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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM             TO             .

                           COMMISSION FILE NUMBER 0-23625

                        ANNUITY AND LIFE RE (HOLDINGS), LTD.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   BERMUDA                                     NOT APPLICABLE
         (STATE OR OTHER JURISDICTION                         (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
     CUMBERLAND HOUSE, 1 VICTORIA STREET,                          HM 11
              HAMILTON, BERMUDA                                  (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (441) 296-7667
        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON SHARES, $1.00 PAR VALUE

                                (TITLE OF CLASS)

     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 [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

     As of March 15, 2000, the aggregate market value of Common Shares, $1.00
par value, held by non-affiliates was $631,124,975, based on the closing price
as reported by the Nasdaq National Market.

     As of March 15, 2000, 25,499,999 Common Shares, $1.00 par value, were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE.

     Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for its 2000 Annual Meeting of Shareholders, which is expected to be
filed with the Securities and Exchange Commission (the "Commission") within 120
days of the close of the registrant's fiscal year ended December 31, 1999.
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                               TABLE OF CONTENTS

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<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    2
Item 2.   Properties..................................................    8
Item 3.   Legal Proceedings...........................................    9
Item 4.   Submission of Matters to a Vote of Security Holders.........    9

                                  PART II
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................    9
Item 6.   Selected Financial Data.....................................    9
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   10
Item 7A.  Quantitative and Qualitative Disclosures about Market
          Risk........................................................   16
Item 8.   Financial Statements and Supplementary Data.................   17
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   39

                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........   39
Item 11.  Executive Compensation......................................   39
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   39
Item 13.  Certain Relationships and Related Transactions..............   39

                                  PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................   39
</TABLE>

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                                     PART I

ITEM 1.  BUSINESS.

OVERVIEW

     Annuity and Life Re (Holdings), Ltd. ("the Company") was incorporated on
December 2, 1997 under the laws of Bermuda. We provide annuity and life
reinsurance to select insurers and reinsurers through our wholly-owned
subsidiaries: Annuity and Life Reassurance, Ltd., which is licensed under the
insurance laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc., an insurance holding company based in the United States.

     On September 7, 1999, we signed an agreement to acquire Capitol Bankers
Life Insurance Company. Capitol Bankers is domiciled in the United States and is
authorized to conduct its life insurance business in 43 states of the United
States. Our completion of the acquisition, however, is subject to regulatory
approval.

BUSINESS WRITTEN

  General

     Our reinsurance business generally consists of entering into contractual
arrangements (known as treaties) with primary insurers (known as ceding
companies) whereby we agree to indemnify the ceding company for all or a portion
of the risks associated with the underlying insurance policy in exchange for a
reinsurance premium. We also may enter into retrocessional reinsurance
arrangements with other reinsurers, which operate in a manner similar to the
underlying reinsurance arrangement described above. Under retrocessional
reinsurance arrangements, we shift a portion of the risk associated with the
underlying insurance policy to the retrocessionaires.

     We write reinsurance agreements on an automatic basis or facultative basis,
and market our reinsurance directly, as well as through reinsurance
intermediaries or brokers. An automatic treaty provides for a ceding company to
cede contractually agreed-upon risks on identified types of business that meet
established criteria to a reinsurer and binds the reinsurer without obtaining
its further approval. Facultative reinsurance is the reinsurance of individual
risks, which allows a reinsurer the opportunity to analyze and separately
underwrite a risk before agreeing to accept the risk. Both automatic treaty and
facultative reinsurance may be written on either a quota share basis, where a
percentage of each risk in the reinsured class of risk is assumed by the
reinsurer from the ceding company with premiums proportional to the assumed risk
being paid to reinsurers, or an excess of loss basis, where reinsurers indemnify
the ceding company up to a contractually-specified amount for a portion of
claims exceeding a specified retention amount in consideration of
non-proportional premiums being paid to the reinsurer.

     Our principal target market is North America, particularly the United
States, and we operate in one business segment. Within that segment our major
product lines are traditional life reinsurance and annuity reinsurance that
cover the following categories of risks: (i) mortality, (ii) investment, (iii)
lapsation, (iv) interest rate and (v) expense. We write reinsurance
predominantly on a direct basis with primary life insurance companies. The
reinsurance agreements typically remain in force for the life of the underlying
policies reinsured, which on average range from ten to thirty years. Each year,
a portion of the business under an existing treaty terminates due to, among
other things, surrenders and/or lapses of underlying policies, deaths of
underlying insureds and the exercise of recapture options.

     Our life reinsurance business principally involves the reinsurance of
ordinary life insurance, primarily for mortality risks. Ordinary life
reinsurance generally is the reinsurance of individual term life insurance
policies, whole life insurance policies, universal life insurance policies and
joint and survivor insurance policies. Our ordinary life line of business
reinsures all of these products. The profitability of our life reinsurance
product depends in large part on the volume and amount of death claims incurred.
Although death claims are reasonably predictable over many years, claims become
less predictable over shorter periods and are subject to fluctuation from
quarter to quarter and year to year. Significant fluctuations from period to
period could adversely affect our results of operations.

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     Our annuity reinsurance business principally involves "fixed" general
account annuities. In the future, we may also reinsure "variable" annuities,
pay-out annuities and certain structured settlement contracts.

     The following table presents selected information for the indicated periods
concerning our insurance operations:

  Distribution of Policy Revenues and Insurance in Force

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31
                                                              --------------------------------
                                                                   1999              1998
                                                              --------------    --------------
<S>                                                           <C>               <C>
Life Reinsurance
  Policy Revenues
     First Year(1)..........................................  $   72,268,437    $   27,943,890
     Renewal................................................      28,566,570                --
                                                              --------------    --------------
       Total................................................  $  100,835,007    $   27,943,890
                                                              ==============    ==============
Insurance In-force at end of year (in thousands)............  $   45,407,000    $   22,538,000
                                                              ==============    ==============
Annuity Reinsurance
  Annuity Deposits..........................................  $1,603,382,955    $1,283,675,809
                                                              ==============    ==============
</TABLE>

---------------
(1) Represents revenues received from the reinsurance of life insurance in the
    first year of the reinsurance contract.

  Underwriting

     We have developed underwriting guidelines with the objective of controlling
the risks of the reinsurance policies written as well as to determine
appropriate pricing levels. Any deviation from the approved guidelines requires
the approval of our Board of Directors. Subject to the approval of our Board,
these guidelines may be amended from time to time in response to changing
industry conditions, market developments, changes in technology and other
factors.

     In implementing our underwriting guidelines, we utilize an experienced
underwriting team to select opportunities with acceptable risk/return profiles.
In deciding whether to assume any particular reinsurance business, we consider
many factors, including the type of risks to be covered, actuarial evaluations,
historical performance data for the cedent and the industry as a whole, the
cedent's retention, the product to be reinsured, pricing assumptions,
underwriting standards, reputation and financial strength of the cedent, the
likelihood of establishing a long term relationship with the cedent and the
market share of the cedent. Pricing of our reinsurance products is based on our
sophisticated actuarial and investment models which incorporate a number of
factors including assumptions for mortality, expenses, demographics, persistency
and investment returns as well as macroeconomic factors, such as inflation, and
regulatory factors, such as taxation and surplus requirements.

     All of our policy revenues derived from ordinary life and annuity
reinsurance are written on an automatic treaty quota share basis with a focus on
large blocks of business where the underlying policies meet our underwriting
criteria. To a lesser extent, we may enter into facultative reinsurance
arrangements with primary insurers with which we have automatic treaty
reinsurance business. We generally require ceding companies to retain at least
10% of every life insurance risk reinsured, and we limit our own net liability
on any single-life risk to $2.0 million.

     The reinsurance agreements typically remain in force for the life of the
underlying policies reinsured. However, these agreements in some instances
provide for recapture rights on the part of the ceding company. Recapture rights
permit the ceding company to reassume all or a portion of the risk formerly
ceded to us after an agreed upon period of time (generally 10 years), subject to
certain other conditions. Recapture is a factor

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<PAGE>   5

taken into consideration when pricing a reinsurance agreement and in some cases
can be mitigated by various contractual provisions.

POLICY BENEFIT LIABILITIES

     Policy benefit liabilities comprise the majority of our financial
obligations. Policy benefit liabilities for other than annuities and interest
sensitive life insurance products reflected in our consolidated financial
statements included elsewhere in this report are based on our estimates of
mortality, persistency and investment income, with estimated provisions for
adverse deviation. The liabilities for policy benefits we have established for
individual risks or classes of business may be greater or less than those
established by ceding companies due to the use of different mortality and other
assumptions. Policy benefit liabilities for annuities and interest sensitive
life insurance products are reported at the accumulated fund balance of these
contracts. Policy benefit liabilities include both mortality and morbidity
claims in the process of settlement and claims that have been incurred but not
yet reported. Actual experience in a particular period may be worse than assumed
experience and, consequently, may adversely affect our operating results for the
period. See Note 2(d) of "Notes to Consolidated Financial Statements" for
additional information regarding reserve assumptions under generally accepted
accounting principles ("GAAP").

INVESTMENTS

  Invested Assets

     Our investment decisions are governed by the investment guidelines
established and approved by our Board of Directors.

     Our investment policy is designed to achieve above average risk-adjusted
total returns, maintain a high quality portfolio, maximize current income,
maintain adequate levels of liquidity and match the cash flows of the portfolio
to the anticipated cash flows of our related insurance liabilities. The
investment guidelines require our overall fixed income investment portfolio to
maintain a minimum weighted average rating of "A." Standard & Poor's "A" rating
on fixed income security signifies its judgment that the security is somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions; however, the issuer's capacity to meet its financial commitment on
the security is still strong. We do not invest in any fixed income securities in
emerging markets or which are not rated by a major rating agency. The investment
guidelines allow us to invest in fixed income securities that are rated below
investment grade. These investments are limited to 25% of the amount by which
the invested assets exceed the related insurance liabilities.

     At December 31, 1999, our invested assets, including cash and cash
equivalents, had an aggregate fair value of $304,060,000, and all of the
securities held were fixed maturities with a weighted average investment quality
rating of "AA-". At December 31, 1999, the weighted average duration of invested
assets was 3.7 years. If the duration of our invested assets was to differ
materially from the duration of our liabilities and if significant rapid
increases in market interest rates were to occur, we could be required to sell
invested assets at a loss. Conversely, if significant rapid decreases in market
interest rates were to occur, we would have gains on invested assets but we
could earn less income than we credit to policyholders. These consequences could
have a material adverse effect on our capital resources and financial condition.

     Our investment securities currently are managed by three professional
investment advisors, Pacific Investment Management Company ("PIMCO"), Alliance
Capital Management Corporation ("ACM") and Prudential Investment Corporation
("PRU"), each of which manages a segment of the portfolio. We directly manage
certain short-term investments aggregating approximately $3 million at fair
value. The agreements with PIMCO and PRU may be terminated by either party upon
thirty days notice; the agreement with ACM may be terminated by either party
upon forty-five days notice. The performance of PIMCO, ACM and PRU and the fees
associated with the arrangements are periodically reviewed by our Boards of
Directors.

                                        4
<PAGE>   6

  Funds Withheld at Interest

     Generally, the ceding companies hold assets related to annuity reinsurance
agreements and appoint investment managers to manage these assets in segmented
portfolios. Under the terms of the reinsurance agreements, the investment income
that accrues to us is dependent on the performance of the underlying portfolios.
These assets are included on our Balance Sheet as Funds Withheld at Interest. At
December 31, 1999, the carrying value was approximately $1,532,653,000.

COMPETITION

     The reinsurance industry is highly competitive, and we compete with the
major reinsurers. Our principal target market is North America. According to
management's estimates, there are approximately 25 reinsurers of annuity or life
insurance products located in the United States. There are also numerous foreign
reinsurers that compete for reinsurance business in the United States as well as
elsewhere. These competitors primarily reinsure life insurance and health
insurance risks and, to a lesser degree, annuity risks. We expect most, if not
all, of these competitors to compete for annuity and life reinsurance business
in the future. Most of these competitors are well established, have significant
operating histories, strong claims paying ability and long-standing client
relationships through existing treaties with cedents.

     Reinsurers compete on the basis of many factors, including premium charges,
their reputation and perceived financial strength of the reinsurers, other terms
and conditions of the products offered, ratings assigned by independent rating
agencies, speed of claims payment and reputation and experience in the
particular line of reinsurance to be written. We believe that our primary
competitors include Lincoln National Corporation, Transamerica Occidental Life
Insurance Company, Reinsurance Group of America, Inc., ING Reinsurance,
Employers Reassurance Corporation and Swiss Reinsurance. However, within the
reinsurance industry, our competitors can change from year to year.

RATINGS

     A.M. Best, an independent insurance company rating organization, has rated
Annuity and Life Reassurance "A-" (Excellent). A.M. Best assigns an "A-"
(Excellent) rating to companies that have on balance, in its opinion, excellent
financial strength, operating performance and market profile as well as strong
abilities to meet their ongoing obligations to policyholders.

     Additionally, Annuity and Life Reassurance has received an "A" (high)
rating from Duff & Phelps and an "A-" (good financial security) rating from
Standard & Poor's.

EMPLOYEES

     As of December 31, 1999, we had eleven employees located in Bermuda and two
employees located in the United States.

REGULATION

  Bermuda

     Annuity and Life Reassurance is licensed as a long-term insurer under the
Bermuda Insurance Act of 1978, as amended, and Related Regulations
(collectively, the "Insurance Act"). The Insurance Act, which regulates the
insurance business of Annuity and Life Reassurance, provides that no person may
carry on an insurance business in Bermuda unless registered as an insurer under
the Insurance Act by the Bermuda Minister of Finance. The registration of an
applicant as an insurer is subject to its complying with the terms of its
registration and such other conditions as the Minister may impose at any time.

     The Insurance Act imposes on Bermuda insurance companies minimum solvency
and liquidity standards and auditing and reporting requirements and grants to
the Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Some of the significant aspects of the Bermuda insurance
regulatory framework are set forth below.

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<PAGE>   7

     Classification of Insurers.  The Insurance Act distinguishes between
insurers carrying on long term business and insurers carrying on general
business. Because Annuity and Life Reassurance has been incorporated to provide
reinsurance of annuity and life insurance related risks, it has been registered
as a long term insurer in Bermuda and will be regulated as such under the
Insurance Act.

     Cancellation of Insurer's Registration.  An insurer's registration may be
cancelled by the Minister on the grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or if, in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.

     Annual Statutory Financial Return.  Annuity and Life Reassurance is
required to file with the Registrar of Companies in Bermuda a Statutory
Financial Return no later than four months after its financial year-end, unless
specifically extended. The Statutory Financial Return includes, among other
matters, a report of the approved independent auditor on the Statutory Financial
Statements of the insurer, a solvency certificate, the Statutory Financial
Statements themselves and a certificate of the approved actuary. The solvency
certificate must be signed by the principal representative and at least two
directors of the insurer who are required to certify whether the Minimum
Solvency Margin has been met, and the independent approved auditor is required
to state whether in its opinion it was reasonable for the directors to so
certify. If an insurer's accounts have been audited for any purpose other than
compliance with the Insurance Act, a statement to that effect must be filed with
the Statutory Financial Return.

     Statutory Financial Statements.  An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of these Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, a statement of capital and surplus and
notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. An insurer is
required to submit the annual Statutory Financial Statements as part of the
annual Statutory Financial Return.

     Independent Approved Auditor.  Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, which
are required to be filed annually with the Registrar of Companies in Bermuda.
The independent auditor of the insurer must be approved by the Minister and may
be the same person or firm that audits the insurer's financial statements and
reports for presentation to its shareholders. Annuity & Life Reassurance's
independent auditor is KPMG.

     Approved Actuary.  Annuity and Life Reassurance, as a registered long term
insurer, is required to submit an annual actuary's certificate when filing its
Statutory Financial Return. The actuary's certificate must state whether or not,
in the opinion of the insurer's approved actuary, the aggregate amount of the
liabilities of the insurer in relation to long term business as at the end of
the relevant year exceeded the aggregate amount of those liabilities as shown in
the insurer's statutory balance sheet. The approved actuary, who will normally
be a qualified life actuary, must be approved by the Minister. Annuity and Life
Reassurance's approved actuary is Robert P. Mills.

     Minimum Solvency Margin.  The Insurance Act provides that the value of the
long-term business assets of an insurer carrying on long term business must
exceed the amount of its long-term business liabilities by at least $250,000.
Annuity and Life Reassurance met the minimum statutory capital and surplus
requirement as of December 31, 1999.

     Supervision, Investigation and Intervention.  The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to the Minister, the
Minister may direct an insurer to produce documents or information relating to
matters connected with the insurer's business.

     If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Minister may, among other things, direct the
insurer (i) not to take on any new insurance business, (ii) not to vary any
insurance contract if the
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effect would be to increase the insurer's liabilities, (iii) not to make certain
investments, (iv) to realize certain investments, (v) to maintain, or transfer
to the custody of a specified bank, certain assets, (vi) not to declare or pay
any dividends or other distributions or to restrict the making of such payments,
and/or (vii) to limit its premium income.

     Under the Insurance Act, an insurer is required to maintain a principal
office in Bermuda and to appoint and maintain a principal representative in
Bermuda. For the purpose of the Insurance Act, the principal office of Annuity &
Life Reassurance is at our offices in Hamilton, Bermuda, and Lawrence S. Doyle,
our President and Chief Executive Officer, is the principal representative of
Annuity & Life Reassurance. Without a reason acceptable to the Minister, an
insurer may not terminate the appointment of its principal representative, and
the principal representative may not cease to act as such, unless 30 days notice
in writing to the Minister is given of the intention to do so. It is the duty of
the principal representative, within 30 days of reaching the view that there is
a likelihood that the insurer for which the principal representative acts will
become insolvent or that a reportable "event" has, to the principal
representative's knowledge, occurred or is believed to have occurred, to make a
report in writing to the Minister setting out all the particulars of the case
that are available to the principal representative. Examples of such a
reportable "event" include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the Minister relating to a solvency margin
or a liquidity or other ratio.

     Certain Bermuda Law Considerations.  We have been designated as
non-resident for exchange control purposes by the Bermuda Monetary Authority.
This designation allows us to engage in transactions, and to pay dividends to
non-residents of Bermuda who are holders of our common shares, in currencies
other than the Bermuda Dollar.

     The transfer of our common shares between persons regarded as non-resident
in Bermuda for exchange control purposes and our issuance of common shares to
such persons may be effected without specific consent under the Exchange Control
Act 1972 and regulations thereunder. Issues and transfers of the common shares
to any person regarded as resident in Bermuda for exchange control purposes
requires specific prior approval under the Exchange Control Act 1972. Annuity
and Life Reassurance's common shares cannot be transferred without the consent
of the Bermuda Monetary Authority.

     As "exempted companies," we are exempt from Bermuda laws restricting the
percentage of share capital that may be held by non-Bermudians, but we may not
participate in certain business transactions, including (i) acquiring or holding
land in Bermuda (except that required for our business and held by way of lease
or tenancy for terms of not more than 21 years) without the express
authorization of the Bermuda legislature, (ii) taking mortgages on land in
Bermuda to secure an amount in excess of $50,000 without the consent of the
Minister, (iii) acquiring any bonds or debentures secured by any land in
Bermuda, other than certain types of Bermuda government securities, or (iv)
carrying on business of any kind in Bermuda, including insuring domestic risks,
except in furtherance of business risks we have undertaken or under a license
granted by the Minister.

  United States

     General.  Our Bermuda operating subsidiary, Annuity and Life Reassurance,
is not licensed or admitted as an insurer in any state of the United States and
is not directly subject to regulation in any state of the United States. The
insurance laws of each state in the United States regulate the sale of insurance
and reinsurance within its jurisdiction by reinsurers, such as Annuity and Life
Reassurance, which are not admitted to do business within its jurisdiction.
Annuity and Life Reassurance conducts its business through its Bermuda office
either directly or through intermediaries, such as brokers and consultants.
Annuity and Life Reassurance does not maintain an office, and its personnel do
not solicit, advertise, settle claims or conduct other activities which may
constitute the transaction of the business of insurance, in any jurisdiction in
which it is not licensed or otherwise authorized to engage in these activities.

     Capitol Bankers Life Insurance Company, which, subject to regulatory
approval, we expect to acquire, is licensed and authorized to conduct life
insurance business in 43 states of the United States. The insurance laws and
regulations, as well as the supervisory authority that may be exercised by the
various insurance
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<PAGE>   9

departments, vary by jurisdiction, but generally grant broad powers to
supervisory agencies or regulators to examine and supervise insurance companies
and insurance holding companies with respect to every significant aspect of the
conduct of the insurance business. These laws and regulations generally require
insurance companies to meet certain solvency standards and asset tests, to
maintain minimum standards of business conduct and to file certain reports with
regulatory authorities, including information concerning their capital
structure, ownership and financial condition, and subject insurers to potential
assessments for amounts paid by guarantee funds. The insurance laws of Michigan
have the most significant impact on Capitol Bankers because that is the
jurisdiction in which it was formed.

     Annuity and Life Re America, Inc. is domiciled in Delaware and regulated as
a Delaware corporation. The Delaware insurance holding company system laws and
regulations generally do not apply to Annuity and Life Re America, Inc. because
it is not an insurer and they will not apply solely because of our pending
acquisition of Capitol Bankers because Capitol Bankers is not required to
register with the Delaware Insurance Commissioner under applicable provisions of
these laws and regulations. Nevertheless, after our acquisition of Capitol
Bankers, Annuity and Life Re America, Inc.'s books and records may be subject to
inspection by the Michigan insurance regulators because Annuity and Life Re
America, Inc. will be an affiliate of Capital Bankers, which is subject to
Michigan's holding company laws.

     Current Michigan law (applicable to Capitol Bankers) permits the payment of
ordinary shareholder dividends or distributions, the fair market value of which,
together with that of other dividends or distributions made during the preceding
twelve months, does not exceed the greater of (i) 10% of Capitol Bankers'
statutory surplus as regards policyholders as of the immediately preceding
December 31, or (ii) statutory net gain from operations, excluding realized
capital gains, for the immediately preceding calendar year, excluding pro rata
distributions of any class of Capitol Bankers' own securities. Any proposed
dividend in excess of this amount is considered an "extraordinary dividend" and
may not be paid until it has been approved, or a 30-day waiting period has
passed during which it has not been disapproved, by the Michigan Insurance
Commissioner. In addition, ordinary shareholder dividends may be paid only from
earned surplus (as opposed to contributed surplus) without the prior approval of
the Michigan Insurance Commissioner.

     In addition to the foregoing, Michigan insurance laws require that the
statutory surplus of Capitol Bankers following any ordinary shareholder dividend
be reasonable in relation to its outstanding liabilities and adequate to meet
its needs so that Capitol Bankers is and continues to be safe, reliable and
entitled to public confidence. If the Michigan Insurance Commissioner determines
that Capitol Bankers' policyholder surplus is not reasonable in relation to its
outstanding liabilities, and is not adequate to meet its financial needs, then
the Commissioner may limit or disallow the payment of shareholder dividends and
may apply for an order enjoining Capitol Bankers from continuing this violation
of the insurance laws.

     Credit for Reinsurance.  In addition to the regulatory requirements imposed
by the jurisdictions in which a reinsurer is licensed, a reinsurer's business
operations are affected by regulatory requirements in other jurisdictions in
which ceding companies are located governing "credit for reinsurance" which are
imposed on its ceding companies. In general, a ceding company that obtains
reinsurance from a reinsurer that is licensed, accredited or approved by the
jurisdiction in which the ceding company files statutory financial statements is
permitted to reflect in its statutory financial statements a credit in an
aggregate amount equal to the liability for policy reserves, claims and other
amounts ceded to the reinsurers. Many jurisdictions permit ceding companies to
take credit on their statutory financial statements for reinsurance obtained
from unlicensed or non-admitted reinsurers if adequate security is posted.

ITEM 2.  PROPERTIES.

     We conduct our operations from leased office space located at Cumberland
House, 1 Victoria Street, Hamilton, HM 11, Bermuda. Annuity and Life Re America
conducts its operations from leased space located at 406 Farmington Avenue,
Farmington, Connecticut, USA. We believe our space is adequate to meet our
current and expected needs.

                                        8
<PAGE>   10

ITEM 3.  LEGAL PROCEEDINGS.

     We are not currently involved in any litigation or arbitration. We
anticipate that in the ordinary course of business we may be subject to
litigation and arbitration.

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

     During the fourth quarter of 1999, no matters were submitted to our
security holders for a vote.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

     Our common shares have been listed for trading on the Nasdaq National
Market since April 17, 1998, the date of our initial public offering, under the
symbol "ALRE". Based on information reported in the NASDAQ ONLINE reporting
system, the high and low sales prices per common share for each quarterly period
from April 17, 1998 to December 31, 1999 were as follows:

<TABLE>
<CAPTION>
                                                        1999                1998
                                                  ----------------    ----------------
PERIOD                                             HIGH      LOW       HIGH      LOW
------                                            ------    ------    ------    ------
<S>                                               <C>       <C>       <C>       <C>
January 1 - March 31............................  27.000    19.750        --        --
April 1 - June 30...............................  26.375    19.094    24.875    21.688
July 1 - September 30...........................  24.875    20.875    22.875    17.000
October 1 - December 31.........................  28.500    20.375    27.000    18.250
</TABLE>

     As of March 15, 2000, there were approximately 3,300 holders of record of
our outstanding common shares.

DIVIDENDS

     We declared quarterly dividends of $0.04 per common share, for a total of
$0.16 per common share, in 1999. On February 10, 2000, our Board of Directors
declared a quarterly dividend of $0.04 per share to be paid in March 2000.

     The declaration and payment of future dividends to holders of our common
shares will be at the discretion of our Board of Directors and will depend upon
our earnings and financial condition, capital requirements of our subsidiaries,
regulatory considerations and other factors our Board of Directors deems
relevant. (See "Liquidity" in Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 14 of "Notes to Consolidated
Financial Statements" included elsewhere in this report.) Our general policy is
to retain most of our earnings to finance the growth and development of our
business.

ITEM 6.  SELECTED FINANCIAL DATA.

     The following table presents selected financial data and other operating
information. The selected financial data have been derived from our consolidated
financial statements and should be read in conjunction with our consolidated
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.

                                        9
<PAGE>   11

<TABLE>
<CAPTION>
                                                                   1999              1998
                                                              --------------    --------------
<S>                                                           <C>               <C>
INCOME STATEMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998:
Revenues:
  Net premiums..............................................  $  100,835,007    $   27,943,890
  Investment income, net of related expenses................      85,089,811        24,130,550
  Net realized investment gains (losses)....................      (1,284,769)        2,673,281
  Other.....................................................       3,215,429           311,243
                                                              --------------    --------------
  Total revenues............................................  $  187,855,478    $   55,058,964
                                                              --------------    --------------
Benefits and expenses:
  Claims and other policy benefits..........................  $   79,953,160    $   23,297,115
  Interest credited to interest sensitive contract
     Liabilities............................................      22,312,684         1,989,000
  Policy acquisition costs and other insurance expenses.....      42,200,688         6,541,872
  Operating expenses........................................       7,685,802         4,150,321
  Organizational expenses...................................              --            69,039
                                                              --------------    --------------
  Total benefits and expenses...............................  $  152,152,334    $   36,047,347
                                                              --------------    --------------
Net Income..................................................  $   35,703,144    $   19,011,617
                                                              ==============    ==============
Basic Earnings per common share.............................  $         1.40    $         0.81
Diluted Earnings per common share...........................  $         1.31    $         0.76
Dividends per common share..................................  $         0.16    $         0.04
Weighted average shares outstanding.........................      25,499,999        24,020,999
BALANCE SHEET DATA:
Invested Assets.............................................  $  304,060,124    $  342,614,194
Funds Withheld..............................................  $1,532,652,990    $1,200,101,268
Total Assets................................................  $2,056,085,988    $1,706,510,180
Stockholders' equity........................................  $  392,054,894    $  375,340,246
OTHER FINANCIAL DATA:
Book value per common share(1)..............................  $        15.82    $        14.57
First year reinsurance premiums assumed.....................  $   72,268,437    $   27,943,890
Life insurance in force (in thousands)......................  $   45,407,000    $   22,538,000
</TABLE>

---------------
(1) Book value per share is calculated by dividing end of period stockholders'
    equity (excluding unrealized investment gains or losses) by the end of
    period common shares outstanding.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     The following analysis of our consolidated financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
the consolidated financial statements and accompanying notes included elsewhere
in this report. The preparation of our financial statements in conformity with
generally accepted accounting principles 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 management estimates
are based, in part, on information provided by ceding companies. As is usual in
the reinsurance business, our ceding companies periodically update, refine and
revise the reinsurance information they provide to us. The financial effects
resulting from the incorporation of revised data are reflected in earnings as
changes in estimates.

     With the exception of historical information, the matters contained in this
report are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Such statements may include, but are not
limited to, projections of earnings, revenues, income or loss, capital
expenditures, plans for future operations and financing needs or plans, as well
as assumptions relating to the foregoing. The words

                                       10
<PAGE>   12

"expect", "project", "estimate", predict", "anticipate", "believes", and similar
expressions are also intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance and achievements could differ materially from those set
forth in, contemplated by or underlying the forward-looking statements. We
assume no obligation to update any forward looking statement to reflect actual
results or changes in or additions to the factors affecting such forward looking
statements.

     The factors that could affect forward-looking statements include, but are
not limited to: uncertainties relating to general economic and business
conditions that may impact the reinsurance marketplace, including, among other
things, changes in interest rate levels and the liquidity of certain securities;
changes in laws and government regulations applicable to us; our ability to
successfully implement our operating strategies; material changes in the level
of our operating expenses; material changes in mortality and morbidity
experience; and material changes in persistency. In addition, as part of our
business strategy we evaluate from time to time opportunities to acquire, make
investments in, or enter into joint ventures or other strategic alliances with
companies whose businesses compliment our business, some of which could be
material. If an acquisition is consummated, we may need to incur indebtedness in
connection with the acquisition. In addition, we could have difficulty
assimilating the personnel and operations of the acquired company, which would
prevent us from realizing expected synergies and could disrupt our ongoing
business and distract management and resources. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.

GENERAL

     Our two major product lines are traditional ordinary life reinsurance and
annuity reinsurance. The reinsurance agreements typically remain in force for
the life of the underlying policies reinsured, which on average range from ten
to thirty years. Each year, a portion of the business under an existing treaty
terminates due to among other things, surrenders and/or lapses of underlying
policies, deaths of underlying insureds and the exercise of recapture options.

     The profitability of the life reinsurance product line depends in large
part on the volume and amount of death claims incurred. While death claims are
reasonably predictable over many years, claims become less predictable over
shorter periods and are subject to fluctuation from quarter to quarter and year
to year. Significant fluctuations from period to period could adversely affect
the results of operations.

     At December 31, 1999, our life insurance in force amounted to $45.4
billion. We assign to third parties, or "retrocede," portions of certain risks
in excess of a predetermined retention amount for which we have accepted
liability. At December 31, 1999, we had ceded $34.9 million, or 0.08%, of our in
force life insurance coverage.

     Our primary annuity product is reinsurance of a general account fixed
deferred annuity. The profitability of the deferred annuity reinsurance product
line depends on earning a targeted spread between the interest rate earned on
the supporting asset base and the interest rate credited to the underlying
annuity liability. This spread is interest rate sensitive, as fluctuations in
the general level of interest rates from period to period may cause fluctuations
in the results of operations. At December 31, 1999, our liability for deferred
annuity contracts amounted to $1.6 billion. Additional information concerning
the spread between the interest rate earned on the supporting asset base and the
interest rate credited to the underlying annuity liability is presented
elsewhere in this report under the headings "Funds Withheld at
Interest -- Interest Sensitive Contract Liabilities" and "Quantitative and
Qualitative Disclosures about Market Risk."

OPERATING RESULTS

     We began our insurance operations on April 17, 1998 following the
completion of our initial public offering and direct sales of our common shares.
A loss of $449,000 was incurred during the three month period ended March 31,
1998 relating to expenses and costs incurred in our formation and organization.
For purposes of this discussion, we compare our results for the year ended
December 31, 1999 to our results for the eight and one half month period ended
December 31, 1998. Part of the difference in our operating results for these
                                       11
<PAGE>   13

two periods is attributable to the difference in length of the two operating
periods. Information regarding the full year ended December 31, 1998 is included
in the financial statements filed as a part of this report.

     Net Income.  For the year ended December 31, 1999, we had consolidated net
income of $35,703,000, or $1.40 per common share ($1.31 per common share on a
fully diluted basis), compared with $0.81 per common share ($0.76 per common
share on a fully diluted basis) for the initial operating period of
approximately eight and one-half months ended December 31, 1998. Earnings per
share for the year ended December 31, 1998 has been calculated using earnings
and the number of shares outstanding since the beginning of the second fiscal
quarter.

     Net Operating Income.  In addition to net income, we report net operating
income. This is not a substitute for net income computed in accordance with
generally accepted accounting principles (GAAP), but is an important measure
used by management, investors and others to measure our results. We define net
operating income as net income excluding realized gains and losses from the sale
of investments. Our definition of net operating income may differ from that used
by other public life and annuity companies.

     For the year ended December 31, 1999 our net operating income increased
120% over the prior year. Net operating income for the year ending December 31,
1999 was $36,988,000 or $1.45 per common share, $1.36 per common share on a
fully diluted basis, compared with $0.70 per common share, $0.66 per common
share on a fully diluted basis for the initial operating period of approximately
eight and one-half months ended December 31, 1998. The increase in net operating
income is due to the growth and development of our insurance operations and
favorable underwriting and investment results.

     Net Premiums.  Net premium revenue for the year ended December 31, 1999 was
$100,835,000, an increase of 261% over the initial operating period of
approximately eight and one-half months ended December 31, 1998. All premium
revenue was derived from traditional ordinary life reinsurance we developed
directly and through the use of intermediaries. The growth reflects the level of
new business written and the increase in the face amount of insurance in force.
At December 31, 1999 the total face amount of life insurance in force was $45.4
billion compared with $22.5 billion at December 31, 1998. New business writings
and premium revenue levels are significantly influenced by the seasonal nature
of the life reinsurance marketplace and by large transactions and therefore can
fluctuate from period to period.

     Net Investment Income.  Total net investment income for the year ended
December 31, 1999 was $85,090,000, an increase of 253% over the initial
operating period of eight and one half months ended December 31,1998. The growth
in the investment income is primarily due to the income earned on Funds Withheld
under modified coinsurance agreements related to our Interest Sensitive
Contracts Liabilities. The income earned on the Funds withheld was $64,606,000
for the year ended December 31, 1999 compared with $8,927,000 for the initial
operating period of eight and one-half months ended December 31, 1998. The
average yield rate earned on an annualized basis on the invested assets,
excluding Funds Withheld, was 6.29% for the year ended December 31, 1999
compared with 6.32% for the period ending December 31, 1998.

     Realized Investment Gains (Losses).  Realized investment losses were
$1,285,000 for the year ended December 31, 1999 compared with realized gains of
$2,673,000 for the initial operating period of eight and one-half months ended
December 31, 1998. These gains and losses result from normal activity in the
management of our investment portfolio.

     We do not consider realized gains and losses to be recurring components of
earnings. We make decisions concerning the sales of invested assets based on a
variety of market, business and other factors.

     During the year ended December 31, 1999, we incurred unrealized losses of
$14,992,000, as compared with unrealized gains of $3,723,000 incurred during the
period ended December 31,1998 which were included in Other Comprehensive Income
(Loss). The change in unrealized gains and losses is principally related to the
increase in the general level of interest rates during 1999.

     Claims and Policy Benefits.  Claims and Policy Benefits for the year ended
December 31, 1999 were $79,953,000 or 79% of net premium as compared with
$23,297,000 or 83% of net premium for the initial operating period of eight and
one-half months ended December 31, 1998. Mortality experience has been

                                       12
<PAGE>   14

favorable, falling within pricing parameters. We expect mortality to be fairly
constant over long periods of time, but it will fluctuate from period to period.
Reserve levels are in part determined by claims reported from ceding companies,
our aggregate experience and overall mortality trends.

     Interest Credited to Interest Sensitive Contract Liabilities.  Interest
credited to interest sensitive contract liabilities, which are the liabilities
we assume under reinsurance agreements we enter into, was $22,313,000 for the
year ended December 31, 1999, as compared with $1,989,000 for the initial
operating period of eight and one-half months ended December 31, 1998. This
increase reflects the growth in our interest sensitive contracts liabilities and
is directly related to income earned on the related Funds Withheld at Interest.
The income earned on Funds Withheld was $64,606,000 for the year ended December
31, 1999, as compared with $8,927,000 for the initial operating period of eight
and one-half months ended December 31, 1998.

     Policy Acquisition Costs and Other Insurance Expenses.  Policy Acquisition
Costs and Other Insurance Expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, were $42,201,000 for the year
ended December 31, 1999, as compared with $6,542,000 for the initial operating
period of eight and one-half months ended December 31, 1998. Generally, policy
acquisition costs and other insurance expenses fluctuate with business volume
and changes in product mix. The increase in these costs reflects the growth and
development of our life insurance and annuity business.

     Other Operating Expenses.  Operating expenses were $7,686,000 or 4.1% of
total revenue for the year ended December 31, 1999, as compared with $3,770,000
or 6.8% of total revenue for the initial operating period of eight and one-half
months ended December 31, 1998. The decrease in the ratio of operating expenses
to total revenue is due to the growth and development of our insurance
operations and our revenue base. We consider the operating expense level to be
low by industry standards and in line with our plan to be a low cost provider.

FINANCIAL CONDITION

     Investments.  Invested assets, including cash and cash equivalents,
amounted to $304,060,000 at December 31, 1999 as compared with $342,614,000 at
December 31, 1998. The change in invested assets during 1999 is due primarily to
the unrealized losses incurred in the year, the funds used in our operating
activities and payment of shareholder dividends. At December 31, 1999 unrealized
losses total $11,269,000 as compared with total unrealized gains of $3,723,000
at December 31, 1998. The change in unrealized gains and losses is principally
related to the increase in the general level of interest rates during 1999.

     Our investment policy is designed to achieve above average risk adjusted
total returns, maintain a high quality portfolio, maximize current income,
maintain an adequate level of liquidity and match the cash flows of the
portfolio to the required cash flows for the related liabilities.

     We do not engage in trading activities to recognize realized investment
gains and, thus, do not have a trading portfolio. However, we evaluate the
desirability of continuing to hold a security when market conditions,
creditworthiness or other measurement factors change. These changes may relate
to a change in the credit risk of an issuer and a decision to sell may be made
to avoid further declines in realizable value. Securities also may be sold prior
to maturity to provide liquidity. As a result our securities are classified as
"available for sale".

     At December 31, 1999, fixed maturity securities, which constituted all of
our invested assets, were 88% investment grade, liquid securities with varying
maturity dates, as compared with 83% at December 31, 1998. The fair value of
these investments may vary depending on economic and market conditions, the
level of interest rates and the perceived creditworthiness of the issuer. At
December 31, 1999 and 1998, the weighted average duration of invested assets was
3.7 and 2.9 years, respectively, and the weighted average investment quality
rating was "AA-" in both years.

     At December 31, 1999, $34,500,000 at fair value or 12% of invested assets,
consisted of below investment grade securities, as compared with $45,000,000 or
17% of invested assets at December 31, 1998. We limit our investments in fixed
maturities that are rated below investment grade to not more than 25% of our
total capital because these investments are subject to a higher degree of credit
risk than investment grade securities. We
                                       13
<PAGE>   15

monitor our below investment grade securities as well as the creditworthiness of
the portfolio as a whole. When fair market values decline for reasons other than
changes in interest rates or other perceived temporary conditions, the security
is written down to its net realizable value. We had no fixed maturities in
default at December 31, 1999 or 1998, and no securities were written down during
1999 or 1998.

     Our results of operations and our financial condition are significantly
affected by the performance of our investments and by changes in interest rates.
During a period of declining interest rates, if our investments are sold,
called, prepaid or redeemed, we may be unable to reinvest the proceeds in
securities of equivalent risk with comparable rates of return. During a period
of rising interest rates, the fair value of our invested assets could decline.
In addition, rising interest rates could also cause disintermediation, which in
turn could cause us to sell investments at prices and times when the fair values
of these investments are less than their amortized cost. We believe that our
traditional life insurance liabilities are not highly interest rate sensitive
and, therefore, the effects of fluctuating interest rates on these liability
cash flows are not significant. For interest sensitive liabilities, the cedent
utilizes asset/liability matching to minimize the impact of changes in interest
rates. We have not engaged in hedging activities to mitigate the effects of
interest rate changes on our invested assets and related liabilities, although
we may do so in the future.

     The following table summarizes our investment results, excluding interest
earned on funds withheld under modified coinsurance agreements, for the periods
ended December 31, 1999 and 1998.

                               INVESTMENT RESULTS

<TABLE>
<CAPTION>
                                                                                    PERIOD ENDED
                                                                YEAR ENDED        DECEMBER 31, 1998
                                                             DECEMBER 31, 1999     (8 1/2 MONTHS)
                                                             -----------------    -----------------
<S>                                                          <C>                  <C>
Total invested assets, cash and cash equivalents(1)........    $304,060,124         $342,614,194
Investment income, net of related expense..................    $ 20,483,345         $ 15,203,210
Effective yield rate(2)....................................           6.29%                6.32%
Realized investment gains (losses).........................    $ (1,284,769)        $  2,673,281
</TABLE>

---------------
(1) Fair value at end of the indicated year.

(2) The effective yield rate equals (i) net investment income divided by (ii)
    the average of total adjusted invested assets (fixed maturities at amortized
    cost) at the end of each calendar quarter included in the indicated period.

     Our invested assets consist primarily of fixed maturity securities. These
fixed maturity securities are invested primarily in U.S. government obligations,
foreign government obligations excluding emerging markets, public utilities
obligations, corporate fixed maturities and mortgage backed securities.

     At December 31, 1999, mortgage backed securities represented 37% of
invested assets, as compared with 33% at December 31, 1998. Investors in these
securities are compensated primarily for reinvestment risk rather than credit
quality risk. Investments in mortgage backed securities include collateralized
mortgage obligations and mortgage backed pass-through securities. Mortgage
backed securities generally are collateralized by mortgages issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, all of which are
agencies of the U.S. government. Of these, only GNMA mortgages are backed by the
full faith and credit of the U.S. government. Credit risk generally is not a
consideration when investing in agency mortgage backed securities. Our mortgage
backed securities portfolio had a weighted average investment quality rating of
"AAA" at December 31, 1999 and 1998.

     At December 31, 1999, 19% of our mortgage backed investment portfolio
consisted of planned amortization class, target amortization class and
sequential instruments, as compared with 14% at December 31, 1998. These
investments are designed to amortize in a more predictable manner by shifting
the primary risk of prepayment of the underlying collateral to investors in
other tranches ("support classes") of the collateralized mortgage obligation.

                                       14
<PAGE>   16

     Funds Withheld at Interest -- Interest Sensitive Contract Liabilities.  At
December 31, 1999 and 1998 the liability related to our annuity reinsurance
agreements in the amount of $1,603,383,000 and $1,283,676,000 was included on
the balance sheet as Interest Sensitive Contract Liabilities. The products
reinsured under these agreements are general account deferred annuity policies
containing minimum interest guarantees and market value adjustment features. At
December 31, 1999 and 1998, assets related to these annuity reinsurance
agreements with a carrying value of $1,532,653,000 and $1,200,101,000,
respectively, were included on our balance sheet as Funds Withheld at Interest.
Funds Withheld at Interest is equivalent to the statutory reserve held by the
ceding company. This reserve is calculated in accordance with the actuarial
valuation method known as the Commissioners Annuity Reserve Valuation Method.
Under the reinsurance agreements the ceding company is obligated to credit
interest on the outstanding amounts of these funds based on the return of the
underlying assets held by the ceding companies in segmented portfolios. The
underlying assets, which include fixed income and convertible fixed income
securities, are managed by investment managers appointed by the original cedant
in accordance with investment guidelines and policies that are included in the
reinsurance agreements. Accordingly, the carrying value of the Funds Withheld at
Interest is not directly exposed to market risk with respect to the assets held
by the ceding company.

     These reinsurance agreements are accounted for as investment type contracts
because they do not bear significant insurance risk. Accordingly, premiums are
reported as a deposit liability on the balance sheet and benefits such as policy
surrenders are reported as withdrawals from the liability account.

     The profitability of these agreements is dependent on earning a targeted
spread between the interest earned on the Funds Withheld at Interest, and the
interest credited to the policyholder liabilities.

     For the year ended December 31, 1999 and the eight and a half month period
ended December 31, 1998 the interest spread we earned was:

<TABLE>
<CAPTION>
                                                                            PERIOD ENDED
                                                        YEAR ENDED        DECEMBER 31, 1998
                                                     DECEMBER 31, 1999     (8 1/2 MONTHS)
                                                     -----------------    -----------------
<S>                                                  <C>                  <C>
Interest Earned....................................     $64,606,000          $8,927,000
Interest Credited..................................     $22,313,000          $1,989,000
Interest Spread....................................     $42,293,000          $6,938,000
</TABLE>

     The product line is interest rate sensitive, as fluctuations in the general
level of interest rates from period to period may cause fluctuations in the
interest spread earned. The product type reinsured and the structure of the
reinsurance agreement tend to mitigate the interest rate sensitivity of this
business. Further, due to the structure of the reinsurance agreement, we are not
directly exposed to market risk with respect to the assets underlying the
reinsurance agreements.

LIQUIDITY AND CAPITAL RESOURCES

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

     Net cash used by operating activities was $18,920,000 for the year ended
December 31, 1999, as compared with $16,388,000 for the initial operating period
of eight and one-half months ended December 31, 1998. In addition to the
difference in length of the operating periods compared, the increase in the cash
used by operating activities is primarily related to the growth and development
of our insurance operations and the initial costs associated with writing new
life reinsurance and annuity reinsurance business. The net cash used by
operating activities was funded from available cash balances and proceeds from
our sales of fixed maturity securities. During the next twelve months, we
believe our obligations will be adequately provided for by our principal sources
of funds.

                                       15
<PAGE>   17

     Our capital structure currently consists entirely of equity. At December
31, 1999, our total capitalization after deducting certain loans to management
and including retained earnings and accumulated other comprehensive income
(loss) amounted to $392,055,000, as compared with $375,340,000 at December 31,
1998. We believe this level of capital is sufficient to support our insurance
writings and growth for the near future.

     At December 31, 1999 and 1998, we had no outstanding debt. At December 31,
1999 and 1998, letters of credit totaling $121,475,000 and $46,425,000,
respectively, issued in the ordinary course of our business had been issued by
our bankers in favor of certain ceding insurance companies to provide security
and to meet regulatory requirements. These letters of credit are fully
collateralized by our investments. We may incur indebtedness in the future in
connection with possible acquisitions of, investments in, joint ventures with or
other strategic alliances with companies whose businesses complement our
business.

     On April 17, 1998 we completed an initial public offering of 19,640,579
common shares. Total proceeds received net of underwriting discounts and
commissions were $276,932,164. Simultaneous with the initial closing of the
public offering, we sold 5,859,420 common shares and 397,500 Class B warrants to
certain investors, members of our Board of Directors and management. Total net
proceeds were $82,617,806. Substantially all of the net proceeds from these
offerings were used to provide working capital and to capitalize our operating
subsidiary, Annuity & Life Reassurance, Ltd.

     At the February 11, 1999, April 29,1999, July 28, 1999 and October 27, 1999
Board of Directors meetings, shareholder dividends of $.04 per share were
declared. The Board intends to continue to declare and pay out of earnings a
quarterly dividend. The continued payment of dividends is dependent on the
ability of our operating subsidiaries to achieve satisfactory underwriting and
investment results, and we cannot assure you that dividends will be declared or
paid in the future.

     We have no material commitments other than as outlined in "Acquisition"
below.

ACQUISITION

     On September 7, 1999, we signed an agreement to acquire Capitol Bankers
Life Insurance Company for $2,000,000 plus the capital and surplus of Capitol
Bankers. Upon completion of the acquisition, we intend to contribute additional
capital to Capitol Bankers of approximately $18 million. Completion of the
acquisition, however, is subject to regulatory approval. We expect to fund the
acquisition price and subsequent capital contribution from available cash
balances and proceeds from the sale of fixed maturity securities. Prior to
closing, the in force insurance business of Capitol Bankers will be 100%
reinsured by Capitol Bankers to a third party reinsurer. This transaction will
be accounted for as a purchase.

     Capitol Bankers is domiciled in the United States and is authorized to
conduct its life insurance business in 43 states of the United States. After we
complete our pending acquisitions, we expect Capitol Bankers to focus its
operations on the United States life and annuity reinsurance markets.

YEAR 2000

     We experienced no significant disruptions to our business as a result of
the conversion to the Year 2000. We incurred no material Year 2000 expenses
during 1999, and all expenses incurred were funded from operations. We do not
expect to incur significant Year 2000 expenses during 2000 and we expect to fund
any such expenses from operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Our major market risk exposure is changing interest rates, primarily in the
United States, because we have a portfolio of fixed maturity investments. A
change in interest rates will affect the fair value of our investments and may
affect our operating results and financial condition. Interest rate risk is
managed with effective maturity structures and with the application of duration
management practices. We do not currently use derivative financial instruments
such as futures and options to manage this risk, although we may do so in the
future. In addition, we manage other risks, including credit and liquidity, in
the normal course of business.
                                       16
<PAGE>   18

In managing credit risk we establish overall quality and rating guidelines and
place limits on credit exposure by industry and issuer to achieve appropriate
diversification. We do not have a trading portfolio and are not exposed to
market risk from trading activities. We are not directly exposed to market risk
with respect to the assets underlying the annuity reinsurance agreements we
enter into.

     The table below (expressed in millions of U.S. dollars) presents as of
December 31, 1999 the amortized cost amounts and related weighted average
interest rates by years of maturity for our investment portfolio. Mortgage
backed securities are included in the table by relevant year of maturity.

<TABLE>
<CAPTION>
                                  CASH AND CASH    WEIGHTED AVERAGE    FIXED MATURITY    WEIGHTED AVERAGE
                                   EQUIVALENTS      INTEREST RATE       INVESTMENTS       INTEREST RATE
                                  -------------    ----------------    --------------    ----------------
<S>                               <C>              <C>                 <C>               <C>
2000............................      $31.2              4.73%             $ 11.6              7.27%
2001............................                                             12.5              6.98%
2002............................                                             13.4              7.94%
2003............................                                             22.0              7.06%
2004............................                                             28.2              7.30%
Thereafter......................                                            196.4              7.21%
Total...........................      $31.2              4.73%             $284.1              7.23%
Fair Value......................      $31.2                                $272.9
</TABLE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                       INDEX TO FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE
             ANNUITY AND LIFE RE (HOLDINGS), LTD. AND SUBSIDIARIES

<TABLE>
<S>                                                             <C>
FINANCIAL STATEMENTS
Report of Management........................................     18
Report of Independent Auditors..............................     19
Consolidated Balance Sheets at December 31, 1999 and 1998...     20
Consolidated Statements of Operations for the years ended
  December 31, 1999 and 1998................................     21
Consolidated Statements of Comprehensive Income for the
  years ended December 31, 1999 and 1998....................     22
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1999 and 1998............     23
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999 and 1998................................     24
Notes to Consolidated Financial Statements..................     25
FINANCIAL STATEMENT SCHEDULE
Schedule II Condensed Financial Information of Registrant...     36
</TABLE>

     All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted, or the information is presented in the consolidated financial
statements or accompanying notes.

                                       17
<PAGE>   19

                              REPORT OF MANAGEMENT

     Management of the Company has primary responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
financial statements included in this report were prepared in accordance with
generally accepted accounting principles in the United States applied on a
consistent basis. The financial statements include amounts that are based on
management's best estimates and judgements. Management also prepared the other
information presented in the annual report and is responsible for its accuracy
and consistency with the financial statements.

     Management of the Company has established and maintains a system of
internal controls designed to provide reasonable assurance as to the integrity
and reliability of the financial statements, the protection of assets from
unauthorized use or disposition and the prevention and detection of fraudulent
financial reporting.

     The Company's financial statements have been audited by our independent
auditors, KPMG. Our independent auditors had unrestricted access to each member
of management in conducting their audit. Management has made available to our
auditors all of the Company's financial records and related data, as well as the
minutes of shareholders' and directors' meetings. Management believes that all
representations made to our auditors during their audits were valid and
appropriate.

     The Audit Committee of the Board of Directors is comprised of certain
directors who are neither employees nor officers of the Company. The Audit
Committee meets periodically with management and KPMG regarding audit scope,
timing, results and to discus other auditing and financial reporting matters.
Our auditors have direct access to and meet privately with the Audit Committee.

LAWRENCE S. DOYLE
President and
Chief Executive Officer

WILLIAM W. ATKIN
Senior Vice President and
Chief Financial Officer

                                       18
<PAGE>   20

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Annuity and Life Re (Holdings), Ltd.

     We have audited the consolidated financial statements of Annuity and Life
Re (Holdings), Ltd. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

     We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and its subsidiaries as at December 31, 1999 and 1998 and the results of their
operations and cash flows for the years ended December 31, 1999 and 1998 in
conformity with United States generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.

KPMG
Chartered Accountants
Hamilton, Bermuda
February 8, 2000

                                       19
<PAGE>   21

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                          CONSOLIDATED BALANCE SHEETS
                      (EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1999    DECEMBER 31, 1998
                                                             -----------------    -----------------
<S>                                                          <C>                  <C>
ASSETS
Cash and cash equivalents..................................   $   31,187,242       $   66,586,267
Fixed interest investments, available for sale, at fair
  value (amortized cost of $284,142,098 at December 31,
  1999 and $272,305,333 at December 31, 1998)..............      272,872,882          276,027,927
Funds withheld at interest.................................    1,532,652,990        1,200,101,268
Accrued investment income..................................        4,279,480            3,812,062
Other reinsurance receivables..............................        7,834,806                   --
Deferred policy acquisition costs..........................      203,510,250          159,582,286
Other assets...............................................        3,748,338              400,370
                                                              --------------       --------------
  Total Assets.............................................   $2,056,085,988       $1,706,510,180
                                                              ==============       ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for future policy benefits........................   $   43,753,923       $   22,026,409
Interest-sensitive contracts liabilities...................    1,603,382,955        1,283,675,809
Other reinsurance liabilities..............................       10,746,269           22,455,437
Payable for investments purchased but not yet settled......          639,352                   --
Accounts payable and accrued expenses......................        5,508,595            3,012,279
                                                              --------------       --------------
  Total Liabilities........................................   $1,664,031,094       $1,331,169,934
                                                              --------------       --------------
STOCKHOLDERS' EQUITY
Preferred Shares (par value $1.00; 50,000,000 shares
  authorized; no shares outstanding).......................   $           --       $           --
Common Shares (par value $1.00; 100,000,000 shares
  authorized; 25,499,999 shares outstanding)...............       25,499,999           25,499,999
Additional paid-in capital.................................      329,496,091          329,517,104
Notes receivable from stock sales..........................       (1,286,741)          (1,391,068)
Accumulated other comprehensive income (loss)..............      (11,269,216)           3,722,594
Retained earnings..........................................       49,614,761           17,991,617
                                                              --------------       --------------
  Total Stockholders' Equity...............................   $  392,054,894       $  375,340,246
                                                              --------------       --------------
  Total Liabilities and Stockholders' Equity...............   $2,056,085,988       $1,706,510,180
                                                              ==============       ==============
</TABLE>

          See accompanying notes to consolidated financial statements
                                       20
<PAGE>   22

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                              ---------------------------
                                                                  1999           1998
                                                              ------------    -----------
<S>                                                           <C>             <C>
REVENUES
Net premiums................................................  $100,835,007    $27,943,890
Investment income, net of related expenses..................    85,089,811     24,130,550
Net realized investment gains (losses)......................    (1,284,769)     2,673,281
Other revenue...............................................     3,215,429        311,243
                                                              ------------    -----------
Total Revenues..............................................  $187,855,478    $55,058,964
                                                              ------------    -----------
BENEFITS AND EXPENSES
Claims and other policy benefits............................  $ 79,953,160    $23,297,115
Interest credited to interest sensitive contract
  liabilities...............................................    22,312,684      1,989,000
Policy acquisition costs and other insurance expenses.......    42,200,688      6,541,872
Operating expenses..........................................     7,685,802      4,150,321
Organizational expenses.....................................            --         69,039
                                                              ------------    -----------
Total Benefits and Expenses.................................  $152,152,334    $36,047,347
                                                              ------------    -----------
  Net Income................................................  $ 35,703,144    $19,011,617
                                                              ============    ===========
NET INCOME PER COMMON SHARE
  Basic.....................................................  $       1.40    $      0.81
                                                              ------------    -----------
  Diluted...................................................  $       1.31    $      0.76
                                                              ------------    -----------
</TABLE>

          See accompanying notes to consolidated financial statements
                                       21
<PAGE>   23

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                      (EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                              ---------------------------
                                                                  1999           1998
                                                              ------------    -----------
<S>                                                           <C>             <C>
Net Income..................................................  $ 35,703,144    $19,011,617
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on securities arising
  during period.............................................   (14,991,810)     3,722,594
                                                              ------------    -----------
Total Comprehensive Income..................................  $ 20,711,334    $22,734,211
                                                              ============    ===========
</TABLE>

          See accompanying notes to consolidated financial statements
                                       22
<PAGE>   24

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                      (EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                              ----------------------------
                                                                  1999            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
PREFERRED SHARES PAR VALUE $1.00
Balance at beginning and end of period......................  $         --    $         --
                                                              ------------    ------------
COMMON SHARES PAR VALUE $1.00
Balance of beginning of period..............................  $ 25,499,999    $     12,000
Issuance of shares..........................................            --      25,499,999
Retirement of shares........................................            --         (12,000)
                                                              ------------    ------------
Balance at end of period....................................  $ 25,499,999    $ 25,499,999
                                                              ------------    ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period..............................  $329,517,104    $    238,000
Issuance of shares..........................................            --     334,049,964
Direct equity offering expenses.............................      ( 21,013)     (4,770,860)
                                                              ------------    ------------
Balance at end of period....................................  $329,496,091    $329,517,104
                                                              ------------    ------------
NOTES RECEIVABLE FROM STOCK SALES
Balance at beginning of period..............................  $ (1,391,068)   $         --
Notes issued................................................            --      (1,325,000)
Repayments..................................................       175,000              --
Accrued interest during period..............................       (70,673)        (66,068)
                                                              ------------    ------------
Balance at end of period....................................  $ (1,286,741)   $ (1,391,068)
                                                              ------------    ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period..............................  $  3,722,594    $         --
Net unrealized holding gains (losses) on securities.........   (14,991,810)      3,722,594
                                                              ------------    ------------
Balance at end of period....................................  $(11,269,216)   $  3,722,594
                                                              ------------    ------------
RETAINED EARNINGS
Balance at beginning of period..............................  $ 17,991,617    $         --
Net income..................................................    35,703,144      19,011,617
Stockholder dividends.......................................    (4,080,000)     (1,020,000)
                                                              ------------    ------------
Balance at end of period....................................  $ 49,614,761    $ 17,991,617
                                                              ------------    ------------
TOTAL STOCKHOLDERS' EQUITY..................................  $392,054,894    $375,340,246
                                                              ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements
                                       23
<PAGE>   25

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                              ------------------------------
                                                                  1999             1998
                                                              -------------    -------------
<S>                                                           <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................  $  35,703,144    $  19,011,617
Adjustments to reconcile net income to net cash used by
  operating activities:
Net realized investment gains (losses)......................      1,284,769       (2,673,281)
Changes in:
Accrued investment income...................................       (467,418)      (3,812,062)
Deferred policy acquisition costs...........................    (43,927,964)    (159,582,286)
Other reinsurance receivables...............................     (7,834,806)              --
Other assets................................................     (3,347,968)        (167,370)
Reserves for future policy benefits and interest sensitive
  contracts, net of funds withheld..........................      8,882,938      105,600,950
Other reinsurance liabilities...............................    (11,709,168)      22,455,437
Accounts payable and accrued expenses.......................      2,475,303        2,779,279
                                                              -------------    -------------
Net cash used by operating activities.......................    (18,941,170)     (16,387,716)
                                                              -------------    -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed interest securities............    226,566,212      309,328,762
Purchase of fixed interest securities.......................   (239,048,394)    (578,960,814)
                                                              -------------    -------------
Net cash used by investing activities.......................    (12,482,182)    (269,632,052)
                                                              -------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of company stock.....................             --      353,376,035
Repayment of notes receivable, less accrued interest........        104,327               --
Dividends paid to stockholders..............................     (4,080,000)      (1,020,000)
                                                              -------------    -------------
Net cash provided (used) by financing activities............     (3,975,673)     352,356,035
                                                              -------------    -------------
Increase (Decrease) in cash and cash equivalents............    (35,399,025)      66,336,267
Cash and cash equivalents, beginning of period..............     66,586,267          250,000
                                                              -------------    -------------
Cash and cash equivalents, end of period....................  $  31,187,242    $  66,586,267
                                                              =============    =============
</TABLE>

          See accompanying notes to consolidated financial statements
                                       24
<PAGE>   26

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

     Annuity and Life Re (Holdings), Ltd. ("Holdings") was incorporated on
December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned subsidiaries:
Annuity and Life Reassurance, Ltd. ("Annuity and Life Reassurance"), licensed
under the laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc. ("Annuity and Life Re America"), an insurance holding company
based in the United States which was incorporated on May 28, 1999. Holdings,
Annuity and Life Reassurance and Annuity and Life Re America are collectively
referred to herein as the "Company". The Company completed an initial public
offering of its equity securities and commenced operations on April 17, 1998.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying financial statements are prepared in accordance with
United States generally accepted accounting principles which require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates. The
following are the significant accounting policies adopted by the Company:

  (a) Basis of consolidation

     The consolidated financial statements include the accounts of Holdings and
its subsidiaries, Annuity and Life Reassurance and Annuity & Life Re America.
All significant inter-company accounts and transactions have been eliminated
upon consolidation.

  (b) Premium income and related expenses

     Reinsurance premiums from traditional life and annuity policies with life
contingencies are generally recognized as revenue when due from policyholders.
Traditional life policies include those contracts with fixed and guaranteed
premiums and benefits, and consist principally of whole life and term insurance
policies. Benefits and expenses are matched with such income so as to result in
the recognition of profits over the life of the contracts. This is achieved by
means of the provision for liabilities for future policy benefits and deferral
and subsequent amortization of policy acquisition costs.

     For contracts with a single premium or a limited number of premium payments
due over a significantly shorter period than the total period over which
benefits are provided ("limited payment contracts"), reinsurance premiums are
recorded as income when due with any excess profit deferred and recognized in
income in a constant relationship to the insurance in force or, for annuities,
in relation to the amount of expected future benefit payments.

     Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders' account
balances for mortality charges, policy administration charges and surrender
charges. Policy benefits and claims that are charged to expense include benefit
claims incurred in the period in excess of related policyholders' account
balances.

  (c) Deferred policy acquisition costs

     The costs of acquiring new business, principally allowances, which vary
with and are primarily related to the production of new business, are deferred.
Deferred policy acquisition costs are subject to recoverability testing at the
time of the policy issuance and loss recognition testing at the end of each
accounting period.

                                       25
<PAGE>   27
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     For traditional life and annuity policies with life contingencies, deferred
policy acquisition costs are charged to expense using assumptions consistent
with those used in computing policy reserves. Assumptions as to anticipated
premiums are estimated at the date of the policy issuance and are consistently
applied during the life of the contracts. Deviations from estimated experience
are reflected in earnings in the period such deviations occur. For these
contracts, the amortization periods generally are for the estimated life of the
policies.

     For universal life and investment-type products, deferred policy
acquisition costs are amortized over the expected average life of the contracts
as a constant percentage of the present value of estimated gross profits arising
principally from investment results, mortality and expense margins and surrender
charges based on historical and anticipated future experience, which is updated
at the end of each accounting period. In computing amortization, interest
accrues to the unamortized balance of capitalized policy acquisition costs at
the rate used to discount expected gross profit. The effect on the amortization
of deferred policy acquisition costs of revisions to estimated gross profits are
reflected in earnings in the period such estimated gross profits are revised.

  (d) Policyholders' account balances and future policy benefits

     The development of policy reserves for the Company's products requires
management to make estimates and assumptions regarding mortality, lapse, expense
and investment experience. Such estimates are primarily based on historical
experience and information provided by ceding companies. Actual results could
differ materially from those estimates. Management monitors actual experience,
and where circumstances warrant, will revise its assumptions and the related
reserve estimates.

     For traditional life policies, future policy benefits and dividend
liabilities are estimated using a net level premium method on the basis of
actuarial assumptions as to mortality, persistency and interest established at
policy issue. Assumptions established at policy issue as to mortality and
persistency are based on anticipated experience which, together with interest
and expense assumptions, provide a margin for adverse deviation. When the
liabilities for future policy benefits plus the present value of expected future
gross premiums for a product are insufficient to provide for expected future
benefits and expenses for that product, deferred policy acquisition costs are
written off and thereafter, if required, a premium deficiency reserve is
established by a charge to income. Benefit liabilities for traditional annuities
during the accumulation period are equal to the accumulated present value of
expected future benefit payments.

     Premiums for universal life and investment-type contracts are reported as
deposits to clients' account balances. Revenues from these contracts will
consist of amounts assessed during the period against clients' account balances
for mortality charges, policy administration and surrender charges. Policy
benefits and claims that are charged to expense include benefit claims incurred
in the period in excess of related clients' account balances and interest
credited to clients' account balances.

  (e) Investments

     The Company classifies its investments in fixed income securities as
available for sale and, accordingly, such securities are carried at fair value.
The cost of fixed income securities are adjusted for amortization of premiums
and discounts. The cost of fixed income securities are adjusted for declines in
value that are considered other than temporary.

     Realized gains and losses on investments are recognized in net income,
using the specific identification method. Changes in fair values of securities
carried at fair value are reflected in other comprehensive income.

                                       26
<PAGE>   28
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (f) Translation of foreign currencies

     The Company's functional currency is the United States dollar. Premiums
written and receivable in foreign currencies are recorded at exchange rates
prevailing on the date the contract attaches and liabilities for future benefits
payable in foreign currencies at the time such liabilities are first recorded.
Exchange gains or losses resulting from the periodic revaluation and settlement
of such assets and liabilities are recorded in the Company's statement of
operations.

  (g) Organizational expenses

     Organization expenses consist of legal, accounting and incorporation
expenses incurred in connection with the formation and organization of the
Company. Such costs were expensed as incurred.

     Certain equity offering costs incurred in connection with the Company's
initial public offering, including certain amounts payable for investment
banking and financial advisory services, have been deducted from the gross
proceeds of the offering.

  (h) Earnings per common share

     The Company calculates basic earnings per common share and earnings per
common share-assuming dilution.

     Basic earnings per common share is calculated by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.

     Diluted earnings per common share is calculated by dividing the net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period, plus dilutive potential common shares.
Options and warrants issued by the Company are considered dilutive potential
common shares and are included in the calculation using the treasury stock
method.

  (i) Comprehensive income

     The most significant items of comprehensive income are net income and the
change in unrealized gains and losses on securities.

  (j) Cash and cash equivalents

     For the purposes of the statements of cash flows, the Company considers all
time deposits and short term investments with an original maturity of 90 days or
less as equivalent to cash.

  (k) Stock plans

     The Company accounts for stock option grants in accordance with APB opinion
No. 25, "Accounting for Stock Issued to Employees." Compensation expense for
stock option grants is recognized to the extent that the fair value of the stock
exceeds the exercise price of the option at the measurement date. Any resulting
compensation expense is recorded over the shorter of the vesting or service
period.

  (l) Accounting pronouncements

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at their fair value. The accounting for changes in the fair
value of such instruments depends upon the intended use of the derivative and
the resulting designation. This standard also establishes new rules for
derivative instruments designated and used as part of a hedging activity.

                                       27
<PAGE>   29
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In June 1999 the FASB issued Statement No. 137 "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the effective date of FASB
Statement No. 133", which defers the effective date of Statement No. 133 until
fiscal quarters beginning after June 15, 2000.

     The Company currently does not hold any derivatives and does not engage in
any derivative hedging activities, although it may do so in the future.
Management has reviewed this new Statement and has concluded that it is not
likely to significantly affect its current financial reporting.

3. INVESTMENTS

     (a) The amortized cost and fair values of investments in fixed interest
securities classified as available for sale at December 31, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                      AMORTIZED     UNREALIZED   UNREALIZED        FAIR
1999                                     COST          GAIN         LOSS          VALUE
----                                 ------------   ----------   -----------   ------------
<S>                                  <C>            <C>          <C>           <C>
US Government Securities...........  $ 42,942,928   $       --   $ 1,631,493   $ 41,311,435
Non U.S. Government Securities.....     2,592,517           --        82,567      2,509,950
US Corporate Securities............   122,134,896           --     4,807,736    117,327,160
Non U.S. Corporate Securities......    11,981,240           --       363,774     11,617,466
Mortgage Securities................   104,490,517           --     4,383,646    100,106,871
                                     ------------   ----------   -----------   ------------
                                     $284,142,098   $       --   $11,269,216   $272,872,882
                                     ============   ==========   ===========   ============
</TABLE>

<TABLE>
<CAPTION>
                                      AMORTIZED     UNREALIZED   UNREALIZED        FAIR
1998                                     COST          GAIN         LOSS          VALUE
----                                 ------------   ----------   -----------   ------------
<S>                                  <C>            <C>          <C>           <C>
US Government Securities...........  $ 41,802,719   $1,279,641   $        --   $ 43,082,360
Non U.S. Government Securities.....     3,137,980      120,800            --      3,258,780
US Corporate Securities............   121,382,257    1,689,659            --    123,071,916
Non U.S. Corporate Securities......    14,800,901      248,926       314,929     14,734,898
Mortgage Securities................    91,181,476      702,649         4,152     91,879,973
                                     ------------   ----------   -----------   ------------
                                     $272,305,333   $4,041,675   $   319,081   $276,027,927
                                     ============   ==========   ===========   ============
</TABLE>

     During the year ended December 31, 1999 there were sales of fixed interest
securities amounting to $226,566,212, as compared with $309,328,762 during the
year ended December 31, 1998.

     (b) The following table sets forth certain information regarding the
investment ratings of the Company's fixed interest securities portfolio at
December 31, 1999 and 1998.

<TABLE>
<CAPTION>
                                                     1999                     1998
                                            ----------------------   ----------------------
RATINGS(1)                                  AMORTIZED COST     %     AMORTIZED COST     %
----------                                  --------------   -----   --------------   -----
<S>                                         <C>              <C>     <C>              <C>
AAA.......................................   $128,530,965     45.2%   $140,231,184     51.5%
AA........................................     16,384,799      5.8      12,832,276      4.7
A.........................................     59,199,639     20.8      38,310,749     14.1
BBB.......................................     45,318,510     15.9      35,759,493     13.1
BB........................................     30,197,599     10.6      42,792,743     15.7
B.........................................      4,510,586      1.7       2,378,888      0.9
                                             ------------    -----    ------------    -----
                                             $284,142,098    100.0%   $272,305,333    100.0%
                                             ============    =====    ============    =====
</TABLE>

---------------
(1) Rating as assigned by Standard & Poor's Corporation.

                                       28
<PAGE>   30
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     (c) At December 31, 1999 and 1998 letters of credit totaling $121,475,000
and $46,425,000, respectively, issued in the ordinary course of the Company's
business had been issued by the Company's bankers in favor of certain ceding
insurance companies. At December 31, 1999 and 1998 investments of a similar
amount were pledged as collateral for these letters of credit.

     (d) For fixed interest securities held on December 31, 1999 and 1998 the
maturity distribution is as follows:

<TABLE>
<CAPTION>
                                                                      1999
                                                          ----------------------------
                                                           AMORTIZED          FAIR
                                                              COST           VALUE
                                                          ------------    ------------
<S>                                                       <C>             <C>
Within one year.........................................  $ 11,640,513    $ 11,590,592
From one to five years..................................    76,025,504      73,582,344
From five to ten years..................................    58,714,280      56,036,156
After more than ten years...............................    33,271,284      31,556,919
Mortgage Securities.....................................   104,490,517     100,106,871
                                                          ------------    ------------
                                                          $284,142,098    $272,872,882
                                                          ============    ============
</TABLE>

     (e) Investment income earned during the year is comprised as follows:

<TABLE>
<CAPTION>
                                                              1999            1998
                                                          ------------    ------------
<S>                                                       <C>             <C>
Interest income.........................................  $ 22,004,986    $ 16,539,911
Interest earned on funds withheld under modified
  coinsurance agreements................................    64,606,466       8,927,340
Amortization of premium/discount........................      (659,506)       (749,899)
Investment Expenses.....................................      (862,135)       (586,802)
                                                          ------------    ------------
                                                          $ 85,089,811    $ 24,130,550
                                                          ============    ============
</TABLE>

     Net realized investment gains (losses) comprise $1,104,026 gross realized
gains and $2,388,795 gross realized losses for the year ended December 31, 1999
(1998: $3,492,358 and $819,077 respectively).

4. STOCKHOLDERS' EQUITY

  Preferred Stock

     The Company is authorized to issue 50,000,000 preferred shares of par value
$1.00 each. At the balance sheet date there were no preferred shares issued or
outstanding.

  Common Stock

     The Company is authorized to issue 100,000,000 common shares of par value
$1.00 each.

     In April 1998, the Company completed an equity offering of its shares to
the public and direct sales of its shares to certain "strategic investors",
directors and members of management. The Company issued 25,499,999 common
shares, raising total equity of approximately $354,000,000.

     The common shareholders have no pre-emptive, redemption, conversion or
sinking fund rights. Subject to certain voting restrictions, which limit the
voting power of any one person to less than 10% of the combined voting power of
the issued voting shares of the Company, each holder is entitled to one vote per
share.

     In the event of a liquidation, dissolution or winding up of the Company,
the holders of the common shares are able to share equally in the assets of the
Company, if any remain after payment of all liabilities and the liquidation
preference of any outstanding preference shares. Certain restrictions exist with
respect to the

                                       29
<PAGE>   31
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transfer of shares, should such a transfer cause the number of shares held by
one person to be 10% or more of the Company's outstanding common shares.

  Class A Warrants

     In connection with the initial capitalization of the Company, the Company
issued Class A Warrants to certain individuals employed by Inter-Atlantic
Securities Corporation ("Inter-Atlantic"). These Warrants entitle the holders to
purchase up to 3,059,990 common shares in the Company.

     The exercise price of the Warrants is $15.00, which was equal to the
initial public offering price per share of the Company's common shares. The
Class A Warrants become exercisable over three years commencing on the first
anniversary of the consummation of the Company's initial public offering. The
Class A Warrants will expire on January 15, 2008.

  Class B Warrants

     In connection with the Direct Sales of equity securities to the "Strategic
Investors," the Company issued Class B Warrants that enable the holders to
purchase an aggregate of 397,500 common shares of the Company. The exercise
price of the Warrants is $15.00 per share, which was equal to the price of the
common shares in the initial public offering. The Class B Warrants become
exercisable in three equal annual installments commencing on the first
anniversary of the date of the Direct Sales. The Class B Warrants expire on the
tenth anniversary of the consummation of the Direct Sales.

5. EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
earnings per share. The Company was nominally capitalized with 12,000 common
shares of par value of $1.00 each during the period from its incorporation to
the date of the initial public offering and did not commence operations until
April 17, 1998. For this reason the calculation of earnings per share for the
year ended December 31, 1998 is based upon the earnings and number of shares
outstanding since the beginning of the second fiscal quarter; in the opinion of
Management this is the most meaningful presentation.

<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
BASIC:
Net income available to common shareholders...............  $35,703,144    $19,460,603
                                                            ===========    ===========
Weighted average number of common shares outstanding......   25,499,999     24,020,999
                                                            -----------    -----------
Earnings per common share.................................  $      1.40           0.81
                                                            ===========    ===========
DILUTED:
Net income available to common shareholders...............  $35,703,144    $19,460,603
                                                            ===========    ===========
Weighted average number of common shares outstanding......   25,499,999     24,020,999
  Plus: incremental shares from assumed exercise of
     options and warrants.................................    1,722,636      1,499,846
                                                            -----------    -----------
Adjusted weighted average number of common shares
  outstanding.............................................   27,222,635     25,520,845
                                                            ===========    ===========
Earnings per common share assuming dilution...............  $      1.31    $      0.76
                                                            ===========    ===========
</TABLE>

     As of December 31, 1999 and 1998 the Company had 1,497,865 and 1,415,865
options outstanding, respectively, and 3,457,490 warrants outstanding.

                                       30
<PAGE>   32
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. AGREEMENTS WITH RELATED PARTIES

  Inter-Atlantic Capital Partners, Inc.

     Certain directors of the Company are also owners, directors, or officers of
Inter-Atlantic Capital Partners, Inc. ("Inter-Atlantic"). In 1998 the Company
entered into an agreement with Inter-Atlantic, whereby Inter-Atlantic agreed to
provide financial advisory services to the Company in connection with its
organization and initial public offering. The Company reimbursed Inter-Atlantic
for expenses incurred in connection with the organization of the Company and the
initial public offering of $683,000 and paid a fee of $2.0 million as
compensation for financial advisory services.

     In addition, in 1998 Inter-Atlantic agreed to provide financial advisory
and other services to the Company for a term of five years in exchange for four
annual payments of $600,000. Such services include, among other things,
assistance in the development of products, financial planning, management of
assets and liabilities, international marketing efforts and such other services
as the Company may request. In 1999 the Company prepaid this fee at a discount
of 10%.

  Strategic Investors

     One of the strategic investors is affiliated with Prudential Securities
Incorporated, one of the underwriters of the Company's initial public offering,
and with The Prudential Investment Corporation, which serves as one of the
Company's investment managers. The Company paid a fee of $1.0 million to
Prudential Securities Incorporated for investment banking and financial advisory
services in connection with the Company's initial public offering. The Company
has agreed to pay a fee for investment management services to The Prudential
Investment Corporation based upon the amount of funds managed. The fee is based
upon a sliding scale and has been determined on an arms-length basis. The
Company has entered into a life reinsurance agreement with the Prudential
Insurance Company of America to reinsure certain mortality risks. The contract
has been negotiated under normal commercial terms.

  Transactions with management

     During the 1998 certain of the Company's officers purchased 163,121 shares
in the Company as part of the Direct Sales. The Company made loans to the
officers totaling $1,325,000 to partially finance such purchases. The loans bear
interest at 7% per annum and must be repaid within five years of the
consummation of the Direct Sales, except that $175,000 of the loans must be
repaid within 14 months of the consummation of the Direct Sales.

     At December 31, 1999 and 1998 there were loans outstanding from management
for stock purchases of $1,150,000 and $1,325,000, respectively, with accrued
interest thereon of $136,691 and $66,068, respectively. Interest income of
$70,623 and $66,068 has been recognized for the years December 31, 1999 and
1998, respectively, on these loans.

7. STOCK OPTION PLANS

     In 1998 the Board of Directors adopted a Stock Option Plan (the "Plan")
under which it may grant, subject to certain restrictions, Incentive Stock
Options ("ISOs") and Non-Qualified Stock Options ("NQSOs"). The aggregate number
of common shares for which options may be granted under the initial plan is
limited to 1,552,500 Common Shares. In 1999 the plan was amended such that
options may be granted in any fiscal year equal to not more than 2% of the
adjusted average of the outstanding common shares of the Company, as that number
is determined by the Company to calculate fully diluted earnings per share. In
1999 no options were granted under this amendment. Only eligible employees of
the Company are entitled to ISOs, while NQSOs may be granted to eligible
employees, non-employee Directors and consultants.

                                       31
<PAGE>   33
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Plan is administered by the Compensation Committee of the Board of
Directors.

     The minimum exercise price of the options will be equal to the fair market
value, as defined in the Plan, of the Company's optioned Common Shares at the
date of grant. The term of the options is not more than ten years from the date
of grant. Unless otherwise provided in the option agreement, they shall be
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.

     Each person who becomes an eligible non-employee Director, as defined in
the plan, shall be granted an option to purchase 15,000 common shares on the
date he or she becomes an eligible non-employee Director. The options shall have
an exercise price equal to the fair market value of the optioned Common Shares
on the date the options are granted and shall be exercisable in three equal
installments commencing with the first anniversary of the grant date. In
addition, subject to certain conditions, each non-employee Director shall be
granted an option to purchase 2,000 Common Shares at each successive annual
general meeting. These options shall have an exercise price equal to the fair
market value of the optioned Common Shares on the date the options are granted
and shall be immediately exercisable if granted after April 8, 1999.

<TABLE>
<CAPTION>
                                                   1999                             1998
                                       -----------------------------    -----------------------------
                                        NUMBER      WEIGHTED AVERAGE     NUMBER      WEIGHTED AVERAGE
                                       OF SHARES     EXERCISE PRICE     OF SHARES     EXERCISE PRICE
                                       ---------    ----------------    ---------    ----------------
<S>                                    <C>          <C>                 <C>          <C>
Outstanding at beginning of year...    1,415,865         $15.28                --         $   --
Granted............................       82,000         $22.08         1,415,865         $15.28
                                       ---------         ------         ---------         ------
Outstanding at end of year.........    1,497,865         $15.65         1,415,865         $15.28
                                       =========         ======         =========         ======
</TABLE>

     At December 31, 1999 497,955 options outstanding are presently exercisable.

     The weighted average fair value of options granted during 1998 is $6.47.
The fair value of the options is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions; dividend
yield of 1.07% per annum; expected volatility of 26%; expected life of 10 years;
and a risk free interest rate of 5.6%.

     The weighted average fair value of options granted during 1999 is $9.85 per
share. The fair values of the options granted in 1999 are estimated on the date
of the grant using the Black-Scholes option pricing model with the following
assumptions; dividend yield of 0.8% per annum; expected volatility of 25%;
expected life of 10 years and a risk free interest rate of 5.6%.

     The Company applies APB Opinion No. 25 and Related Interpretations in
accounting for the Stock Option Plan. Accordingly, no compensation cost has been
recognized as the intrinsic value of the options was $nil at the measurement
date. The net income and earnings per Common Share would have been reduced to
the pro forma amounts indicated below, had compensation cost been determined
based on the fair value of the options at the grant date, consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation."

                                       32
<PAGE>   34
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Net income:
  - as reported...........................................  $35,703,144    $19,011,617
  - pro forma.............................................  $32,437,835    $16,903,501
Earnings per share as stated:
  - Basic.................................................        $1.40          $0.81
  - Diluted...............................................        $1.31          $0.76
Pro forma Earnings per share:
  - Basic.................................................        $1.27          $0.70
  - Diluted...............................................        $1.19          $0.66
</TABLE>

8. RETROCESSION AGREEMENT

     The Company has entered into a retrocession agreement which enables it to
limit the amount of life reinsurance it retains to $2,000,000 per single life.
The contract is on an automatic basis and is effective for risks assumed and in
force from January 1, 1997. The limit of cover is $50 million and covers all
single and joint life reinsurance assumed by the Company on an automatic basis.
At December 31,1999 the Company ceded approximately $34.9 million of in force
insurance coverage for a premium of $396,000. No claims are recoverable.

     It should be noted that such retrocession agreements do not relieve the
Company from its obligations to its reinsureds and failure of reinsurers to
honor their obligations could result in losses to the Company. The Company
evaluates the financial condition of its reinsurers and monitors any
concentrations of credit risk that may develop to minimize its exposure. The
other party to this retrocession agreement has a current credit rating of AA+,
as assigned by A.M. Best.

9. VULNERABILITY FROM CONCENTRATIONS

     At December 31, 1999 and 1998, the Company did not have a material
concentration of investments in fixed income securities in a single investee,
industry or geographic location.

     The Company has entered into several significant life reinsurance contracts
and one significant deferred annuity contract. Due to the size of certain of
these contracts, there is a material concentration of net premiums, funds
withheld at interest, deferred policy acquisition costs and balances related to
interest-sensitive contract liabilities with the underlying parties to these
significant contracts. The underlying parties to these contracts are large
insurance companies based in the United States and Canada.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly, the
estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.

  Fixed Interest Securities

     Fair values for fixed interest securities are based on quoted market
prices, where available. For fixed interest securities not actively traded, fair
values are estimated using values obtained from independent pricing services.

                                       33
<PAGE>   35
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Cash and Cash Equivalents

     The carrying value of assets classified as cash and cash equivalents is
approximately their fair value.

  Funds Withheld at Interest and Interest Sensitive Contract Liabilities

     The balance sheet captions "Funds Withheld at Interest" and "Interest
Sensitive Contracts Liabilities" relate to deferred annuity contracts reinsured
on a modified coinsurance basis. The Funds Withheld at Interest is equivalent to
the statutory reserve held by the ceding company. Taking into consideration the
structure of the reinsurance agreement, the carrying value of the liabilities
approximate their fair value.

  Other items

     Fair value disclosures are not required for deferred policy acquisition
costs and liabilities arising from insurance contracts and, therefore, they have
not been determined by the Company.

     Fair values of other assets and liabilities approximate their carrying
values due to their short-term nature.

11. SEGMENTS

     In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
This Standard requires public companies to report financial and descriptive
information about their reportable operating segments. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance.

     To date the Company has written of a number of ordinary life reinsurance
and annuity reinsurance contracts. The Company views life and annuity
reinsurance as one business segment and accumulates financial data for this
segment when assessing performance and allocating resources. As the Company only
has one business segment at the current time, management feels that the
information presented in the balance sheet and statement of operations is
sufficient to understand the business segment of the Company.

12. SIGNIFICANT TRANSACTION

     On September 7, 1999 the Company, through Annuity and Life Re America,
signed an agreement to acquire Capitol Bankers Life Insurance Company ("Capitol
Bankers") for approximately $2,000,000 plus the capital and surplus of Capitol
Bankers. Upon completion of the acquisition, the Company intends to contribute
additional capital of approximately $18 million. Completion of the acquisition,
however, is subject to regulatory approval. The acquisition price and subsequent
capital contribution will be funded from available cash balances and proceeds
from the sale of fixed maturity securities held by the Company. Prior to
closing, the in force insurance business of Capitol Bankers will be 100%
reinsured by Capitol Bankers to a third party. This transaction will be
accounted for as a purchase.

     Capitol Bankers is domiciled in the United States and is authorized to
conduct its life insurance business in 43 states of the United States. After the
Company completes its acquisition of Capitol Bankers, the Company expects
Capitol Bankers to focus its operations on the United States life and
reinsurance markets.

13. TAXATION

     Under current Bermuda law neither Holdings nor Annuity and Life Reassurance
is required to pay any taxes in Bermuda on either income or capital gains.
Holdings and Annuity and Life Reassurance have each received an assurance from
the Minister of Finance in Bermuda that in the event of any such taxes being
imposed the Company will be exempted from taxation until the year 2016. Annuity
and Life Reassurance
                                       34
<PAGE>   36
                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

intends to operate in a manner such that it will not be liable to United States
tax other than premium excise taxes and withholding taxes on certain
investments.

     Annuity and Life Re America is subject to all applicable Federal and State
taxes of the United States.

14. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS

     Under The Bermuda Insurance Act, 1978, and related regulations, Annuity and
Life Reassurance is required to maintain certain levels of solvency. This
requirement was met at the balance sheet date.

     The Company's ability to pay dividends depends on the ability of its
operating subsidiaries to pay dividends to the Company. While the Company itself
is not subject to any significant legal prohibitions on the payment of
dividends, Annuity and Life Reassurance is subject to Bermuda regulatory
constraints which affect its ability to pay dividends to the Company. Annuity
and Life Reassurance is prohibited from declaring or paying a dividend if such a
payment would reduce its statutory surplus below the required minimum of
$250,000. No such restriction currently exists.

15. UNAUDITED QUARTERLY FINANCIAL DATA

     The Company was incorporated on December 2, 1997 but did not commence
operations until the successful completion of its initial public offering on
April 17, 1998.

     The unaudited quarterly financial data for the years ended December 31,
1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                   FIRST         SECOND          THIRD         FOURTH
1999                              QUARTER        QUARTER        QUARTER        QUARTER
----                            -----------    -----------    -----------    -----------
<S>                             <C>            <C>            <C>            <C>
Net Premiums..................  $18,247,012    $18,372,285    $21,101,366    $43,114,344
Net Investment income.........  $18,159,060    $20,677,325    $19,528,879    $26,724,547
Net realized investment gains
  (losses)....................  $   263,458    $  (157,755)   $  (793,008)   $  (597,464)
Claims and policy benefits....  $15,765,869    $15,507,499    $17,232,038    $31,447,754
Interest credited.............  $ 3,876,829    $ 3,948,668    $ 4,762,521    $ 9,724,666
Net income....................  $ 8,482,279    $ 8,746,243    $ 8,715,060    $ 9,759,562
Net income per common share
  (diluted)...................  $      0.31    $      0.32    $      0.32    $      0.36
</TABLE>

<TABLE>
<CAPTION>
                                   FIRST         SECOND          THIRD         FOURTH
1998                              QUARTER        QUARTER        QUARTER        QUARTER
----                            -----------    -----------    -----------    -----------
<S>                             <C>            <C>            <C>            <C>
Net premiums..................  $        --    $        --    $10,065,750    $17,878,140
Net investment income.........  $        --    $ 4,299,615    $ 5,366,566    $14,464,369
Net realized investment
  gains.......................  $        --    $   148,674    $ 1,018,990    $ 1,505,617
Claims and policy benefits....  $        --    $        --    $ 8,399,500    $14,897,615
Interest credited.............  $        --    $        --    $        --    $ 1,989,000
Net income (loss).............  $  (448,986)   $ 3,575,011    $ 6,660,166    $ 9,225,426
Net income per common share
  (diluted)...................  $        --    $      0.16    $      0.25    $      0.35
</TABLE>

                                       35
<PAGE>   37

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                  SCHEDULE II

                                 BALANCE SHEETS
                                (PARENT COMPANY)

<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1999    DECEMBER 31, 1998
                                                             -----------------    -----------------
<S>                                                          <C>                  <C>
ASSETS
Investment in common stock of subsidiaries.................    $388,423,856         $367,983,728
Cash and cash equivalents..................................       3,652,821            7,353,039
Other assets...............................................          15,813               15,000
                                                               ------------         ------------
Total Assets...............................................    $392,092,490         $375,351,767
                                                               ============         ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...........................................    $     37,596         $     11,521
                                                               ------------         ------------
Total Liabilities..........................................    $     37,596         $     11,521
                                                               ------------         ------------
STOCKHOLDERS' EQUITY
Preferred shares (par value $1.00; 50,000,000 shares
  authorized; no shares outstanding).......................    $         --         $         --
Common shares (par value $1.00; 100,000,000 shares
  authorized; 25,499,999 shares outstanding);..............      25,499,999           25,499,999
Additional paid-in capital.................................     329,496,091          329,517,104
Notes receivable from stock sales..........................      (1,286,741)          (1,391,068)
Accumulated other comprehensive income (loss)..............     (11,269,216)           3,722,594
Retained earnings..........................................      49,614,761           17,991,617
                                                               ------------         ------------
                                                               $392,054,894         $375,340,246
                                                               ------------         ------------
Total Liabilities and Stockholders' Equity.................    $392,092,490         $375,351,767
                                                               ============         ============
</TABLE>

                                       36
<PAGE>   38

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                  SCHEDULE II

                            STATEMENTS OF OPERATIONS
                                (PARENT COMPANY)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
REVENUES
Interest income.............................................  $   305,605    $   573,683
                                                              -----------    -----------
Total revenues..............................................      305,605        573,683
                                                              -----------    -----------
EXPENSES
Operating expenses..........................................      860,899        573,200
                                                              -----------    -----------
Net Income (loss) before equity in earnings of
  subsidiaries..............................................     (555,294)           483
Equity in earnings of subsidiaries..........................   36,258,438     19,011,134
                                                              -----------    -----------
  Net Income................................................  $35,703,144    $19,011,617
                                                              ===========    ===========
</TABLE>

                                       37
<PAGE>   39

                      ANNUITY AND LIFE RE (HOLDINGS), LTD.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                  SCHEDULE II

                            STATEMENTS OF CASH FLOWS
                                (PARENT COMPANY)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                              -----------------------------
                                                                  1999            1998
                                                              ------------    -------------
<S>                                                           <C>             <C>
OPERATING ACTIVITIES
Net Income..................................................  $ 35,703,144    $  19,011,617
Adjustments to reconcile net income to net cash used by
  operations:
Equity in earnings of subsidiaries..........................   (36,258,438)     (19,011,134)
Other assets................................................          (813)         218,000
Accounts payable............................................        26,075         (221,479)
                                                              ------------    -------------
Net cash used by operating activities.......................      (531,032)          (2,996)
                                                              ------------    -------------
INVESTING ACTIVITIES
Dividend received from subsidiary...........................     1,020,000               --
Investment in subsidiary....................................      (193,500)    (345,000,000)
                                                              ------------    -------------
Net cash provided (used) by investing activities............       826,500     (345,000,000)
                                                              ------------    -------------
FINANCING ACTIVITIES
Net proceeds from sale of company stock.....................            --      353,376,035
Equity offering expenses paid...............................       (21,013)              --
Repayment of notes receivable, less accrued interest........       104,327               --
Dividends paid to stockholders..............................    (4,080,000)      (1,020,000)
                                                              ------------    -------------
Net cash provided (used) by financing activities............    (3,996,686)     352,356,035
                                                              ------------    -------------
Increase (Decrease) in cash and cash equivalents............    (3,700,218)       7,353,039
Cash and cash equivalents, beginning of period..............     7,353,039               --
                                                              ------------    -------------
Cash and cash equivalents, end of period....................  $  3,652,821    $   7,353,039
                                                              ============    =============
</TABLE>

                                       38
<PAGE>   40

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by Item 10 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.

ITEM 11.  EXECUTIVE COMPENSATION.

     The information required by Item 11 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by Item 12 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by Item 13 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a) The following documents are filed or incorporated by reference as part
of this Form 10-K.

          1. Financial Statements

     The audited consolidated financial statements of Annuity and Life Re
(Holdings), Ltd. and the related auditor's report listed in the Index to
Financial Statements and Financial Statement Schedule appearing on page 18.

          2. Financial Statement Schedule

     The schedule listed in the Index to Financial Statements and Financial
Statement Schedule appearing on page 18.

          3. Exhibits

     The following exhibits are filed or incorporated by reference as part of
this Form 10-K:

<TABLE>
<C>      <S>
  *3.1   Memorandum of Association, as amended, of the Company
         (Exhibit 3.1 to the Company's Registration Statement on Form
         S-1, Registration No. 333-43301, declared effective on April
         8, 1998 (the "Registration Statement")).
  *3.2   Bye-laws, as amended, of the Company (Exhibit 3.2 of the
         Registration Statement).
  *4.1   Form of Amended and Restated Class A Warrant (Exhibit 4.2 to
         the Registration Statement).
  *4.2   Form of Class B Warrant (Exhibit 4.3 to the Registration
         Statement).
*+10.1   Employment Agreement, dated as of December 5, 1997, between
         Lawrence S. Doyle and the Company (Exhibit 10.1 to the
         Registration Statement).
</TABLE>

                                       39
<PAGE>   41
<TABLE>
<C>      <S>
*+10.2   Amendment No. 1, dated as of February 27, 1998, to
         Employment Agreement, dated as of December 5, 1997, between
         Lawrence S. Doyle and the Company (Exhibit 10.8 to the
         Registration Statement).
*+10.3   Employment Agreement, dated as of January 5, 1998, between
         Robert P. Mills, Jr. and the Company (Exhibit 10.7 to the
         Registration Statement).
*+10.4   Amendment No. 1, dated as of February 27, 1998, between
         Robert P. Mills, Jr. and the Company (Exhibit 10.10 to the
         Registration Statement).
*+10.5   Employment Agreement, dated as of January 8, 1998, between
         Robert J. Reale and the Company (Exhibit 10.6 to the
         Registration Statement).
*+10.6   Amendment No. 1, dated as of February 1, 1998, to Employment
         Agreement, dated as of January 8, 1998, between Robert J.
         Reale and the Company (Exhibit 10.9 to the Registration
         Statement).
*+10.7   Employment Agreement dated as of March 2, 1998, between
         William W. Atkin and the Company (Exhibit 10.15 to the
         Registration Statement).
*+10.8   Employment Agreement, dated as of March 5, 1998, between
         Richard Tucker and the Company (Exhibit 10.16 to the
         Registration Statement).
 *10.9   Agreement, dated as of December 23, 1997, between
         Inter-Atlantic Securities Corp. and the Company (Exhibit
         10.4 to the Registration Statement).
*+10.10  Initial Stock Option Plan, as amended and restated effective
         April 29, 1999 (Exhibit 4 to the Company's Quarterly Report
         on Form 10-Q for the quarter ended March 31, 1999).
 *10.11  Registration Rights Agreement, dated as of January 9, 1998,
         between the Company and the holders of the Class A Warrants
         (Exhibit 10.5 to the Registration Statement).
 *10.12  Form of Securities Purchase Agreement entered into by The
         Prudential Insurance Company of America and the Company,
         EXEL Limited and the Company, Risk Capital Reinsurance
         Company and the Company, Insurance Partners, L.P. and the
         Company and Insurance Partners Offshore (Bermuda), L.P. and
         the Company (Exhibit 10.12 to the Registration Statement).
 *10.13  Form of Registration Rights Agreement entered into between
         The Prudential Insurance Company of America and the Company,
         EXEL Limited and the Company, Risk Capital Reinsurance
         Company and the Company, Insurance Partners, L.P. and the
         Company and Insurance Partners Offshore (Bermuda), L.P. and
         the Company (Exhibit 10.13 to the Registration Statement).
 *10.14  Letter Agreement, dated as of March 4, 1998, between Risk
         Capital Reinsurance Company and the Company (Exhibit 10.14
         to the Registration Statement).
 *10.15  Letter Agreement, dated as of December 23, 1997, between
         Prudential Securities Incorporated and the Company and
         related indemnification agreement (Exhibit 10.17 to the
         Registration Statement).
 *10.16  Letter Agreement, dated as of March 19, 1998, among
         Insurance Partners, L.P., Insurance Partners Offshore
         (Bermuda), L.P. and the Company, which has been assigned to
         Overseas Partners, Ltd. (Exhibit 10.18 to the Registration
         Statement).
 +10.17  Employment Agreement, dated as of January 1, 1999, among
         Gary Scofield, Annuity and Life Reassurance, Ltd. and the
         Company.
 +10.18  Employment Agreement, dated as of July 1, 1999, among Bryan
         Featherstone, Annuity and Life Re America, Inc. and the
         Company.
  21.1   Subsidiaries of the Company (Exhibit 21.1 to the
         Registration Statement).
  23.1   Consent of KPMG (Independent Accountants).
  27.1   Financial Data Schedule.
</TABLE>

---------------
*  Previously filed with the Commission and incorporated herein by reference.

+ Management contract or compensatory plan or arrangement required to be filed
  as an exhibit to this form.

     (b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended December 31, 1999.

                                       40
<PAGE>   42

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          ANNUITY AND LIFE RE (HOLDINGS), LTD.

                                          /s/      LAWRENCE S. DOYLE
                                          --------------------------------------
                                          Lawrence S. Doyle
                                          President, Chief Executive Officer and
                                          Director

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                       SIGNATURE                               DATE
                       ---------                               ----
<S>                                                       <C>
                 /s/ LAWRENCE S. DOYLE                     March 2, 2000
--------------------------------------------------------
             Lawrence S. Doyle, President,
          Chief Executive Officer and Director

                  /s/ WILLIAM W. ATKIN                     March 2, 2000
--------------------------------------------------------
        William W. Atkin, Senior Vice President,
         Chief Financial Officer and Treasurer
             (Principal Accounting Officer)

                /s/ FREDERICK S. HAMMER                    March 2, 2000
--------------------------------------------------------
       Frederick S. Hammer, Chairman and Director

                 /s/ ROBERT M. LICHTEN                     March 2, 2000
--------------------------------------------------------
    Robert M. Lichten, Deputy Chairman and Director

                                                          March   , 2000
--------------------------------------------------------
Robert Clements, Director

                  /s/ ALBERT R. DOWDEN                     March 2, 2000
--------------------------------------------------------
               Albert R. Dowden, Director

                /s/ MICHAEL P. ESPOSITO                    March 2, 2000
--------------------------------------------------------
           Michael P. Esposito, Jr., Director

                /s/ LEE M. GAMMILL, JR.                    March 2, 2000
--------------------------------------------------------
             Lee M. Gammill, Jr., Director

                     /s/ MARK GRIER                        March 2, 2000
--------------------------------------------------------
                  Mark Grier, Director

                 /s/ DONALD J. MATTHEWS                    March 2, 2000
--------------------------------------------------------
              Donald J. Matthews, Director
</TABLE>

                                       41
<PAGE>   43

<TABLE>
<CAPTION>
                       SIGNATURE                               DATE
                       ---------                               ----
<S>                                                       <C>
                  /s/ BRIAN M. O'HARA                      March 2, 2000
--------------------------------------------------------
               Brian M. O'Hara, Director

                /s/ JERRY S. ROSENBLOOM                    March 2, 2000
--------------------------------------------------------
             Jerry S. Rosenbloom, Director

                  /s/ WALTER A. SCOTT                      March 2, 2000
--------------------------------------------------------
               Walter A. Scott, Director

                   /s/ JON W. YOSKIN                       March 2, 2000
--------------------------------------------------------
              Jon W. Yoskin, II, Director
</TABLE>

                                       42