##### Table of Contents



---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


__________________

FORM 10-Q

__________________


þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003oro
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
           to


Commission file number 0-23637

Global Preferred Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)


DELAWARE
    
    58-2179041(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)


6455 EAST JOHNS CROSSING, SUITE 402
DULUTH, GEORGIA 30097
(770) 248-3311(Address, Including Zip Code and Telephone Number, Including Area Code, of Registrants Principal Executive Offices)

__________________

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

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

As of November 7, 2003, there were 4,141,684 shares of common stock
outstanding.



---

---





---

TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1. FINANCIAL STATEMENTS                                                                 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                                                                  
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS                                         
|ITEM 3.    DEFAULTS UPON SENIOR SECURITIES                                                   
|ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                               
|ITEM 5.    OTHER INFORMATION                                                                 
|ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K                                                  
|SIGNATURES                                                                                   
|FIRST AMENDMENT TO THE LEASE AGREEMENT                                                       
|AMENDMENT NO.4 TO THE AUTOMATIC FLEXIBLE PREMIUM                                             
|SECTION 302 CERTIFICATION OF THE CEO                                                         
|SECTION 302 CERTIFICATION OF THE CFO                                                         
|SECTION 906 CERTIFICATION OF THE CEO                                                         
|SECTION 906 CERTIFICATION OF THE CFO                                                         



---



##### Table of Contents



TABLE OF CONTENTS

PART I 
    
    FINANCIAL INFORMATION
    
    
    3ITEM 1
    
    FINANCIAL STATEMENTS
    
    
    3ITEM 2
    
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    11ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    23ITEM 4
    
    CONTROLS AND PROCEDURES
    
    
    23PART II 
    
    OTHER INFORMATION
    
    
    23ITEM 1
    
    LEGAL PROCEEDINGS
    
    
    23ITEM 2
    
    CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    23ITEM 3
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    23ITEM 4
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24ITEM 5
    
    OTHER INFORMATION
    
    
    24ITEM 6
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    24


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

2



---



##### Table of Contents









PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GLOBAL PREFERRED HOLDINGS, INC.

Consolidated Balance Sheets
(Unaudited)

December 31,
    
    September 30,2002
    
    2003AssetsFixed maturity securities  available for sale (amortized
cost of $2,673,762 and $7,045,446 for 2002 and 2003,
respectively)
    
    $
    2,798,190
    
    
    $
    7,308,796Equity securities  available for sale (cost of $2,000,000
for 2003)
    
    
    
    
    
    
    2,002,085Cash and cash equivalents
    
    
    15,858,256
    
    
    
    17,818,312Investment income due and accrued
    
    
    80,882
    
    
    
    90,451Accounts receivable
    
    
    215,500
    
    
    
    11,164Reinsurance balances receivable
    
    
    3,078,949
    
    
    
    2,349,260Reinsured policy loans
    
    
    1,115,994
    
    
    
    1,214,128Deferred acquisition costs
    
    
    49,850,309
    
    
    
    46,676,951Prepaid expenses
    
    
    888,662
    
    
    
    635,480Current income tax recoverable
    
    
    172,500
    
    
    
    93,976Fixed assets (net of accumulated depreciation of $240,439 and
$312,171 for 2002 and 2003, respectively)
    
    
    215,095
    
    
    
    153,988Total assets
    
    $
    74,274,337
    
    
    $
    78,354,591Liabilities and Stockholders EquityLiabilities:Future policy benefits
    
    $
    16,923,775
    
    
    $
    19,071,441Reinsurance balances payable
    
    
    42,130
    
    
    
    Accrued expenses and accounts payable
    
    
    473,636
    
    
    
    435,004Accrued interest payable
    
    
    158,219
    
    
    
    63,699Short term debt
    
    
    
    
    
    
    5,000,000Long term debt
    
    
    5,000,000
    
    
    
    Deferred tax liability
    
    
    8,354,722
    
    
    
    9,019,599Total liabilities
    
    
    30,952,482
    
    
    
    33,589,743Stockholders equity:Common stock, par value $.001, 50,000,000 shares and
15,000,000 shares authorized for 2002 and 2003,
respectively; 4,149,074 shares issued for 2002 and 2003
    
    
    4,149
    
    
    
    4,149Additional paid-in capital
    
    
    23,326,026
    
    
    
    23,326,026Accumulated other comprehensive income
    
    
    82,125
    
    
    
    175,187Retained earnings
    
    
    19,958,822
    
    
    
    21,308,753Treasury stock, at cost (7,390 shares)
    
    
    (49,267
    )
    
    
    (49,267
    )Total stockholders equity
    
    
    43,321,855
    
    
    
    44,764,848Total liabilities and stockholders equity
    
    $
    74,274,337
    
    
    $
    78,354,591


See accompanying notes to consolidated financial statements.

3



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.

Consolidated Statements of Income
(Unaudited)

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2002
    
    2003
    
    2002
    
    2003Revenues:Premiums
    
    $
    4,484,848
    
    
    $
    4,331,649
    
    
    $
    13,574,548
    
    
    $
    13,083,712Reinsured policy revenues
    
    
    3,441,907
    
    
    
    3,200,173
    
    
    
    10,596,850
    
    
    
    9,690,225Net investment income
    
    
    168,074
    
    
    
    95,206
    
    
    
    570,455
    
    
    
    266,094Net realized gain on investments
    
    
    
    
    
    
    
    
    
    
    7,338
    
    
    
    Other income
    
    
    
    
    
    
    9,497
    
    
    
    
    
    
    
    15,007Total revenues
    
    
    8,094,829
    
    
    
    7,636,525
    
    
    
    24,749,191
    
    
    
    23,055,038Benefits and expenses:Benefits, claims and settlement
expenses
    
    
    2,134,758
    
    
    
    2,212,743
    
    
    
    6,806,589
    
    
    
    6,943,333Change in future policy benefits
    
    
    353,099
    
    
    
    308,616
    
    
    
    1,210,776
    
    
    
    815,622Reinsurance expense allowances, net
    
    
    2,100,972
    
    
    
    2,001,759
    
    
    
    6,435,428
    
    
    
    6,158,269Amortization of deferred
acquisition costs
    
    
    2,483,943
    
    
    
    1,566,410
    
    
    
    4,674,447
    
    
    
    4,222,651Operating expenses
    
    
    814,119
    
    
    
    765,175
    
    
    
    2,235,574
    
    
    
    2,587,044Costs of withdrawn offering
    
    
    1,712,000
    
    
    
    
    
    
    
    1,712,000
    
    
    
    Interest expense
    
    
    94,521
    
    
    
    94,521
    
    
    
    285,596
    
    
    
    280,479Total benefits and expenses
    
    
    9,693,412
    
    
    
    6,949,224
    
    
    
    23,360,410
    
    
    
    21,007,398Income (Loss) before income tax
    
    
    (1,598,583
    )
    
    
    687,301
    
    
    
    1,388,781
    
    
    
    2,047,640Income tax benefit (expense)
    
    
    535,347
    
    
    
    (235,213
    )
    
    
    (476,790
    )
    
    
    (697,709
    )Net income (loss)
    
    $
    (1,063,236
    )
    
    $
    452,088
    
    
    $
    911,991
    
    
    $
    1,349,931Basic earnings (loss) per share
    
    $
    (0.26
    )
    
    $
    0.11
    
    
    $
    0.22
    
    
    $
    0.33Diluted earnings (loss) per share
    
    $
    (0.26
    )
    
    $
    0.11
    
    
    $
    0.22
    
    
    $
    0.33Weighted-average common shares
outstanding
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    4,141,684Total weighted-average common and
common equivalent shares outstanding
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    4,141,684
    
    
    
    4,141,684


See accompanying notes to consolidated financial statements.

4



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)

Nine Months EndedSeptember 30,2002
    
    2003Cash flows from operating activities:Net income
    
    $
    911,991
    
    
    $
    1,349,931Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Amortization and depreciation
    
    
    4,743,326
    
    
    
    4,294,383Costs of withdrawn offering
    
    
    1,712,000
    
    
    
    Deferred tax expense
    
    
    459,709
    
    
    
    616,935Net realized gain on investments
    
    
    (7,338
    )
    
    
    Change in:Investment income due and accrued
    
    
    35,246
    
    
    
    (9,569
    )Accounts receivable
    
    
    
    
    
    
    204,336Reinsurance balances receivable
    
    
    100,433
    
    
    
    729,689Reinsured policy loans
    
    
    (105,892
    )
    
    
    (98,134
    )Deferred acquisition costs
    
    
    (13,491,454
    )
    
    
    (1,049,293
    )Prepaid expenses
    
    
    (858,895
    )
    
    
    253,182Current income tax recoverable
    
    
    (174,375
    )
    
    
    78,524Future policy benefits
    
    
    4,268,711
    
    
    
    2,147,666Reinsurance balances payable
    
    
    175,028
    
    
    
    (42,130
    )Accrued expenses and accounts payable
    
    
    (67,402
    )
    
    
    (38,632
    )Accrued interest payable
    
    
    (94,520
    )
    
    
    (94,520
    )Current income tax payable
    
    
    (413,299
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (2,806,731
    )
    
    
    8,342,368Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    1,372,284
    
    
    
    Proceeds from principal payments on mortgage-backed
securities of available-for-sale securities
    
    
    628,942
    
    
    
    651,228Proceeds from maturity of available-for-sale securities
    
    
    200,000
    
    
    
    600,000Purchase of available-for-sale securities
    
    
    (1,458,463
    )
    
    
    (7,622,915
    )Purchase of fixed assets
    
    
    (222,337
    )
    
    
    (10,625
    )Net cash provided by (used in) investing activities
    
    
    520,426
    
    
    
    (6,382,312
    )Cash flows from financing activities:Prepaid expenses  costs of withdrawn offering
    
    
    577,112
    
    
    
    Costs of withdrawn offering
    
    
    (1,712,000
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (1,134,888
    )
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (3,421,193
    )
    
    
    1,960,056Cash and cash equivalents at beginning of period
    
    
    8,062,110
    
    
    
    15,858,256Cash and cash equivalents at end of period
    
    $
    4,640,917
    
    
    $
    17,818,312Supplemental disclosure of cash flow information:Interest paid
    
    $
    380,116
    
    
    $
    375,000Income taxes paid
    
    $
    604,755
    
    
    $
    2,250


See accompanying notes to consolidated financial statements.

5



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)



|1. |  | Basis of Presentation
|-- |  | ---------------------

The accompanying unaudited consolidated financial statements of Global
Preferred Holdings, Inc. (Global Preferred) have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. The unaudited financial statements should be read in conjunction with
Global Preferreds audited financial statements included in Global Preferreds
2002 Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission.



|2. |  | Deferred Tax
|-- |  | ------------

Global Preferred uses the asset and liability method to record deferred
income taxes. Accordingly, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases using an effective federal income tax rate of 34%.
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxesspecifically excludes recognition of the small life insurance
company deduction available under Section 806 of the Internal Revenue Code for
qualifying life insurance companies. This special deduction can reduce the
effective federal income tax rate from 34% to less than 20% depending upon the
amount of taxable income. Consequently, the effective tax rate on Global
Preferreds earnings may ultimately prove to be less than the net deferred
income tax liabilities and related expenses determined under SFAS No. 109 at
September 30, 2003.



|3. |  | Comprehensive Income
|-- |  | --------------------

SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The primary component of other
comprehensive income is the unrealized gain on securities as shown under the
equity section of the consolidated balance sheet. Total comprehensive income
for the three months ended September 30, 2003 was $540,312, compared to
$933,093 for the three months ended September 30, 2002. Total comprehensive
income for the nine months ended September 30, 2003 was $1,442,993, compared to
$1,078,638 for the nine months ended September 30, 2002.



|4. |  | Earnings Per Share
|-- |  | ------------------

Basic earnings per share is computed based on the weighted-average number
of common shares outstanding during the period, in accordance with SFAS No.
128, Earnings Per Share. Diluted earnings per share is computed based on the
total weighted-average number of common and common equivalent shares
outstanding during the period. All outstanding stock options were
anti-dilutive for the three months and nine months ended September 30, 2003.

For the three and nine month periods ended September 30, 2002 and 2003,
the incremental shares issued and the income impact upon the conversion of the
convertible note issued to Money Services, Inc. were excluded because they
would have been anti-dilutive. The conversion price of the note is $15.99 per
common share based on the maturity value of the convertible note. As of
September 30, 2003, Global Preferred had 249,315 outstanding stock options,
none of which were dilutive. The outstanding stock options along with the
convertible note could be dilutive in the future.



|5. |  | Common Stock
|-- |  | ------------

Shares of convertible preferred stock issued in June and July 2000 were
converted to common stock on January 1, 2002. No other changes to our common
stock occurred during 2002 or 2003.

6



---



##### Table of Contents





|6. |  | Stock Options
|-- |  | -------------

Global Preferreds employee stock incentive plan and directors stock
option plan (the stock option plans) are accounted for under the intrinsic
value recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. As the exercise
price of all options granted under the stock option plans did not exceed the
fair value of the underlying common stock on the grant date, no stock-based
employee compensation cost is recognized in net income. The following table
illustrates the effect on net income and earnings per share if Global Preferred
had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to the stock option plans as of the dates
reported.

Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,(In ThousandsExcept Per Share Amounts)
    
    2003
    
    2003Net income, as reported
    
    $
    452.1
    
    
    $
    1,349.9Less: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net of
tax
    
    
    (5.7
    )
    
    
    (13.3
    )Pro-forma net income
    
    $
    446.4
    
    
    $
    1,336.6Reported basic earnings per common share
    
    $
    0.11
    
    
    $
    0.33Reported diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.33Pro-forma basic earnings per common share
    
    $
    0.11
    
    
    $
    0.32Pro-forma diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.32




|7. |  | Accounting Pronouncements
|-- |  | -------------------------

SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative
instrument. The provisions of SFAS No. 133 do not have a material impact on
Global Preferreds financial statements. In 2003, SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, was issued.
This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. The provisions
of SFAS No. 149 are not expected to have a material impact on Global
Preferreds financial statements.

In April 2003, the Financial Accounting Standards Board (FASB) cleared
Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Creditworthiness
of the Obligor Under Those Instruments, which includes guidance with respect to
modified coinsurance arrangements involving fixed account products. Global
Preferred does not have any modified coinsurance reinsurance treaties involving
fixed account products and therefore this issue is not expected to have a
material impact on Global Preferreds financial statements.

The FASB recently issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The
provisions of this statement provide guidelines on how companies recognize
certain financial instruments with characteristics of both liabilities and
equity. It requires certain financial instruments, which were previously
treated as equity, to be classified as a liability. The provisions of this
statement are effective for financial statements issued on or after June 15,
2003. The adoption of this statement did not have a material impact on Global
Preferreds financial statements.

7



---



##### Table of Contents



In 2002, FASB issued SFAS No. 145, SFAS No. 146 and SFAS No. 147 dealing
with extinguishment of debt, exit and disposal activities and acquisitions of
financial institutions, respectively. The provisions of these standards do not
have a material impact on Global Preferreds financial statements. The FASB
also issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure,in 2002. Global Preferred has implemented the disclosure
requirement of this standard in conjunction with its reporting of employee
stock compensation.

Also, in 2002, FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Othersand in January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities.The interpretations issued are
not expected to have a material impact on Global Preferreds financial
statements.

In July 2003, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts. The provisions of this SOP are effective for financial statements
for fiscal years beginning after December 15, 2003 and require, among other
things, an explicit approach to account for guaranteed minimum death benefits
for certain variable annuity policies. Under the explicit approach, a
guaranteed minimum death benefit liability is established with the change in
the liability included in gross profits used to determine the amortization of
the deferred acquisition costs. A change to the explicit approach from current
methods would result in an increase in future policy benefits and an increase
in deferred acquisition costs. While Global Preferred has not fully quantified
the effect of these changes, they are not expected to have a material impact on
Global Preferreds financial statements.



|8. |  | Segment Reporting
|-- |  | -----------------

Global Preferred defines reportable segments based on the nature of its
reinsurance agreements and the accounting treatment used for the various
reinsurance agreements. Based on this definition, two reportable segments have
been identified: non-universal life-type agreements and universal life-type
agreements (as each is referenced in SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments, paragraphs 44 and 45). Global
Preferred reinsures certain variable universal life insurance policies on a
renewable term basis, which are reported below as Non-Universal Life-Type
Agreements and, as such, these revenues are classified as premium revenue.
Renewable term reinsurance involves the reinsurance of mortality risk whereby
premiums are not directly related to the premium rates on the original plan of
insurance. Global Preferreds renewable term agreements are accounted for
under SFAS No. 60, Accounting and Reporting by Insurance Enterprises,
accounting principles. Global Preferred reinsures variable annuity contracts
and certain other variable universal life insurance policies on a coinsurance
and modified coinsurance basis, which are reported below as Universal Life-Type
Agreements and, as such, these revenues are classified as reinsured policy
revenues. Coinsurance involves the reinsurance of mortality and investment
risks on the same basis as that of the underlying policies. The ceding life
companies and Global Preferred share in these risks on a pro rata basis.
Global Preferreds existing coinsurance and modified coinsurance agreements are
accounted for under SFAS No. 97 accounting principles.

Items not directly related to the business segments and unallocated
corporate items (i.e., other income, interest expense on corporate debt and
unallocated operating expenses) are shown separately, consistent with Global
Preferreds internal measurement process. Segment assets reported include
those assets directly attributable to the reinsurance agreements such as
reinsurance balances receivable, deferred acquisition costs, policy loans,
prepaid expenses, invested assets and cash. Cash and invested assets are
allocated to the agreements based upon statutory reserves, the letters of
credit posted in support of the statutory reserves held, statutory receivables
and allocated surplus, which is consistent with Global Preferreds current
internal measurement process.

8



---



##### Table of Contents



SEGMENT REPORTING

Three Months EndedSeptember 30,
    
    2002
    
    2003Non-
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Universal
    
    Universal
    
    
    
    
    
    
    
    
    
    Universal
    
    Universal(Dollars in thousands)
    
    Life-Type
    
    Life-Type
    
    Other
    
    Total
    
    Life-Type
    
    Life-Type
    
    Other
    
    TotalPremiums
    
    $
    4,485
    
    
    $
    
    
    
    $
    
    
    
    $
    4,485
    
    
    $
    4,332
    
    
    $
    
    
    
    $
    
    
    
    $
    4,332Reinsured policy revenues
    
    
    
    
    
    
    3,442
    
    
    
    
    
    
    
    3,442
    
    
    
    
    
    
    
    3,200
    
    
    
    
    
    
    
    3,200Benefits, claims and
settlement expenses*
    
    
    2,086
    
    
    
    402
    
    
    
    
    
    
    
    2,488
    
    
    
    2,182
    
    
    
    339
    
    
    
    
    
    
    
    2,521Reinsurance expense
allowances, net
    
    
    1,574
    
    
    
    527
    
    
    
    
    
    
    
    2,101
    
    
    
    1,503
    
    
    
    499
    
    
    
    
    
    
    
    2,002Amortization of deferred
acquisition costs
    
    
    117
    
    
    
    2,367
    
    
    
    
    
    
    
    2,484
    
    
    
    41
    
    
    
    1,525
    
    
    
    
    
    
    
    1,566Underwriting profit
    
    
    708
    
    
    
    146
    
    
    
    
    
    
    
    854
    
    
    
    606
    
    
    
    837
    
    
    
    
    
    
    
    1,443Net investment income
    
    
    37
    
    
    
    97
    
    
    
    34
    
    
    
    168
    
    
    
    3
    
    
    
    60
    
    
    
    32
    
    
    
    95Net realized gain on
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Costs of withdrawn offering
    
    
    
    
    
    
    
    
    
    
    1,712
    
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Other expenses
    
    
    40
    
    
    
    75
    
    
    
    793
    
    
    
    908
    
    
    
    52
    
    
    
    97
    
    
    
    711
    
    
    
    860Segment operating income
(loss) before income tax
    
    
    705
    
    
    
    168
    
    
    
    (2,471
    )
    
    
    (1,598
    )
    
    
    557
    
    
    
    800
    
    
    
    (670
    )
    
    
    687Income tax expense (benefit)
    
    
    236
    
    
    
    56
    
    
    
    (827
    )
    
    
    (535
    )
    
    
    191
    
    
    
    273
    
    
    
    (229
    )
    
    
    235Segment net income (loss)
    
    $
    469
    
    
    $
    112
    
    
    $
    (1,644
    )
    
    $
    (1,063
    )
    
    $
    366
    
    
    $
    527
    
    
    $
    (441
    )
    
    $
    452Segment assets
    
    $
    7,866
    
    
    $
    61,251
    
    
    $
    4,229
    
    
    $
    73,346
    
    
    $
    5,396
    
    
    $
    49,755
    
    
    $
    23,204
    
    
    $
    78,355




---

|* |  | Benefits, claims and settlement expenses include change in future policy
benefits.
|- |  | ----------------------------------------------------------------------------------

Nine Months EndedSeptember 30,
    
    2002
    
    2003Non-
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Universal
    
    Universal
    
    
    
    
    
    
    
    
    
    Universal
    
    Universal(Dollars in thousands)
    
    Life-Type
    
    Life-Type
    
    Other
    
    Total
    
    Life-Type
    
    Life-Type
    
    Other
    
    TotalPremiums
    
    $
    13,575
    
    
    $
    
    
    
    $
    
    
    
    $
    13,575
    
    
    $
    13,084
    
    
    $
    
    
    
    $
    
    
    
    $
    13,084Reinsured policy revenues
    
    
    
    
    
    
    10,597
    
    
    
    
    
    
    
    10,597
    
    
    
    
    
    
    
    9,690
    
    
    
    
    
    
    
    9,690Benefits, claims and
settlement expenses*
    
    
    6,494
    
    
    
    1,523
    
    
    
    
    
    
    
    8,017
    
    
    
    6,399
    
    
    
    1,360
    
    
    
    
    
    
    
    7,759Reinsurance expense
allowances, net
    
    
    4,776
    
    
    
    1,660
    
    
    
    
    
    
    
    6,436
    
    
    
    4,550
    
    
    
    1,609
    
    
    
    
    
    
    
    6,159Amortization of deferred
acquisition costs
    
    
    190
    
    
    
    4,485
    
    
    
    
    
    
    
    4,675
    
    
    
    199
    
    
    
    4,023
    
    
    
    
    
    
    
    4,222Underwriting profit
    
    
    2,115
    
    
    
    2,929
    
    
    
    
    
    
    
    5,044
    
    
    
    1,936
    
    
    
    2,698
    
    
    
    
    
    
    
    4,634Net investment income
    
    
    111
    
    
    
    230
    
    
    
    230
    
    
    
    571
    
    
    
    7
    
    
    
    176
    
    
    
    83
    
    
    
    266Net realized gain on
investments
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Costs of withdrawn offering
    
    
    
    
    
    
    
    
    
    
    1,712
    
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    15Other expenses
    
    
    98
    
    
    
    193
    
    
    
    2,230
    
    
    
    2,521
    
    
    
    124
    
    
    
    259
    
    
    
    2,484
    
    
    
    2,867Segment operating income
(loss) before income tax
    
    
    2,128
    
    
    
    2,966
    
    
    
    (3,705
    )
    
    
    1,389
    
    
    
    1,819
    
    
    
    2,615
    
    
    
    (2,386
    )
    
    
    2,048Income tax expense (benefit)
    
    
    731
    
    
    
    1,018
    
    
    
    (1,272
    )
    
    
    477
    
    
    
    620
    
    
    
    891
    
    
    
    (813
    )
    
    
    698Segment net income (loss)
    
    $
    1,397
    
    
    $
    1,948
    
    
    $
    (2,433
    )
    
    $
    912
    
    
    $
    1,199
    
    
    $
    1,724
    
    
    $
    (1,573
    )
    
    $
    1,350Segment assets
    
    $
    7,866
    
    
    $
    61,251
    
    
    $
    4,229
    
    
    $
    73,346
    
    
    $
    5,396
    
    
    $
    49,755
    
    
    $
    23,204
    
    
    $
    78,355




---

|* |  | Benefits, claims and settlement expenses include change in future policy
benefits.
|- |  | ----------------------------------------------------------------------------------

9



---



##### Table of Contents



During the three months ended September 30, 2002 and 2003, the percentages
of total premiums and reinsured policy revenues that related to business issued
by Western Reserve Life Assurance Co. of Ohio (Western Reserve) were 90% and
92%, respectively. The percentages of total premiums and reinsured policy
revenues that related to business issued by Western Reserve for the nine months
ended September 30, 2002 and 2003 were 91% and 92%, respectively. During the
three months ended September 30, 2002 and 2003, the percentages of total
underwriting profit that related to business issued by Western Reserve were 95%
and 96%, respectively. The percentages of total underwriting profit that
related to business issued by Western Reserve for the nine months ended
September 30, 2002 and 2003 were 91% and 94%, respectively.



|9. |  | Reclassification
|-- |  | ----------------

Global Preferred has reclassified the presentation of certain 2002
information to conform to the 2003 presentation.



|10. |  | Employment Agreements
|--- |  | ---------------------

Global Preferreds executive officers, Edward F. McKernan, Bradley E.
Barks, Caryl P. Shepherd and Thomas J. Bobowski, are employed pursuant to
written employment agreements. Mr. McKernans employment agreement has an
initial term which expires December 31, 2005 and is automatically renewed for
additional one-year periods unless either party provides written notice of
termination at least 60 days in advance of the expiration date of the current
term.

Mr. Barks, Ms. Shepherd and Mr. Bobowski have employment agreements with
Global Preferred, which expire December 31, 2003. The agreements are renewable
by agreement of the parties for additional one-year periods. As part of the
renewal of their agreements, these employees agreed to forego rights under
their original employment agreements to receive certain option grants that were
conditioned upon Global Preferreds completion of a firm commitment,
underwritten public offering before December 31, 2003.

All executive officers are eligible for an annual bonus in an amount to be
determined by the board of directors. Each of the executive officers
employment agreements includes post-employment restrictive covenants not to
solicit Global Preferreds customers or recruit Global Preferreds employees.



|11. |  | Contingencies
|--- |  | -------------

Under
its reinsurance agreements, Global Preferred is required to provide
security through letters of credit for the benefit of the ceding life
companies with which it has agreements. Global Preferred has three letters of credit totaling $5.85 million,
which are issued by Comerica Bank, our custodian, for the benefit of the ceding
life companies.

Liabilities for future policy benefits under modified coinsurance
agreements equal reinsured policy account balances on the underlying life
insurance and annuity policies. With regard to the separate account benefits
reinsured on a modified coinsurance basis, liabilities are recorded as an
offset to related assets as the intentions and rights under the agreements with
the ceding life companies meet the appropriate conditions governing rights of
setoff. Separate account benefits and related assets reinsured on a modified
coinsurance basis total $262.2 million as of September 30, 2003.

10



---



##### Table of Contents






ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of Global Preferred
Holdings, Inc. as of September 30, 2003 compared with December 31, 2002, and
its results of operations for the three months and nine months ended September
30, 2003, compared with the three months and nine months ended September 30,
2002. This discussion should be read in conjunction with the consolidated
financial statements and accompanying notes included elsewhere in this report
and with the MD&A and Global Preferreds consolidated financial statements and
notes thereto included in Global Preferreds 2002 Annual Report on Form 10-K.

Overview

Global Preferred Holdings, Inc. was incorporated in Delaware in 1995 as a
holding company and owns all of the outstanding capital stock of Global
Preferred Re Limited, Global Preferred Solutions, Inc. and Global Preferred
Resources, Inc. Global Preferred Re Limited is a Bermuda company that
is
registered as a long-term insurer under the Bermuda Insurance Act 1978
(Global Preferred Re).
References in this report to Global Preferred, we, us, our and our
company refer to Global Preferred Holdings, Inc. and, unless the context
otherwise requires or otherwise as expressly stated, our subsidiaries.

IMO Reinsurance Development Programs

Our primary customers are independent marketing organizations (IMOs),
which consist of organizations of independent agents that contract with one or
more insurance companies to distribute and market securities and insurance
products. Global Preferred, through its subsidiaries, provides a reinsurance
development program for IMOs in the life insurance and annuity industry that
allows IMOs to share in the profits of the policies they market. We provide
the services necessary for an IMO to establish, manage and maintain a
proprietary reinsurance relationship with an insurance company. We refer to
these relationships as producer-owned reinsurance. Through our services, we
provide:



| |  |  | A reinsurance development program for IMOs utilizing proprietary strategies that permits the members of the marketing organization to share in
the economics of the business reinsured, thus aligning the long-term
interests of the life insurance company with the interests of the
marketing organization;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Actuarial and management advisory services to IMOs and life insurers
to aid clients in their assessment of the strategic and structural
benefits of sharing the economics of the business produced through their
distributor-insurer relationships; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A management support structure to leverage our core competencies and
provide economies of scale to IMOs and insurance
companies who are considering the formation of, or have formed, a
producer-owned reinsurance enterprise.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Both the IMOs and insurers benefit from mutually
rewarding relationships based on parallel interests, a dedication to
improving the quality
of business written, and a focus on managing insurance and distribution risk for long-term
economic rewards.
Through these collaborative relationships:



| |  |  | IMOs can share in the profits of the business they sell,
enhance their recruiting and retention programs, increase their
role in product development and better assess the quality of
business they write;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Insurance companies can benefit from secure, stable growth in
distribution, increased attention to the quality of business written, lower
marketing costs due to continuity in distribution and renewed focus on
long-term goals; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global Preferred can share in the economic
benefits derived from fee
income for managing the reinsurance risk and administering the
reinsurance structure,
and also from our participation in a portion of the reinsurance of the products
sold by the IMOs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### Table of Contents



Reinsurance Business

Our core business consists of providing reinsurance on business
that has resulted from a relationship with the independent agents of an IMO
member of the AEGON Group. Although our reinsurance business is directed to us
through these independent agent relationships, the life insurance and annuity
policies that we currently reinsure are underwritten and issued by various
ceding life companies. In the insurance industry, the term ceding refers to
the use of reinsurance to transfer from one insurance company to another some
or all of the risks associated with one or more insurance policies. We often
refer to the life insurance companies that reinsure life insurance and annuity
policies through us as the ceding life companies. The ceding life companies
who issue the policies we reinsure are:



| |  |  | Western Reserve Life Assurance Co. of Ohio, a subsidiary of AEGON
USA, Inc. (Western Reserve);
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | American Skandia Life Assurance Corporation, a subsidiary of
Prudential Financial, Inc. (American Skandia);
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Pacific Life Insurance Company (Pacific Life); and
| | - |  | ----------------------------------------------------



| |  |  | Federal Kemper Life Assurance Company, a subsidiary of Bank One Corporation (Kemper).
| | - |  | ---------------------------------------------------------------------------------------

Under a reinsurance agreement, the economic consequences of certain
insurance risks are transferred from the ceding life company to the reinsurer.
Depending upon the type of reinsurance agreement, these risks may include
mortality, persistency, investment and expense. Key considerations in
evaluating the risks include industry experience, the ceding life companys
pricing and assumptions, the type of product, the ceding life companys
underwriting practices and procedures, the type of distribution system, the
ceding life companys recent experience, and the market for the product.

The ceding life companies retain responsibility for the payment of all
claims, surrender values, commissions, and expenses involved in issuing and
maintaining the policies we reinsure. In addition, the ceding life companies
administer the reinsurance contracts and, on a monthly and quarterly basis,
provide us with information regarding premiums, reserves and benefits and the
amounts we owe to the ceding life company for claims and settlement expenses on
the policies we reinsure.

Types of Reinsurance

We currently write three types of reinsurance on a quota share basis:
renewable term (consisting of monthly renewable term and yearly renewable
term), coinsurance and modified coinsurance.

Renewable Term.Renewable term, also referred to as risk premium
reinsurance, which includes monthly renewable term and yearly renewable term,
is a plan of reinsurance in which the premium rates are not directly related to
the premium rates on the original plan of insurance. Under renewable term
reinsurance, the ceding life company reinsures a portion of the mortality risk
with us. The amount reinsured in any one period is not based on the face amount
of the policy, but rather on the portion of the net amount of risk we reinsure.
The net amount of risk is typically defined as the difference between the death
benefit and the cash value of a policy. The ceding life company establishes
the policy reserves, which are reduced for the mortality risk reinsured with
us, and pays all policy benefits, commissions and expenses involved in issuing
and maintaining the business and, correspondingly, we establish reserves
specific to the mortality risk reinsured.

Under renewable term reinsurance, we may also be subject to risks as a
result of persistency risk. Persistency risk is the risk that a policyholder
either stops paying premiums, which would cause the policy to lapse, or chooses
to surrender the policy for the cash surrender value. The effect of
persistency risk on us is that possible future revenue will be reduced,
potentially reducing profits.

Coinsurance.Under a coinsurance arrangement, the insured risks are ceded
to us on essentially the same basis as underwritten by the ceding life company.
The ceded risks include mortality, persistency, investment, and expense. We
share the risks pro rata with the ceding life company. We receive a
proportionate share of gross premiums from the ceding life company and provide
contractual expense allowances to the ceding life company to pay for the
expenses associated with the reinsured policies. Expenses include commissions
and costs associated with underwriting, marketing, policy issue, and
maintenance. We also pay our proportionate share of death benefits and other
policy benefits to the ceding life company. The reserves on the ceded portion
of the policy are held by us and are our obligations. Correspondingly, we
invest the assets related to the reserves and receive investment income from
those assets.

12



---



##### Table of Contents



Modified Coinsurance.Our modified coinsurance agreements are similar to
our coinsurance agreements except the ceding life company does not transfer the
reserves, the invested assets related to the reserves, or the investment risks
related to the reinsured policies. Modified coinsurance is used primarily for
products that develop cash values and allows the ceding life company to retain
the associated assets for investment purposes.

Under coinsurance and modified coinsurance agreements, our reinsurance
premiums are materially higher than premiums paid on the renewable term
reinsurance since we are reinsuring more risks. During the first year in which
a policy is reinsured on a coinsurance or modified coinsurance basis, we are
required to reimburse the ceding life company for our share of acquisition
costs, including first year commissions and issuance expenses. Consequently,
our net cash outlays could be as much as, or more than, the first year life
insurance premiums and as much as 10% of annuity premiums. In year two and
beyond, however, our cash outlays for reinsurance allowances are significantly
lower than in the first year of a policy.

Financial Statement Impact of Reinsurance

Information included elsewhere herein and in Note 2 to the consolidated
financial statements in our Annual Report on Form 10-K, for the year ended
December 31, 2002, includes a summary of the critical accounting policies used
in the preparation of our consolidated financial statements.

Income Statement Impact

Reinsurance Revenues.For renewable term reinsurance, we record as
premiums the amount of reinsurance premiums we receive over the payment
periods of the reinsured policies. For policies reinsured on a coinsurance or
modified coinsurance basis, we record as reinsured policy revenues our
proportionate share of the gross revenues received by the ceding life company
over the period of time that we reinsure the policies. These revenues represent
the policy mortality and expense charges, asset-based allowances and deferred
sales charges that have been assessed against the reinsured policy account
balances.

Reinsurance Expenses.Regardless of the type of reinsurance, our related
expenses may include: (1) benefits, claims and settlement expenses, which
represent our share of the payments made under the reinsured policies during
the period, the change in claims in course of settlement, and the change in
claims incurred but not reported; (2) expense allowances paid to the ceding
life company for expenses associated with the reinsured policies, including
commissions and costs associated with underwriting, marketing, policy issue and
maintenance; and (3) amortization of deferred acquisition costs, which are
discussed in more detail below.

Net Income.Our profitability, in part, depends on the volume of policies
reinsured and experience of the reinsured policies. Factors that affect the
experience of the business include reinsured policy persistency, death claims,
and investment performance of the separate account balances. While death
claims are reasonably predictable over a period of years, claims become less
predictable over shorter periods, and are subject to fluctuation from quarter
to quarter and year to year. Similarly, separate account investment returns,
upon which a portion of our revenues depend, have relatively stable returns
over a period of years but can be volatile over shorter periods. A
considerable amount of separate account balances is invested in equities;
therefore, prolonged deterioration in the equity markets will result in a
decrease in account balances and, correspondingly, a decrease in our current
and future income.

Balance Sheet Impact

Deferred Acquisition Costs.We capitalize and defer costs that vary with
and are primarily related to the acquisition of the reinsured policies. These
expenses are deferred to the extent that such costs are deemed recoverable from
future policy revenues and are recorded as deferred acquisition costs on the
balance sheet. Such costs include reinsurance expense allowances paid to ceding
life companies, and may include other underwriting costs such as actuarial,
legal and accounting fees.

Deferred acquisition costs are amortized over the lives of the underlying
policies, in conformity with the terms of the reinsurance agreement. Under the
renewable term agreements, the rate of amortization is based upon assumptions
applicable at the time the policies are reinsured, such as estimates of
expected investment yields, mortality, persistency and expenses. The
amortization is in proportion to the ratio of premiums collected during the
then current period to total

13



---



##### Table of Contents



anticipated premiums and is adjusted to reflect actual persistency of the
insurance in effect. To the extent fewer policies persist than otherwise
anticipated, the amortization will be greater. Conversely, to the extent more
policies persist than otherwise anticipated, the amortization will be smaller.

Under the coinsurance and modified coinsurance agreements, the
amortization of the deferred acquisition costs is in proportion to the ratio of
gross profits recognized during the then current period to total anticipated
future gross profits. During each accounting period, assumptions used in
calculating the amortization of the deferred acquisition expense reflect actual
experience for the then current accounting period. We also review, on a
periodic basis, our evolving experience with regard to our assumptions
concerning future experience as to mortality, persistency, investment yields,
and expenses in determining our estimate of anticipated future gross profits.
This periodic review is commonly referred to as unlocking. Our normal period
of observation is from October 1 of the previous calendar year through
September 30 of the current calendar year with the review completed during the
fourth quarter of the current calendar year. If we believe variances from
expected assumptions are other than temporary, we will change the assumptions
we use with regard to future experience. Upon adoption of any change in
assumptions used with regard to future experience, the amortization of the
deferred acquisition cost will be recalculated and reflected during the then
current accounting period.

A material component of variable life and annuity product revenues is
derived from the asset-based fees that have been assessed against the policy
account balances, of which a considerable portion is invested in the equity
markets. The volatility of equity market returns over the short-term can be
significant without materially impacting long-term equity market returns.
Historical equity market performance shows equity market volatility is much
higher over short-term horizons as compared to long-term horizons. The
short-term volatility of the policy fund value will result in the short-term
volatility being applied to all future expected gross profits if no adjustments
are made to account for the differences between long-term and short-term
volatility. We utilize a credibility approach to account for the differences
between long-term and short-term volatility. Under this approach, the
estimates of future expected gross profits are revised to recognize the effects
short-term volatility and market yields have upon long-term yield expectations.
We review our approach annually to determine if additional adjustments to
amortization are necessary as a result of prolonged and/or severe negative or
positive equity market performance. In such instances, the equity market
performance must be sufficiently high or low to justify a belief that the
effect of current market conditions on future expected gross profits should be
more permanently reflected.

In addition, certain variable annuity policies we reinsure include a
guaranteed minimum death benefit that will guarantee a death benefit typically
equal to a return of premium or the highest level the fund values had
accumulated over certain prescribed periods under the annuity policy. These
policies represent less than 10% of our revenues. Upon the death of an annuity
policyholder, we will incur a claims expense equal to the excess of the amount
guaranteed under this provision over the then current policy fund value. This
expense increases when equity markets decline and decreases as equity markets
increase. We utilize an implicit approach to account for guaranteed minimum
death benefits. Under this approach, future expected gross profits are
decreased to account for future expected claims expenses. The short-term
volatility of the policy fund value will result in significant volatility in
the expected claims expense if no recognition is made to acknowledge
differences between long-term yields and short-term volatility. Using a
credibility approach, we implicitly recognize the effect of long-term versus
short-term volatility when accounting for guaranteed minimum death benefits.

Future Policy Benefits.Liabilities for future benefits on life insurance
policies are established in an amount we estimate is adequate to meet the
estimated future obligations on the policies in effect. Policy reserves are
included in future policy benefits on the consolidated balance sheet.

Liabilities for future policy benefits under the renewable term agreements
include provisions for claims in the course of settlement, claims incurred but
not reported, and expected future claims. The liability is estimated using
assumptions such as estimates of expected investment yields, mortality,
persistency and expenses applicable at the time the reinsurance contracts are
executed.

Liabilities for future policy benefits under coinsurance and modified
coinsurance agreements equal reinsured policy account balances on the
underlying life insurance and annuity policies. With regard to the separate
account benefits reinsured on a modified coinsurance basis, we record the
liabilities as an offset to related assets as our intentions and rights under
the agreements with the ceding life companies meet the appropriate conditions
governing rights of setoff. The nature of separate account benefits under
variable life insurance or variable annuity policies do not permit us to
reinsure those benefits on a

14



---



##### Table of Contents



coinsurance basis. We currently reinsure the fixed account portion of
life insurance and annuity policies only on a coinsurance basis and,
accordingly, the liabilities for that portion of the reinsurance are recorded
as future policy benefits.

Liabilities for future policy benefits reflected in the consolidated
financial statements are based on information provided to us by the ceding life
companies. Reserves established by us with respect to individual risks or
classes of business may not be the same as those established by ceding life
companies due to differing risks and assumptions regarding mortality,
persistency, investment, and expenses.

Fair Value Disclosure

Investments.We classify all fixed maturity securities and equity
securities as available-for-sale. Such securities are reported at fair value.
Fixed maturity securities available-for-sale are so classified based upon the
possibility that such securities could be sold prior to maturity if that action
enables us to execute our investment philosophy and appropriately match
investment results to operating and liquidity needs. Unrealized gains and
losses on marketable equity securities and fixed maturity securities
available-for-sale, less applicable deferred income taxes, are reported as a
separate component of accumulated other comprehensive income within
stockholders equity.

Investment income is recognized as it accrues or becomes legally due.
Realized gains or losses on sales of investments are included in income, as are
write-downs of securities where declines in value are deemed to be other than
temporary. The cost of investment securities sold is determined based upon the
specific identification method.

Other Financial Assets and Liabilities.The carrying value of cash and
cash equivalents, reinsurance receivables and payables, short-term debt,
accrued expenses and accounts payable approximate their fair values due to the
short-term nature of these accounts.

Reinsurance Relationships

Current Reinsurance Business

We currently provide reinsurance for variable universal life and variable
annuity policies issued by four large life insurance companies. Our
reinsurance agreements with these ceding life companies provide for our
assumption of a portion of defined risks associated with specified products
sold by certain independent agents with which we have a relationship.
Reinsurance under these agreements is automatic, meaning we are required to
accept the business ceded to us so long as the ceding life companies satisfy
the terms of the reinsurance agreements.

The following table indicates, by ceding life company, the types of
policies we are currently reinsuring and the type of reinsurance applicable to
each.

Type of ReinsuranceCeding Life Company
    
    Renewable Term
    
    Coinsurance
    
    Modified CoinsuranceWestern ReserveVariable universal life
    
    
    ü
    
    
    
    ü
    
    
    
    üVariable annuity
    
    
    
    
    
    
    ü
    
    
    
    üAmerican SkandiaVariable annuity
    
    
    
    
    
    
    
    
    
    
    üPacific LifeVariable universal life
    
    
    üKemperVariable universal life
    
    
    ü


15



---



##### Table of Contents



We have four separate reinsurance agreements with Western Reserve that
cover variable universal life insurance and variable annuity policies issued by
Western Reserve on or after January 1, 1992, which are sold by independent
agents of an IMO member of the AEGON Group. These agreements were entered into
on July 1, 1996, January 1, 1998, April 1, 1998, and October 1, 1999,
respectively. Our reinsurance agreement with American Skandia began on January
1, 1997 and covers policies on an American Skandia variable annuity product
issued between January 1, 1997 and December 31, 2002 sold by those same agents.
Our Kemper reinsurance agreement was effective September 1, 1996 and covers
all policies on a Kemper variable universal life product issued between
September 1, 1996 and March 31, 2001 sold by those agents. Our reinsurance
agreement with Pacific Life was signed on June 25, 2001 and covers policies on
a variable universal life product issued on or after January 1, 2001, sold by
those agents.

Effective May 29, 2003, Kemper Investors Life Insurance Company, Federal
Kemper Life Assurance Company and Global Preferred Re Limited entered into a
Novation Agreement, whereby Federal Kemper became a party to our Kemper
reinsurance agreement replacing Kemper Investors Life. The Novation Agreement
substitutes Federal Kemper for Kemper Investors, binds Federal Kemper by all of
the terms and conditions, allows Federal Kemper to enjoy all of Kemper
Investors rights, and instructs Federal Kemper to perform all of Kemper
Investors duties, obligations and liabilities under the above referenced
Kemper agreement. Concurrent with the novation, Federal Kemper was acquired
by, and became a business unit of, Bank One Corporation.

We believe that the terms of our reinsurance arrangements are favorable
for our industry and that we were able to obtain these terms in part because of
our relationships with the agents that sell the policies we reinsure. Our
right to reinsure new business under our reinsurance agreements generally
extends for an initial term of 3 to 5 years, with automatic renewals and
one-year notices of termination following the initial term. Termination of our
right to reinsure new business does not, however, affect our right to continue
to reinsure the policies reinsured at the time of termination. Under our
agreements, we have the right to continue to reinsure a policy for as long as
it remains in effect or until the ceding life company otherwise recaptures it.
A ceding life company may have the right to recapture a reinsured policy only
upon certain defaults or after a period of 10 years or longer, depending on the
terms of the relevant reinsurance agreement.

Rights to Increase Business under Existing Contracts

Reinsurance of In Force Business and New Business with Western Reserve.
In June 2001, we entered into a First Right Agreement with Western Reserve that
provides us a first right to reinsure certain new products issued by Western
Reserve or its U.S. affiliates that are sold by independent agents of an IMO
member of the AEGON Group, as follows:



| |  |  | We have the contractual right, through December 31, 2003, to commence
reinsurance of the Freedom Elite Builder variable universal life
insurance polices and riders issued by Western Reserve from January 1,
2002 through December 31, 2002; and through March 31, 2004, to commence
reinsurance of the Freedom Elite Builder or any subsequently introduced
single life variable universal life insurance policies and riders issued
by Western Reserve from January 1, 2003 through March 31, 2004, up to
20% on a coinsurance and modified coinsurance basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We also have the right, through March 31, 2006, to prospectively
reinsure on a monthly renewable term basis up to 20% of all new single
life variable universal life insurance policies issued after January 1,
2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have the contractual right to prospectively increase our
reinsurance quota share percentages, up to a maximum ranging from 40% to
50%, on certain new variable annuity products issued through December
31, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | These rights, which are subject to minimum sales volume thresholds,
automatically extend for one-year renewal periods unless either party
gives notice of termination 180 days prior to the expiration of the
applicable term. Our decision to exercise these contractual rights will
be made from time to time during the term of the First Right Agreement
and such decisions will be based on a number of relevant factors,
including the attractiveness of the reinsurance rates prescribed by the
agreement, the volume of business, and our available capital capacity.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



---



##### Table of Contents



Reinsurance of New Business with Other Insurance Companies

We intend to enter into reinsurance agreements with other insurance
companies from time to time and such decisions will be based on a number of
relevant factors, including the attractiveness of the reinsurance rates
prescribed by the agreement, the volume of business, our relationship with the
insurance company, our relationship with the IMO, and our available capital
capacity.

We intend to enter into agreements with other IMOs similar to a directed
reinsurance agreement we currently have with an IMO member of the AEGON Group,
pursuant to which the IMO has agreed to use commercially reasonable efforts to
assist us in attaining the opportunity to reinsure all insurance products sold
by its agents for insurance companies with which it has selling agreements,
other than Western Reserve and Western Reserves affiliates. Additionally, the
agreement provides that the IMO will use commercially reasonable efforts to
cooperate with us in our negotiations to establish reinsurance relationships
with life insurance companies and provide certain benefits to the companies
that reinsure their business through us.

Our Current Reinsurance Agreements

The life insurance and annuity policies that we have reinsured to date are
underwritten and issued by Western Reserve, American Skandia, Kemper, and
Pacific Life. The following table indicates the percentage of our reinsurance
revenues derived from our ceding life companies:

NineYear Ended
    
    Months EndedDecember 31,
    
    September 30,2001
    
    2002
    
    2003Western Reserve
    
    
    89
    %
    
    
    91
    %
    
    
    92
    %American Skandia
    
    
    9
    %
    
    
    8
    %
    
    
    7
    %Kemper
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %Pacific Life(1)
    
    
    
    (2)
    
    
    
    (2)
    
    
    
    (2)Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %




---

|(1) |  | This agreement was effective as of January 1, 2001.
|--- |  | ---------------------------------------------------
|   
|(2) |  | Less than 1%.                                      

The following table indicates, by ceding life company: (1) the names and
types of insurance products we currently reinsure; (2) the type of reinsurance
agreement applicable to each; (3) policy issue dates reinsured under each
agreement; and (4) the commencement date of the reinsurance.

ReinsuranceProduct
    
    Reinsurance
    
    Policy
    
    CommencementCeding Life Company
    
    Reinsured Product Name
    
    Type(1)
    
    Type(2)
    
    Issue Dates
    
    DateWestern Reserve
    
    Freedom Equity Protector
    
    VUL
    
    MRT
    
    1/92 to 12/99
    
    7/96Western Reserve
    
    Financial Freedom Builder
    
    VUL
    
    MRT
    
    7/97 to 3/98
    
    7/97Western Reserve
    
    Financial Freedom Builder
    
    VUL
    
    Co/Modco
    
    4/98 to 12/98
    
    4/98Western Reserve
    
    Financial Freedom Builder
    
    VUL
    
    MRT
    
    1/99 to 3/01
    
    10/99Western Reserve
    
    Financial Freedom Builder
    
    VUL
    
    Co/Modco
    
    4/01 to 12/01
    
    1/02Western Reserve
    
    Financial Freedom Builder
    
    VUL
    
    MRT
    
    1/02 to 12/02
    
    10/99Western Reserve
    
    Freedom Elite Builder
    
    VUL
    
    Co/Modco
    
    7/01 to 12/01
    
    1/02Kemper
    
    Power VUL
    
    VUL
    
    MRT
    
    9/96 to 3/01
    
    9/96Pacific Life
    
    Select Exec II
    
    VUL
    
    YRT
    
    1/01 to present
    
    1/01American Skandia
    
    Imperium
    
    VA
    
    Modco
    
    1/97 to 12/02
    
    1/97Western Reserve
    
    Freedom Wealth Creator
    
    VA
    
    Co/Modco
    
    1/98 to 12/01
    
    1/98Western Reserve
    
    Freedom Premier
    
    VA
    
    Co/Modco
    
    10/00 to present
    
    10/00




---

|(1) |  | VUL means variable universal life product. VA means variable annuity
product.                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | MRT means monthly renewable term. YRT means yearly renewable term.
Co/Modco means coinsurance and modified coinsurance.

17



---



##### Table of Contents



Under our reinsurance agreements with the ceding life companies, we currently
reinsure variable life insurance and variable annuity policies on either a
renewable term basis or a coinsurance and modified coinsurance basis. The
policies we reinsure on a renewable term basis represented 58% of our
reinsurance revenues for the three months ended September 30, 2003. The
policies we reinsure on a coinsurance and modified coinsurance basis
represented 42% of our reinsurance revenues for the same period. Of the 42%,
26% relates to variable life insurance policies and 16% relates to variable
annuity policies.

Results of Operations

Three Months and Nine Months Ended September 30, 2003 Compared to Three Months and Nine Months Ended September 30, 2002

The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated:

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2002
    
    2003
    
    2002
    
    2003(As a percentage of total revenue)Consolidated Statements of Income Data:Revenues:Premiums
    
    
    55
    %
    
    
    57
    %
    
    
    55
    %
    
    
    57
    %Reinsured policy revenues
    
    
    43
    
    
    
    42
    
    
    
    43
    
    
    
    42Net investment income
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Net realized gain (loss) on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Benefits and expenses:Benefits, claims and settlement expenses
    
    
    27
    
    
    
    29
    
    
    
    27
    
    
    
    30Change in future policy benefits
    
    
    4
    
    
    
    4
    
    
    
    5
    
    
    
    4Reinsurance expense allowances, net
    
    
    26
    
    
    
    26
    
    
    
    26
    
    
    
    27Amortization of deferred acquisition costs
    
    
    31
    
    
    
    21
    
    
    
    19
    
    
    
    18Operating expenses
    
    
    10
    
    
    
    10
    
    
    
    9
    
    
    
    11Costs of withdrawn offering
    
    
    21
    
    
    
    
    
    
    
    7
    
    
    
    Interest expense
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Total benefits and expenses
    
    
    120
    
    
    
    91
    
    
    
    94
    
    
    
    91Income (Loss) before income tax
    
    
    (20
    )
    
    
    9
    
    
    
    6
    
    
    
    9Income tax benefit (expense)
    
    
    7
    
    
    
    (3
    )
    
    
    (2
    )
    
    
    (3
    )Net income (loss)
    
    
    (13
    )%
    
    
    6
    %
    
    
    4
    %
    
    
    6
    %


Revenues

Premiums.Premiums decreased $153,000, or 3%, and $491,000, or 4%, for
the quarter and the nine months ended September 30, 2003, respectively,
compared to the same periods in 2002. The majority of the premium decrease was
due to the decreasing business in force under our renewable term agreements.
Policies in force are decreasing because the number of policy surrenders and
lapses currently exceed the number of new policies reinsured.

Reinsured Policy Revenues.Reinsured policy revenues decreased $242,000,
or 7%, for the quarter ended September 30, 2003 compared to the same period in
2002. This decrease was primarily attributable to a decrease in
deferred sales
charge revenue due to lower surrender activity on variable annuity policies.
In addition, reinsured policy revenues decreased $907,000, or 9%, for the nine
months ended September 30, 2003 compared to the same period in 2002. This
decrease was primarily attributable to a decline in mortality and expense
charges and asset-based allowances resulting from a decline in average account
balances in 2003 as compared to the same periods in 2002 and the effect of
policy surrender activity for our variable annuity business.

18



---



##### Table of Contents



Net Investment Income and Net Realized Gain on Investments.Net
investment income decreased $73,000, or 43%, and $304,000, or 53%, for the
quarter and the nine months ended September 30, 2003, respectively, compared to
the same periods in 2002, primarily due to the decreased size of our fixed
maturity securities portfolio. The decrease in our fixed maturity securities
portfolio resulted from the sale of $9.9 million of fixed maturity securities
in 2002, with the majority being sold in December 2002. The proceeds from these
sales have been predominantly held in cash and cash equivalents. During the
quarter ended September 30, 2003, $4.6 million of fixed maturity securities and
$2.0 million of equity securities were purchased. There were no sales of fixed
maturity securities for the quarters ended September 30, 2002 and 2003, thus no
gains or losses were realized.

Benefits and Expenses

Benefits, Claims and Settlement Expenses.Benefits, claims and settlement
expenses increased $78,000, or 4%, and $137,000, or 2%, for the quarter and the
nine months ended September 30, 2003, respectively, compared to the same
periods in 2002. The increase was primarily associated with an increase in the
average death claim size and the increasing age of the policies reinsured
partially offset by a decline in the aggregate face value of insurance. The
aggregate face value of insurance underlying the policies we reinsured at
September 30, 2002 was $8.7 billion compared to $7.8 billion at September 30,
2003.

Change in Future Policy Benefits.Change in future policy benefits
decreased $44,000, or 13%, and $395,000, or 33%, for the quarter and the nine
months ended September 30, 2003, respectively, compared to the same periods in
2002. The decrease resulted from the aging of the policies and the decrease in
business in force reinsured on a monthly renewable term basis.

Reinsurance Expense Allowances, Net.Net reinsurance expense allowances
decreased $99,000, or 5%, and $277,000, or 4%, for the quarter and the nine
months ended September 30, 2003, respectively, compared to the same periods in
2002. These amounts reflect the decrease in business in force due to policy
lapse and surrender activity. The decrease was also due to lower average
account balances in 2003 as compared to the same periods in 2002.

Amortization of Deferred Acquisition Costs.Amortization of deferred
acquisition costs decreased $918,000, or 37%, and $452,000, or 10%, for the
quarter and the nine months ended September 30, 2003, respectively, compared to
the same periods in 2002. The decrease in amortization primarily resulted from
additional amortization during the quarter ended September 30, 2002 due to
unlocking our near term surrender assumptions to reflect the increase in our
surrender experience (akin to industry-wide surrender experience). For the
nine months ended September 30, 2003, as compared to the same period in 2002,
the decrease in amortization also includes certain refinements to estimated
future gross profits offset by increased amortization from lower fund based
revenues and lower death claims associated with our variable universal life
coinsurance and modified coinsurance business.

Under current assumptions, and all else being equal, if separate account
fund yields exceed 5% for 2003, we do not expect that there would be increased
amortization in 2003 from unlocking due to lower than expected equity market
performance. If separate account fund yields are 0% for 2003 we would expect
additional amortization of approximately $500,000 for 2003 from unlocking due
to lower than expected equity market performance. We will complete our annual
review of our future experience assumptions during fourth quarter 2003.

Operating Expenses.Operating expenses decreased $49,000, or 6%, and
increased $351,000, or 16%, for the quarter and the nine months ended September
30, 2003, respectively, compared to the same periods in 2002. These expenses
include salaries and benefits, professional fees for legal, actuarial and
accounting expenses and other operating expenses. The majority of the decrease
for the quarter ended September 30, 2003 was attributable to decreases in
recruiting fees and legal fees. The majority of the increase for the nine
months ended September 30, 2003 was attributable to increases in our directors
and officers insurance premiums, legal fees, rent expense, consulting fees,
shareholder communications and software amortization expense, offset by a
decrease in salaries, bonuses and benefits due to a reduction in employee
bonuses and a reduction in staffing.

19



---



##### Table of Contents



Costs of Withdrawn Offering.During October 2002, we withdrew the
registration statement for our proposed initial public offering of 9.5 million
shares of common stock. Offering costs related to our withdrawn offering were
$1.7 million for the quarter and nine months ended September 30, 2002. These
costs, which consisted primarily of legal, printing, accounting, and actuarial
fees, were expensed during the quarter ended September 30, 2002. We did not
incur any similar expenses in 2003.

Interest Expense.Interest expense remained constant, and decreased
$5,000, or 2%, for the quarter and nine months ended September 30, 2003,
respectively, compared to the same periods in 2002. The decrease was due to
the interest associated with the $7.2 million settlement paid to Western
Reserve on April 2, 2002 to fund the reinsurance amendments that were effective
January 1, 2002.

Income Taxes.Due to higher levels of income before income taxes, income
taxes increased $771,000, or 144%, and $221,000, or 46%, for the quarter and
the nine months ended September 30, 2003, respectively, compared to the same
periods in 2002. Income before income taxes is comprised of income subject to
taxes that is recognized and due in the current period and income subject to
taxes that is recognized during the current period but is due in future
periods. The small life insurance company deduction available under Section
806 of the Internal Revenue Code for qualifying life insurance companies can
reduce the effective federal income tax rate from 34% to less than 20%
depending upon the amount of current taxable income. As of September 30, 2002
and 2003, we had no current taxable income and, as a result, we were unable to
take advantage of any of the small life insurance company deduction. As of
September 30, 2003, however, we were subject to alternative minimum tax.
During 2002 and 2003 our effective tax rate was 34%.

In accordance with SFA
S No. 109, Accounting for Income Taxes, we have $4.9 million of net operating loss carryforwards, which begin to expire in 2018.
These net operating loss carryforwards at a 34% effective tax rate are included
as an offset to the deferred tax liability. It is our belief that it is more
likely than not that the deferred tax assets will be realized as an offset
against future taxable income, however, if we do not have sufficient taxable
income in the future to utilize this asset, a write-off may result, thereby
reducing our net income.

Liquidity and Capital Resources

To grow our life and annuity business, we use cash to pay for the initial
marketing and underwriting expenses of the policies we reinsure. These same
policies thereafter provide cash from premiums, policy charges and policy fees
over their lifetime. We also use cash to pay for policy claims, policy benefits
and operating expenses which include: salaries and benefits, and professional
fees for management, legal, investment, custodial, accounting, tax and
consulting services. In addition to operating cash flows, cash is provided by
and used in financing activities we undertake to increase our capital position
and through activities associated with our invested assets.

Our primary source of liquidity was $17.8 million in consolidated cash and
cash equivalents at September 30, 2003. The effective duration of our fixed
maturity portfolio is 4.2 years with 100% of the fixed maturity securities
having an effective maturity of less than 10 years. Our fixed maturity
portfolio represents 78% of our invested assets, and has an average Moodys
quality rating of A1. During the quarter ended September 30, 2003, we
purchased $2.0 million of equity securities. We have no unrealized losses on
fixed maturity securities or equity securities as of September 30, 2003.

Our capital structure consists of short-term debt and equity. Our
short-term debt is comprised of a $5 million, five-year convertible term note
to Money Services, Inc. due on July 29, 2004. Money Services is a subsidiary of
AEGON USA, Inc. Proceeds of this note were used to reduce a portion of the
outstanding principal balance on a line of credit with Money Services from $10
million to $5 million. Interest is payable on the note at 7.5% per annum
(except in the event of redemption), on the 29th of each succeeding January and
July through and including July 29, 2004. Money Services has the right to
convert the outstanding principal balance of this note into common stock at any
time. Upon conversion, Money Services would receive 6.255 shares of common
stock for each $100 of the outstanding principal amount of the note, for a
total of 312,750 shares, which reflects our three-for-two stock split in 2001.
We have the option to redeem the note, in whole or in part, before maturity.
To redeem the note before maturity, we must pay all principal, plus interest
accrued from the date of the note through the redemption date at a higher
effective interest rate of 9% per annum. As of September 30, 2003, we had an
outstanding principal balance on the term note of $5 million and accrued
interest of $64,000.

20



---



##### Table of Contents



Operating Cash Flows.Under the renewable term reinsurance agreements,
premiums typically vary in proportion with the expected mortality claims
reinsured. Our cash inflows under the renewable term agreements are premiums
for the mortality risk reinsured. Our cash outflows are reinsurance expense
allowances and death benefit claims. The reinsurance expense allowances
represent our share of acquisition and maintenance expenses incurred by the
ceding life company that are attributable to the risks reinsured by us.

Under the coinsurance and modified coinsurance agreements, since we are
reinsuring risks on essentially the same basis as that of the original policy,
reinsurance premiums are materially greater than premiums received on the
renewable term reinsurance. During the first year in which a policy is
reinsured on a coinsurance basis, we are required to reimburse the ceding life
company for our share of acquisition costs, including first year commissions
and issuance expenses. Thereafter, we reimburse the ceding life company for our
share of renewal commissions and maintenance expenses. Further, under modified
coinsurance, we allow the ceding life company to retain assets related to
reserves in support of reinsured policy benefits (e.g., cash values).
Accordingly, because of the type of reinsurance and the basis reinsured, the
net first year cash outlays could be as much as, or more than, that years
premiums paid for variable universal life insurance, and as much as 10% of
variable annuity premiums. In year two and beyond, however, our cash outlays
for reinsurance allowances are significantly lower than in the first year of a
policy.

Net cash flows provided by (used in) operating activities were ($2.8
million) and $8.3 million for the nine months ended September 30, 2002 and
2003, respectively. Changes in cash provided by operating activities primarily
relate to: amounts of reinsurance premiums and policy revenues received;
claims, reinsurance expense allowances and operating expenses paid; and changes
in working capital. Cash flows were used in operating activities in 2002
primarily because of the $7.2 million settlement paid to Western Reserve to
fund the reinsurance amendments. Cash flows provided by operating activities
increased in 2003 because we utilized less cash to acquire new reinsurance
business.

At this time we are exploring financing strategies to fund transactions to
assume new business. The amount, timing, receipt and cost of additional capital
will, in part, determine the extent to which we will be able to increase
business reinsured.

Investment Cash Flows.We generally receive premiums in advance of paying
related benefits and claims. In addition, some policies we reinsure require
that we credit interest on funds that are deposited with us. We invest these
assets in securities that will provide a return and cash flow stream that are
consistent with these benefits. Investment cash flows are the result of buying,
selling and holding these securities in addition to activities relating to
buying and selling fixed assets.

Net cash flows provided by (used in) investing activities were $520,000
and ($6.4 million) for the nine months ended September 30, 2002 and 2003,
respectively. The cash flows used in 2003 were the result of the purchase of
$5.6 million of available-for-sale securities and $2.0 million of equity
securities offset by the maturities and principal payments from
available-for-sale securities of $1.2 million. The cash flows provided in 2002
were the result of maturities, principal payments and sales of
available-for-sale securities of $2.2 million offset by the purchase of $1.7
million of available-for-sale securities and fixed assets. We have incurred no
significant capital expenditures during 2003.

Financing Cash Flows.Net cash flows used in financing activities were
$1.1 million for the nine months ending September 30, 2002. Changes in cash
used in financing activities in 2002 related to the cash paid for activities
related to the public offering (deferred offering costs), which were expensed
during the quarter ended September 30, 2002, offset by cash paid for deferred
offering costs in 2001 which had been previously recorded as prepaid expenses
on the consolidated balance sheet. No financing activities occurred during the
nine months ended September 30, 2003.

Restrictions.Global Preferred Holdings, Inc. is a holding company with
no direct operations, and whose principal assets are the capital stock of
Global Preferred Re and $3.6 million of cash and invested assets, as of
September 30, 2003. Global Preferred Holdings, Inc. relies primarily on funds
retained at the holding company level, debt service on amounts loaned to Global
Preferred Re, service fees and potential dividends from Global Preferred Re to
meet ongoing cash requirements. Global Preferred Re must maintain the required
minimum solvency margin of $250,000 as a long-term insurer in Bermuda. The
ability of Global Preferred Re to pay dividends to Global Preferred Holdings,
Inc. is subject to, among other things, regulatory restrictions under the
insurance laws of Bermuda. As of September 30, 2003, Global Preferred Re had
total statutory capital and surplus of $20.0 million, which
includes up to $4.7
million available to distribute in dividends without seeking regulatory
approval. Global Preferred Re has paid no dividends to Global Preferred
Holdings, Inc. during 2003.

21



---



##### Table of Contents



Under our reinsurance agreements, we are required to provide security
through a letter of credit for the benefit of the ceding life companies. We
have three letters of credit issued by Comerica Bank, our custodian, for the
benefit of Western Reserve, Pacific Life and Kemper, in the amounts of $5.5
million, $50,000 and $300,000, respectively. We assess our letter of credit
needs in support of each reinsurance agreement. If determined to be necessary,
we will undertake to develop facilities for future letters of credit and trust
arrangements in support of additional reinsurance agreements.

Forward-Looking Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions developed by our management. Any adjustments to
reported bases of assets or liabilities resulting from changes in estimates are
reflected in earnings in the period the estimates are revised.

Certain statements made in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to the safe-harbor provisions of that Act. Additionally, any
written or oral statements made by us or on our behalf may include
forward-looking statements that reflect our current views with respect to
future events and financial performance. These statements may include, but are
not limited to statements relating to reinsurance revenues, gross profits, cash
flows, and net income in future periods. Such statements often include the
words believes, expects, assumes, predicts, continue, potential,
should, could, can, may, will, proposes, anticipates, intends,
plans, estimates, projects, and variations or negations of such
expressions or similar expressions. When we make forward-looking statements, we
are basing them on our managements beliefs and assumptions, using information
currently available to us. Because such forward-looking statements involve
risks, both known and unknown, and uncertainties, there are important factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements, including but not limited to:



| |  |  | Extent to which we are able to develop new reinsurance programs;
| | - |  | ----------------------------------------------------------------



| |  |  | Adverse reinsurance experience, including death claims and surrenders;
| | - |  | ----------------------------------------------------------------------



| |  |  | Estimates of reserves;
| | - |  | ----------------------



| |  |  | Assumptions used in accounting for deferred acquisition costs;
| | - |  | --------------------------------------------------------------



| |  |  | Negotiation of reinsurance agreements;
| | - |  | --------------------------------------



| |  |  | A decrease in the level of demand for our reinsurance business, or increased competition in the industry;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Our cash requirements;
| | - |  | ----------------------



| |  |  | Availability of capital on acceptable terms;
| | - |  | --------------------------------------------



| |  |  | The amount, timing, receipt, and cost of additional capital to fund
our exercise of the rights to increase our reinsurance business with
Western Reserve;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The passage of federal or state legislation subjecting our business to
additional supervision or regulation, including additional tax regulation,
in the United States or other jurisdictions in which we operate; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in economic conditions, including interest rate and equity market
conditions, which could affect our investment portfolio and reinsured
policy revenues.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

These forward-looking statements are subject to change and uncertainty
that are beyond our control and have been made based upon our expectations and
beliefs concerning future developments and their potential effect on our
business. We cannot assure you that future developments will be in accordance
with our expectations or that the effect of future developments will be those
we anticipate. Actual results could differ materially from those we expect,
depending upon the outcome of certain factors, including those described in the
forward-looking statements and in the Exhibit 99.3 titled Factors That May
Affect Future Results in our 2002 Annual Report on Form 10-K. We caution
readers not to place undue reliance on these forward-looking statements, which
speak only as of their dates. Except as otherwise required by federal
securities laws, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

22



---



##### Table of Contents






ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We seek to earn a favorable risk-adjusted total return on our assets by
engaging in an investment strategy that employs strategies to manage investment
risk. We attempt to maintain adequate liquidity in our fixed income portfolio
to fund operations and protect against unexpected events. We have diversified
our portfolio to reduce volatility. We seek to manage our credit risk through
industry and issuer diversification, and interest rate risk by monitoring the
duration and structure of our investment portfolio relative to the duration and
structure of our liability portfolio. We are exposed to potential loss from
various market risks, primarily changes in interest rates and equity prices.
Accordingly, earnings would be affected by these changes. We manage our market
risk based on investment policies approved by our board of directors.

We do not directly control the allocation of our assets to strategies or
underlying funds, nor do we control the manner in which they are invested by
underlying fund managers. We utilize an independent investment manager to
invest our assets in accordance with our investment guidelines. Conning Asset
Management Inc., a subsidiary of Swiss Reinsurance Company, has been our
investment manager since June 1998. Conning has discretionary authority to
manage our non-cash investment portfolio. As a result, the performance of our
aggregate investment portfolio depends largely on the ability of Conning to
select and manage appropriate investments. However, we consistently and
systematically monitor the strategies and funds in which we are invested, and
we believe our overall risk is limited as a result of our selected strategy.

Our investment portfolio includes investments that are subject to changes
in market values due to changes in interest rates. The impact on our
investment portfolio from an immediate 100 basis point increase in market
interest rates would have resulted in an estimated decrease in fair value of
0.06%, or approximately $148,000, on a portfolio valued at approximately $26.5
million at September 30, 2003. The impact on our investment portfolio from an
immediate 100 basis point decrease in market interest rates would have resulted
in an estimated increase in fair value of 0.06%, or approximately $170,000.
The foregoing reflects the use of an immediate time horizon. Credit spreads
are assumed to remain constant in these hypothetical examples.




ITEM 4.    CONTROLS AND PROCEDURES

As of the most recent fiscal quarter end, we carried out an evaluation of
the effectiveness of our disclosure controls and procedures (as defined by Rule
13a-14(c) of the Securities Exchange Act of 1934) under the supervision and
with the participation of our chief executive officer and chief financial
officer. Based on and as of the date of such evaluation, the aforementioned
officers have concluded that our disclosure controls and procedures were
effective, in all material aspects, to ensure that information required to be
disclosed in the reports we file with the Securities and Exchange Commission is
recorded, processed, summarized, and reported as and when required.

There were no significant changes in our internal controls or other
factors that could significantly affect these controls subsequent to the date
our chief executive officer and chief financial officer carried out their
evaluation. There were no significant deficiencies or material weaknesses
identified in the evaluation and, therefore, no corrective actions were taken.




PART II  OTHER INFORMATION




ITEM 1.    LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings.




ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

There were no changes in securities during the nine months ended September
30, 2003.




ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

There have been no defaults in the payment of principal or interest of any
indebtedness of the issuer.

23



---



##### Table of Contents






ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the third quarter of 2003, no matters were submitted to our
security holders for a vote.




ITEM 5.    OTHER INFORMATION

None.




ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits
|--- |  | --------

10.1
    
    First Amendment to the Lease Agreement by and between the Registrant
and Metropolitan Life Insurance Company effective July 14, 2003.10.2
    
    Amendment No. 4 to the Automatic Flexible Premium Variable Life
Reinsurance Agreement Number 3 Between Western Reserve Life Assurance
Co. of Ohio and Global Preferred Re Limited effective July 1, 2003.31.1
    
    Certification by Edward F. McKernan, Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Bradley E. Barks, Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Edward F. McKernan, Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by Bradley E. Barks, Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.




|(b) |  | Reports on Form 8-K
|--- |  | -------------------

A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on August 20, 2003 to disclose the earnings press release of the
second quarter financial results.

24



---



##### Table of Contents






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, in the City of Duluth, State of Georgia
on the 14th day of November, 2003.

GLOBAL PREFERRED HOLDINGS, INCBy:
    
    /s/ EDWARD F. MCKERNANEdward F. McKernan
Chief Executive Officer and President and DirectorBy:
    
    /s/ BRADLEY E. BARKSBradley E. Barks
Chief Financial Officer and Senior Vice President  Finance


25