatory requirements.
At March 31, 2002 and December 31, 2001 letters of
credit totaling $92,000,000 and $101,000,000, respectively, were
fully collateralized by our investments. We may incur
indebtedness in the future for investment or operational
purposes, acquisitions of, investments in, joint ventures with
or strategic alliances with companies whose businesses
complement the Companys business.

At March 31, 2002 and December 31, 2001
investments of $274,000,000 and $272,000,000, respectively, were
held in trust for the benefit of certain ceding insurance
companies to provide security and to meet regulatory
requirements.

On February 15, 2002 our Board of Directors
declared a quarterly dividend of $.05 per share payable to
shareholders of record on March 7, 2002. The Board intends
to continue to declare and pay out of earnings a quarterly
dividend. The continued payment of dividends is dependent on the
ability of our operating subsidiaries to achieve satisfactory
underwriting and investment results and other factors determined
to be relevant by our Board of Directors.

We have no material commitments for capital
expenditures as of March 31, 2002.

Forward-Looking and Cautionary
Statements

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

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|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

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

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ANNUITY AND LIFE RE (HOLDINGS), LTD.

SIGNATURES

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

| |  |                                                                
| |  | ---------------------------------------------------------------
| |  | Annuity and Life Re (Holdings), Ltd.                           
|
| |  | /s/ JOHN F. BURKE                                              
| |  |                                                                
| |  | Name: JOHN F. BURKE                                            
| |  | Title:  Chief Executive Officer and
    Chief Financial Officer

Date:     March 20,
2003

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CERTIFICATION

I, John F. Burke, certify that:



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

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

March 20, 2003

29